Toggle SGML Header (+)


Section 1: 10-Q (10-Q)

Document



 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
x
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2016
OR
¨
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from                      to                     
Commission File Number 001-33201 (DCT Industrial Trust Inc.) 333-195185 (DCT Industrial Operating Partnership LP)
_____________________________________________________________
DCT INDUSTRIAL TRUST INC.
DCT INDUSTRIAL OPERATING PARTNERSHIP LP
(Exact name of registrant as specified in its charter)
_____________________________________________________________
Maryland (DCT Industrial Trust Inc.)
 
82-0538520
Delaware (DCT Industrial Operating Partnership LP)
 
82-0538522
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
518 Seventeenth Street, Suite 800
Denver, Colorado
 
80202
(Address of principal executive offices)
 
(Zip Code)
(303) 597-2400
(Registrant’s telephone number, including area code)
_____________________________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
DCT Industrial Trust Inc.    Yes  x    No  ¨
 
DCT Industrial Operating Partnership LP    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
DCT Industrial Trust Inc.    Yes  x    No  ¨
 
DCT Industrial Operating Partnership LP     Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
DCT Industrial Trust Inc.:
Large accelerated filer
 
x
  
Accelerated filer
 
¨
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
DCT Industrial Operating Partnership LP:
Large accelerated filer
 
¨
  
Accelerated filer
 
¨
Non-accelerated filer
 
x  (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
DCT Industrial Trust Inc.    Yes  ¨    No  x
 
DCT Industrial Operating Partnership LP     Yes  ¨   No  x
As of October 28, 2016, 91,027,216 shares of common stock of DCT Industrial Trust Inc., par value $0.01 per share, were outstanding.
 
 
 
 
 

1




EXPLANATORY NOTE
This report combines the Quarterly Reports on Form 10-Q for the period ended September 30, 2016 of DCT Industrial Trust Inc., a Maryland corporation, and DCT Industrial Operating Partnership LP, a Delaware limited partnership. Except as otherwise indicated herein, the terms “Company,” “we,” “our” and “us” refer to DCT Industrial Trust Inc. and its subsidiaries, including its operating partnership, DCT Industrial Operating Partnership LP. When we use the term “DCT” or “DCT Industrial,” we are referring to DCT Industrial Trust Inc. by itself, and not including any of its subsidiaries, and when we use the term “Operating Partnership,” we are referring to DCT Industrial Operating Partnership LP by itself, and not including any of its subsidiaries.
We are a leading industrial real estate company specializing in the ownership, acquisition, development, leasing and management of bulk-distribution and light-industrial properties located in high-demand distribution markets in the United States. DCT's actively managed portfolio is strategically located near population centers and well-positioned to take advantage of market dynamics. DCT has elected to be treated as a real estate investment trust, or REIT, for U.S. federal income tax purposes. We are structured as an umbrella partnership REIT under which substantially all of our current and future business is, and will be, conducted through a majority owned and controlled subsidiary, DCT Industrial Operating Partnership LP, a Delaware limited partnership, for which DCT is the sole general partner. We own our properties through the Operating Partnership and its subsidiaries. As of September 30, 2016, DCT owned approximately 96.1% of the outstanding equity interests in the Operating Partnership.
We operate DCT and the Operating Partnership as one enterprise. The management of DCT consists of the same members as the management of the Operating Partnership. As general partner with control of the Operating Partnership, DCT consolidates the Operating Partnership for financial reporting purposes. DCT does not have significant assets other than its investment in the Operating Partnership. Therefore, the assets and liabilities of DCT and the Operating Partnership are the same on their respective financial statements.
We believe combining the quarterly reports on Form 10-Q of DCT and the Operating Partnership into this single report results in the following benefits:
enhances investors’ understanding of DCT and the Operating Partnership by enabling investors to view the business as a whole in the same manner as management views and operates the business;
eliminates duplicative disclosures and provides a more streamlