Duck Creek Technologies, Inc.
Q3 2013 Earnings Call Transcript

Published: 1 Nov 2013

[Operator:]

Good morning, and welcome to the DCT Industrial Third Quarter 2013 Earnings Call and Webcast. All participants will be in listen-only mode. After today’s presentation, there will be an opportunity to ask questions. (Operator Instructions). We ask that you please limit yourself to one question and a single follow-up. If you have further questions you may reenter the question queue. Please note this event is being recorded. I would now like to turn the conference over to Ms. Melissa Sachs, Vice President, Corporate Communications and Investor Relations. Please go ahead.

[Melissa Sachs:]

Thank you Amy. Hello everyone, and thank you for joining DCT Industrial Trust’s third 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. 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:]

Thank you, Melissa and good morning everyone and thanks for joining our call. We had another good quarter with excellent progress across all fronts. Leasing volume was strong. We started four new development projects that are 44% pre-leased. Our market teams acquired $123 million of existing assets which on average were 81% leased, providing additional upside in growth. We finalized the sale of our entire Mexico portfolio. And last but not least, we issued our first public bonds at an attractive rate further lengthening our maturity ladder and giving us access to additional source of capital. In short we had a busy and very successful quarter. Industrial leasing markets continue to improve across the U.S. with positive net absorption in every market. Small tenants in particular remain active, a trend that first came noticeable about a year ago. Rents are also continuing their gradual improvement across all markets. Reflecting this positive environment we leased 4.4 million square feet in our portfolio during the third quarter and an additional 1.3 million square feet in October. Proposal activity remains healthy and our market teams are upbeat about their pipelines of leases and negotiations. Occupancy of our portfolio at quarter-end increased 90 basis points to 92.8%. I am particularly pleased given our value add bias that occupancy in our 2013 acquisitions increased from 84% at time of acquisition to 95.8% as of quarter end. Also this quarter, same store NOI increased 5.9% on a cash basis and 2.7% on a GAAP basis. Moving onto capital deployment we acquired a $123 million of assets since the end of the second quarter with an average occupancy of 81% and an average projected stabilized yield of 7.1% reflecting our continued bias to acquire assets with additional upside opportunity. Our acquisition activity includes the recently announced Chicago portfolio, Fox River Business Center, comprised of six buildings totaling 1.1 million square feet and 59% leased at the time of acquisition. The North Kane County submarket is one of the fastest growing in the Chicago Metropolitan area with a convenient location, access to high quality labor and lower taxes relative to surrounding counties. The Fox River acquisition gives us critical mass in this targeted submarket as well as attractive returns and future growth through modest building improvements and an aggressive marketing and leasing program. Neil Doyle is on the call and can answer any more questions you might have regarding this acquisition and sub-market. Shifting to development. This quarter we stabilized three buildings with $34 million of total projected costs and a first year yield of 8.7%. Year-to-date we have stabilized five buildings with total development cost of $54 million at an average per share yield of 9.2%. Since the end of the second quarter, we started construction on four new projects totaling 1.5 million square feet, this brings our current development pipeline up to $200 million of projects that are 53% leased with good prospect activity on the balance. Due to the favorable investment market pricing, we continue to be active sellers of buildings which we consider to be non-strategic or lower growth. In addition to the Mexico portfolio sales, we closed in the sale of our older flex type buildings in Dallas in two separate transactions. Year-to-date we have sold $224 million of non-strategic assets and exited six markets, representing substantial progress towards our goal of continuously upgrading our portfolio and focusing both our people and our capital on fewer markets. In summary, we continue to make great progress and are excited about prospects for continued strategic, operational and capital deployment success. The markets remain supportive and our marketing teams are doing a great job sourcing opportunities and creating value for our shareholders. With that let me turn it over to Matt Murphy to provide more details on our results this quarter as well as our updated 2013 guidance. Matt?

[Matt Murphy:]

Thanks Phil and good morning everyone. I’m going to go into a little more detail on our third quarter results, cover our capital markets activity during the quarter and discuss the factors that drove our increase in FFO guidance for 2013. The fundamentals of our business continue to improve as evidenced by the 90 basis point increase in our operating portfolio occupancy during the quarter to 92.8%. 80 basis points of this increase resulted from net move-ins of 466,000 square feet while 10 basis points was the result of acquisition and disposition activity during the quarter as well as stabilizing our Pan American development buildings in Miami. This net absorption was a little ahead of our internal projections and part of the reason we’ve increased 2013 guidance which I will talk about a little more fully in a moment. As of September 30, about 350,000 square feet or roughly 60 basis points of our consolidated operating portfolio was leased but not yet occupied. All of that space is expected to be occupied by the end of the year and we’re now expecting our year-end occupancy to be a little above 93%. As expected same store performance was strong in the third quarter. Cash same store net operating income increased 5.9% and GAAP NOI increased 2.7% as average occupancy increased 140 basis points to 91.9%. This 53.2 million square foot portfolio of assets represents approximately 84% of our total consolidated portfolio. Cash based rent on these assets increased 4.2% with approximately 65% of this increase coming from embedded rent increases. 17 of our 21 markets experienced positive same store growth with 10 of those markets experiencing double-digit growth. Sequentially, third quarter cash NOI increased 2.9% over the second quarter driven by rental rate increases and a 50 basis point increase in average occupancy. Year-to-date, cash same store NOI growth was 6.1% over 2012. Given the strength of our same store performance thus far in 2013 we are increasing our expectations for full year growth to between 4% and 5.5%. Turning to capital markets activity, it’s been a very busy quarter at DCT. Both significantly in early October, we announced our debut public bond offering. We issued $275 million of 10 year notes with a coupon of 4.5% and a yield to maturity of 4.62%. The proceeds from these notes were used to pay-off various debt maturities including our $175 million pre-payable floating rate term loan that was put in place earlier this year to facilitate this transaction and $50 million of unsecured notes that were scheduled to mature in January of next year, but were pre-payable at par in early October. We are very pleased with the execution on this transaction and think it was an excellent time to take advantage of favorable interest rate environment, while extending our average maturities by 18 months to 6.1 years. Prior to launching the bond offering, we announced that we had received investment grade ratings with stable outlooks from both Moody’s and S&P. Moody’s rating was BAA2 and S&P was BBB minus. We believe this is an important milestone in the evolution of DCT and look forward to the flexibility and liquidity that access to the public bond market will provide us moving forward. With respect to our capital plan, we continue to be successful, mass funding our growing deployment activities. With our $158 million equity offering in August along with the earlier use of our ATM program combined with our success thus far on the disposition front including the recent sales of our Mexico portfolio and flexibility in Dallas, we are well positioned from a capital funding perspective. Moving on to guidance, we are narrowing and raising our 2013 FFO guidance to $0.44 to $0.45 per share. This increase has primarily resulted better than expected performance on our value-add activities, delayed closing of dispositions most notably Mexico and favorable pricing on our bond offerings. Additionally as I already mentioned, we’ve increased our expectations for year-end operating occupancy, as well as same-store growth. Given our continued success on the acquisition front, as well as our current pipeline, we are increasing our 2013 acquisition expectations by $100 million to $350 million to $400 million, much of which has already occurred. Finally we are still on track for approximately $210 million of development starts for the year. When added together, these factors have resulted in us raising the bottom-end of guidance by $0.02 and the midpoint by a $0.01. In summary, we are very pleased with our third quarter, both from an activity and results perspective. We think the fundamentals of our business are in excellent shape and our market teams continue to execute well on leasing, property management and deployment. We believe this will result in a very successful 2013 and position DCT well heading into 2014. With that I will turn it over to [Andy] for questions. Thank you.

[Operator:]

(Operator Instructions) Our first question comes from George Auerbach at ISI Group.

[George Auerbach:]

Great. Thanks guys. Phil, I saw you started two spec buildings in Seattle this quarter, I know the market is pretty strong, but anything in particular in preleasing discussions that makes you more comfortable about starting both buildings?

[Phil Hawkins:]

Well, there are two different sizes and so that was part of it. And we do have early activity on both nothing is eminent or I would say closable, but we’ve also had done very well with our own portfolio up there, so we really like that market and the timing of site preparation and entitlement approvals led to both starting at about the same time, almost as much coincidence as it was planned, but we are very comfortable with having them both going.

[George Auerbach:]

Okay. And more broadly the development pipeline is now over $200 million, I know the numbers move around based on what projects are in the hopper. But as you think about capital spend at this point in the cycle, should we assume that your development pipelines for the time being will be at $200 million plus or minus run rate?

[Phil Hawkins:]

You know what, giving guidance I think it’s not a bad starting point. We’ve talked about up to 10% to 15% of our assets in development being - and that would allow the pipeline to go a little higher than that, but when you look at the number of markets we were comfortable with and then not wanting to have buildings compete with themselves it sort of gets you to $152 million of starts and hopefully it lease about the same around each year maybe you’ll do a little bit than that in some years and you throw it all back on others, we do have cycles. But I don’t think that’s not a bad departure point.

[George Auerbach:]

Great. Thank you.

[Operator:]

Our next question comes from James Feldman of Bank of America Merrill Lynch.

[James Feldman:]

Great. Thank you. Phil, you had commented that you are seeing pretty good activity from smaller tenants. Can you talk a little bit about the vacancy lapse in the portfolio and how it stacks up in terms of large versus small and how that’s [inaudible] kind of end you’re seeing?

[Phil Hawkins:]

I appreciate you asking me that question, the comments you’ve given me, but I'm going to let Matt, who knows the details really give you the right answer.

[Matt Murphy:]

Yeah Jamie, with respect to smaller tenants, I think of those kind of in the 0 to 25,000 square foot range. We're currently just under 90% occupied today, which is about a 550 basis point increase in the past year; it's been one of the, sort of fastest growing segments if you will. Beyond that, I think you are seeing sort of low to mid 90s on all of the different strata if you will with the strongest being 200,000 square feet and above, which is 94.5% occupied today. Spaces 0 to 25,000 square feet represent about 10% of the portfolio, 25,000 to 50,000 is about 12%, 50,000 to 100,000 square feet is just under 20%, 100,000 to 200,000 is just over 23% and the remainder again 200,000 and above is 35% little over.

[James Feldman:]

So I guess as you think about the pipeline of demand you're seeing, is it more weighted towards smaller or larger or pretty mixed?

[Matt Murphy:]

Yeah. I think it’s a mix. We continue to have 30% of our leasing, little under 30% of our leasing in this quarter was 25,000 square feet and below. So we had more leases on the smaller spaces not surprisingly, it doesn't represent as big a portion of the square footage sort of just for mathematical purposes it really has been - the improvement over the last 18 months if you will has been in the smaller spaces, the demand as it exist today is pretty consistent across all sort of food groups if you will.

[James Feldman:]

Okay, all right. Thank you.

[Operator:]

Your next question comes from Michael Bilerman with Citi

[Kevin Varin:]

Good morning. This is Kevin Varin with Michael. I know you don’t give guidance on asset sales, but what does the disposition pipeline look like heading into 2014? Should we expect some more one-off sales or are there any larger portfolios that you’re thinking of putting on the market?

[Phil Hawkins:]

Well, we're thinking about a lot of different things. What’s on the market now is a few one-off or actually one deal on the market is one-off. And then we have a few sort of user-type sales that we are always in talks with. And then we will probably look at early next year coming out with a few additional packages, nothing has yet been finalized.

[Kevin Varin:]

Okay. And then how should we think about…

[Phil Hawkins:]

Let me add, we also have one package that was out within our joint venture, we don’t own much of it, but we have a package of assets within one of our joint ventures that has been marketed recently and I think is likely to close.

[Kevin Varin:]

Okay, thanks. And how should we think about same-store occupancy for the remainder of the year, it’s actually flat sequentially. We're just trying to get a sense if there is a certain percentage that is leased not yet occupied same like the consolidated portfolio?

[Matt Murphy:]

Yeah. Kevin, this is Matt. I think fourth quarter same-store occupancy again given the idea that operating occupancy will get above 93%, you’ll see same-store occupancy increase slightly in the fourth quarter relative to the third. I think as we continue to increase our occupancy and become more focused on rental rates, the increase in occupancy rates slows. We will continue to move forward as we’ve talked about in the past. But I think you’ll see that slow a little bit one as obviously our portfolio as it exist it’s more occupied. So I think you’ll see improvement in the fourth quarter, but it will be modest.

[Kevin Varin:]

Okay. Thanks guys.

[Operator:]

Our next question comes from Eric Frankel at Green Street Advisors.

[Eric Frankel:]

Thank you. Phil I know you commented in the past about development being much more [disappointing] [ph] during this cycle, but we’ve noticed supply picking up in a couple different markets and I know you’ve also commented that’s been much more of an assembly line type approach that developers have taken. Is that still the case?

[Phil Hawkins:]

Yes, it’s still the case. It’s also still the case we should be watching it, I can comment about development in general because I know it’s appropriate that a key question about industrial, it has ramped up more than I would have probably –more than I like and more than I would have expected, there has been a fair - it’s really reflecting the amount of equity capital really interested in industrial in general. And you look at where it is the markets where it is, I think it’s still at, I know it’s still at manageable levels. When you look at, there is almost no vacancy, and what's being built is big box space, big box buildings. In almost every one of the market we have seen construction there is no vacancy in that size range. And what’s being built is still manageable relative to the number of deals actively looking for space in the marketplace and you’re looking at absorption and market trends. And you see you can get comfortable, but it’s no longer – you’re no longer in a situation where only a few buildings are competing against many tenants looking for it, it’s little more balanced. But anyway it’s a - I watch it, where we go from here, the more supply increases from here, the more nervous I become. And I am still hopeful given that - we still are not seeing any banks loosen up without balance sheet to back it up. I mean you can borrow anything if you want to guarantee with a good balance sheet, but non-recourse lending on development, spec development and land is almost nonexistent. I probably shouldn’t say completely nonexistent because I am sure there is some exceptions out there, that still gives me hope, but the amount of capital out there chasing investment in industrial is what is clearly driving supply at this point in time.

[Eric Frankel:]

And speaking of a lots of equity capital heading going to the sector, maybe you can touch upon secondary market pricing, considering that’s what part of the portfolio you’re trying to turn over the next couple of years?

[Phil Hawkins:]

It remains healthy. Cap rates in general over the last quarter have come down a little bit reflecting interest rate moving down. And secondary markets I would say very consistent with that. There is significant demand for quality product. I mean when investors are more discerning as they take more market risk, they are going to take less product risk, but I would say in general that investment market is red hot and that applies across the board including secondary markets.

[Eric Frankel:]

Okay, thank you.

[Operator:]

Our next question comes from Brendan Maiorana at Wells Fargo.

[Brendan Maiorana:]

Matt, the same store guidance for Q4 if I sort of look at your plus 4 to plus 5.5 for the year implies a pretty wide range I think maybe at a negative 4 to plus 4 as I understood the back asking math correctly. What would drive sort of the big variance there and is that something that we can sort of use as a run rate as we head into ‘14, given that you have done a nice job moving occupancy of and done a nice job reducing that pretty well that’s in the portfolio today?

[Matt Murphy:]

Yeah, first of all, I am not going to get too far into talking about 2014 guidance. As you know we will do that in conjunction with our fourth quarter call, but I do think there is a couple of things that are driving the fourth quarter numbers to be lower than the trends line. I think the first of those is related to the fourth quarter of 2012. So in terms of occupancy that portfolio, what will be in the fourth quarter ‘13 same store pool ended the year at 92.2% occupancy which is slightly ahead of where that same store pool, what left of it. Keep in mind we still hold a lot of occupancy that would have been in that pool over the year. So that’s part of what will mitigate the impact of occupancy increases in the fourth quarter. There was sort of one-time true-up numbers roughly $750,000 in the fourth quarter of 2012 that had to do with winning of appeals of tax protest that sort of made the fourth quarter of 2012 sort of artificially high, which is really why you got to be careful about using that to extrapolate forward so that was based on one time things. And then the other thing that I will say is that, we do have a large tenant in Indianapolis occupies a little over 500,000 square feet. Then inherent in those predictions are they are having some credit problems, frankly that we're bailing with them over, I think they are and that will have a -- we're basically assuming that we're not going to get any NOI out of that, as conservative an assumption as you can make, hopefully we do better than that. So I think the fourth quarter of 2013 is a little bit aberrant, but your math, I think it will be clearly positive on a cash basis, likely positive on a GAAP basis, not as much as we have done in the first three quarters, but it's much about the fourth quarter 2012, as it is about the fourth quarter of 2013.

[Brendan Maiorana:]

Okay, great. That's helpful color. And just related to that, if I look at your expiring rents next year, I think they are around 405 or 410 a square foot, if I compare that, it kind of where you guys were 2013, it's about 450, 455, somewhere around there. So, it's obviously a pretty big drop off. Is that indicative that you are now comping up against trough market rents or is there making a mix issue there with some of the higher finished flex stuff that you sold with an obviously would bring the average up in the prior periods versus which have last 14?

[Matt Murphy:]

Yeah. I think it's a little bit of both, it's always a little bit of both. Our number two market in terms of exposure next year is Columbus 600 million square feet, that's obviously a big box stuff, it has a lower per square foot number, the Memphis is number four, but it absolutely has to do with the fact that what you're seeing. So roughly 80% of the lease is little over 80% of the lease is that expire next year are post 2009 leases. So, both of those factors are at work, you will always have variability on the mix, but clearly the trend line or answer moving in the right direction as well.

[Brendan Maiorana:]

Great. Thanks guys.

[Operator:]

Our next question comes from Craig Mailman at KeyBanc Capital Markets.

[Craig Mailman:]

Matt, maybe you can just take on same store, I am just curious what the free rent component of same store is at this point and maybe what the average escalator you guys have in the same store pool?

[Matt Murphy:]

So I answer the second part first because I am not sure how to answer the first part I'll get back to you. In terms of the bumps that are embedded in the portfolio today, so roughly 90% of our -- little over 90% of our leases have bumps. The average increase -- the average next bump is actually 6% now that’s not an annual number but that is the next bump is 6%. As far as the free rent component, I am not sure the free rent component of what, are you talking about where we are in free rent today?

[Craig Mailman:]

Yeah. How much free rents you’re still going to burn off say over the next 12 months in the same store pool, I know it’s 5.8 million overall but how much of that same store?

[Matt Murphy:]

So the fourth quarter same store numbers in the same store pool -- excuse me the third quarter of 2000 was basically zero, it was about $0.5 million with positive impact in the free rent in the same store pool. It’s not surprising that a lot of what you’re seeing in the same store particularly the number you’re referring to is an annualized sort of September 30 number. Lot of that has to do with the leases that we signed in the redevelopment pool, the lease we signed in DCT 55. So as a value add lease is up you see a higher component of free rent in that piece than you are in the store pool overall.

[Craig Mailman:]

Okay. That’s helpful then maybe still just your thoughts here on development I appreciate the comments earlier, any markets at this point you are kind of red lining for next year or maybe other markets that are gained the deployment replacement rents could validate some monetization in your land bank?

[Phil Hawkins:]

We don’t have a lot of land bank that is in forward motion right now. I think you are going to entitlement. We’ve got a little bit of land that I would call a legacy land that is I don’t expect to be monetizing directly ourselves anyway, maybe we sell it at some point. There are, when you look at the markets where most construction going on, I would say that of those markets each of them is manageable, you wish you had nothing going on, but you should have this manageable. So I am reasonably comfortable with where we are. And with that red lining markets, we clearly by our actions have focused more on coastal markets in Houston, which I guess is semi-coastal leases near salt water. But other than that, I think showing our bias towards markets that are more difficult to develop in and difficult to the relative term in industrial but our own personal bias, but I look at other markets where there is a fair amount of construction that we are not necessarily, we don’t own a land and we don’t have a dog in a fight I still feel that those markets also reasonably comfortable shape.

[Craig Mailman:]

Great. Thank you.

[Operator:]

Our next question comes from John Guinee at Stifel.

[John Guinee:]

Great. Nice quarter guys.

[Phil Hawkins:]

Thank you.

[Matt Murphy:]

Thank you.

[John Guinee:]

It feel like you are on a run rate to run this business at about a regardless what the vacancy or what the lease expirations are at about 3 million square feet a quarter of leases 12 million a year which is roughly 20% of your portfolio per annum and spending about $2 a foot NTIs in leasing commissions are those appropriate number to use as we just try to model this business out a few years? That’s one question. And then the second question it looks like the average square foot size building you sold in Dallas was under a 40,000 square feet, clearly flex product, how much product of your 60 million square feet of that size and shape which you expect to exit in the next few years.

[Matt Murphy:]

John this is Matt. I will take certainly the first part of that. I think generally speaking your numbers are spot on, 3 million square feet a quarter plus or minus it will be plus I think as development leases happen I would expect it to be unlikely to go below 3 million square feet, but as a sort of a base line modeling that feel is about right. Obviously as the occupancy improves in the portfolio there is less new leasing that can be done. Having said that, the portfolio is going to grow. But I think that’s the right way to think about it and $2 a square foot overtime is always a pretty good number for the kind of space that we have. With regard to the flex stuff I will kick it over to Phil.

[Phil Hawkins:]

Well, he may answer too. That’s really the last of our material flex positions. We have less than 1%, in fact 0.7% of our portfolios now will be called flex, much of that we like. Then this newer product, it’s prior less office and better suited to markets that it’s in, it’s somehow a building or two in Miami, couple of buildings in Houston which are really well located in newer and a couple of building in the San Francisco Airport. So really the last our flex challenges and those are we just weren’t very good at honestly and in the hands of I think a better owner.

[John Guinee:]

Wonderful. Thank you very much. Done.

[Operator:]

Our next question comes from Sheila McGrath with Evercore.

[Sheila McGrath:]

Yes, good morning. So it seems like rental rates are definitely showing some positive movement. I just wondered if you can talk about which markets you see the best rental growth outlook and which might be the weakest?

[Matt Murphy:]

You know I think it’s moving across the board and now probably moving more in the Midwest to the non-coastal markets which is less development and has more room to run, before we hit a development, the type of cost runs, but then the coastal markets are not growing because I think that there is it’s a broad recovery lead in particularly by reduced concessions but even face rates are moving up and there is not a single market where that’s not the case. I wouldn’t flag any market saying it’s not recovery from a rental perspective, some moving faster than others. I like Chicago a lot right now, and Cincinnati is doing well, Nashville is doing well, Blueville is kind of slow, because of development, Columbus for us and we’re pretty bias, but probably lags those as an in Memphis you are seeing some new construction across the Mississippi line, which is I think going to start to slow runaway growth, effective runaway growth. Atlanta which has been lagging, that’s the most encouraging market that I have seen in the last three months. I think you’re going to see a pretty good quarter out of them in the market and hopefully at DCT as well in the fourth quarter and beyond, that market seem to have finally picked up some stream. And as not much construction going on which at least for now, which gives you a nice sweet spot, I think for some economic growth.

[Sheila McGrath:]

Okay. And as a follow up, you mentioned concessions, could you just kind of give us a current rule of some and how that compares to maybe a year ago?

[Matt Murphy:]

Yeah. I think Sheila for the last two quarters on our leasing, basically you have had little less than a half a month free for Europe term, in the leases that we signed in the last two quarter. A year ago that was probably a little over a year, a little over month per year, two years ago it was probably approaching two months per year.

[Sheila McGrath:]

Okay, great. Thanks a lot.

[Phil Hawkins:]

Thank you.

[Operator:]

Our next question comes from Mitch Germain at JMP Securities.

[Mitch Germain:]

Good morning guys. How are you?

[Phil Hawkins:]

Good morning. good.

[Mitch Germain:]

So I think you mentioned six markets exits and just curious kind of where that stands and how many more are planned?

[Phil Hawkins:]

Our general conceptual strategy is would rather be in still fewer markets, but given where we are which is all U.S. and in markets where we have a long history of operating our focus is more on buildings as opposed to markets. What buildings can we sale that will allow us to redeploy that capital in a way that’s accretive to both near-term earnings and growth as well as NAV. And if we can sale something that makes it difference, we will, if we can’t, we won’t. We’ll find extending path, we would rather not. So it’s really now -- and now it has been, but we clearly were driven the exit Mexico where I don’t think we had any special expertise for example and a number of smaller markets we’ve exited we just didn’t have much of our presence to begin with. But at this point I think we really are more in a position of focusing really on managing our portfolio at a building level and not necessarily at a market level.

[Mitch Germain:]

All right, thank you. Good quarter.

[Phil Hawkins:]

Thanks.

[Operator:]

Our next question comes from Rob Stevenson at Macquarie.

[Rob Stevenson:]

Good morning guys. So I’ll ask similar question as the last one in a different way. What’s the ballpark dollar value of the assets that you guys view is non-core today?

[Matt Murphy:]

Depends on the price. And I don’t believe we have smart about it, but back in my last answer there are very few assets where I feel like we’ve got to sale, every asset however in the company is for sale. You tell me the price, I’ll tell you I’m going to hold it or sell it. And again, it’s important that we think about capital allocation in a relative way, what can we do to improve the company, improve the portfolio, improve our growth by recycling not just recycle because of strategy. And that's always been our philosophy. So we didn’t sell actively in 2010 and 2011 even though we had a very clear view of where we wanted to go from a market focus perspective. It’s why we've been active sellers lately, because we thought we could actually improve the company. And we can improve the company by selling more buildings in markets that we have a strong presence in just as much we can improve the company by selling more buildings in markets where we have a small presence. So it gets really backed on, you tell me the price and then let me look at the building’s cash flow projections that are own that we put together and then we will, I’ll tell you the decision.

[Rob Stevenson:]

Okay. And then Matt, how far away are you from being force from a taxable earnings standpoint to raise a dividend?

[Matt Murphy:]

Well, given the fact that it’s actually a somewhat related question to what you were just talking about it, it’s hard to answer that question when you are actively selling assets. I don’t think in our current run rate it’s that far into the future, but it’s not something that we’re facing today. It’s hard to answer that question without getting into future guidance which I’m not willing to do. But it’s, the taxable minimum is a harder number to calculate than you might think.

[Rob Stevenson:]

Okay. Thanks guys.

[Operator:]

Our next question comes from Ki Bin Kim at SunTrust.

[Ki Bin Kim:]

First off just on your predevelopment pipeline, what is the ballpark dollar value of those assets? And generally speaking, are those assets nearly just ready to go just depends on timing when you’re comfortable with increasing the pipeline?

[Matt Murphy:]

When you say the value, Ki, are you talking current value, historical cost?

[Ki Bin Kim:]

I’m talking about…

[Matt Murphy:]

You’re talking about things aren’t in production today, right?

[Ki Bin Kim:]

Projected investment dollars for your bucket called predevelopment?

[Matt Murphy:]

I think that’s very difficult to predict. There is a reason we don’t put projected cost on predevelopment. Again I think the way to range it in terms of how many assets we have is what is the pipeline going to be and what’s our strategy in terms of feeding that pipeline if you will. We have land that is ready to go in Houston, land that is being worked on in Southern California, we have one building that is expected to start shortly, the Rialto building, but we also just acquired an additional land that’s sort of a 2015 start or beyond. We have land that is on the balance sheet that’s ready to go in Houston. I don’t think it’s helpful to start projecting the total cost of that portfolio at this point. But I think to George’s earlier question about what does our pipeline look like, I think that answer will help you sort of gauge that.

[Phil Hawkins:]

Let me just give a little more color if you don’t mind. In Atlanta I think we need to do some preleasing on that building or leasing in the surrounding submarket which is River West. The Houston building is all in my mind need some leasing in their counterpart, we have a similar building on a construction already. And so we need that to show some leasing either complete the lease up or a significant step forward. [A, B and C] again it’s how we’re going to build a suit or we require B where the specs start up to lease up or sell. We also, we will be starting, but that has simply been a going through the entitlement process, it’s been a matter of time and not it’s truly the success of our other buildings there that will go as soon as it’s ready and that we think that’s going to be in December if you see the supplemental. And then the last building in Southern California which we just bought is actually going to take time to go to the entitlement process and is also subject to a lease backup, the current use which happens to be in [an ag ranch][ph] that is generating actually a decent yield on the land as much as we’d get on the building itself probably. So that’s a function of A, [quarterly] [ph] leasing up Rialto, but have better be done by then. And then also a function of the entitlements happening and then the ground lease expiring, not the ground - the lease of the ground to the [ag ranch] [ph]. Hello?

[Ki Bin Kim:]

Yeah. So thanks for the color. Just want to ask a quick question, what should we expect on your G&A run rate especially in light of you exiting Mexico. You have about I would have guess about $28 million on run rate, should we expect that to come down a little bit?

[Matt Murphy:]

Well, I think third quarter was a little bit late frankly just as a result of sort of really professional fees, legal fees, tax fees that was wider than kind of a normal run rate. As Phil mentioned, I would not read a lot into G&A associated with Mexico, we didn't have a deep presence there, which was part of the thinking behind it. So while there will be some savings, we had 1% down there. We had resources in Texas, both Houston and Dallas that were focused on those assets. But I wouldn't expect a big drop as a result of Mexico.

[Ki Bin Kim:]

Okay. Thank you, guys.

[Phil Hawkins:]

Thank you.

[Operator:]

(Operator Instructions). And our next question comes from Eric Frankel at Green Street Advisors.

[Eric Frankel:]

Thank you. Neil, you’ve been somewhat quite in this call maybe you can talk about your Elgin acquisition and your thought process one to the deal?

[Neil Dolye:]

Eric, Thank you.

[Phil Hawkins:]

Eric, I appreciate you doing that, because Neil has been completely a waste of time.

[Neil Doyle:]

So Eric this was I think Phil said it best in his opening comments, this was a target in submarket. So that brings the Chicago team to really targeting five submarkets out of 20 to 24 depending on how you give it up. Essentially this is a value-add play. It's really an infill value-add play to get some mass in what we think is a growing submarket with some strategic advantages. Elgin 20 years ago was not a submarket you’d talk about, but quite honestly neither was I55 corridor. So we went up there, targeted it, spent about 12 months circling and found an opportunity with the seller that had been there for a while, built some of these buildings in the 80s, built some of them in the late 90s and the latest building the 400 was built in 2006. So the nice mix of A&B. The unit sizes are very nice, averaging from 25,000 to 400,000. From a market standpoint, we like where it’s growing, we like the sort of steady demand, the disciplines supply, the proximity, the labor, the highway access, etcetera. From our portfolio what we like is really some solid buildings, some great bones, significant discount to replacement, the nice mix as I said earlier and really the cost advantage not only to the competing buildings in the Elgin submarket, but a more significant cost advantage to Cook County. And so if you look at Elgin, you’re probably 40% of sort of internal demand and maybe 60% of the demand comes from O'Hare and that is simply people getting out of Cook County, seek of competing for labor, want a new building and it’s really difficult to do in an affordable price at O'Hare. So for all those reasons we thought it was a great opportunity. I'll tell you we're above three weeks into this, and albeit at the short-term deal we leased the 125,000 in the first week and we're very busy with our CapEx improvements, open houses, et cetera and reception has been great. So it’s certainly most exciting thing for the Chicago team right now.

[Eric Frankel:]

Great. And any lessons learned regarding to DCT 55 developments and your thoughts and maybe pursuing development opportunities in the market or is it more, is it time to just kind of the things on hold for a little while?

[Neil Doyle:]

Well, I mean, that the assumptions are reading the question there has that taken longer to stabilize and maybe perform. One I would tell you that we're very conservative and our downtime when we’re put a performance together for development. Two is lease rates from when we commenced construction, lease are probably up $0.50 from when we complete a construction to probably up $0.20. So our first deal and so we’re very picky quite honestly and then maybe to a fault, but our first deal was tremendous credit, a great user, a potential multiple city client and we got significantly more rent than we ever perform it. So that leaves me with 200 to go, my competition is really two other, 200 are available in the vicinity and they are both older buildings and I think we’re going to push rents a little bit higher than we anticipated a year for the 200. So from a pro forma standpoint, we are fine. From a quality standpoint, we couldn’t be more excited. So I don’t see a lesson learned, maybe a lesson reinforced, we do it again all day and I hope to maybe a little different product, maybe a slightly different location, but hope to do - hit again soon.

[Matt Murphy:]

Keep in mind Neil, you mentioned the Central Avenue price that we took on were announced last quarter, which will be a redevelopment.

[Neil Doyle:]

Sure, so Central Avenue now that is still I55 corridor, that's just a much more infill location and we’re enjoying our leaseback at the moment. And when that ends in the two and half more years, we don’t usually break around with development. And from the amount of activity there is significant chance we’re pre-leased. That's a really, really sweet spot that has generated much, much interest.

[Eric Frankel:]

Thanks. I appreciate the color

[Operator:]

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

[Phil Hawkins:]

Thank you everyone for joining our call. We appreciate your interest and time and look forward to seeing many of you at NAREIT in a few weeks. Take care.

[Operator:]

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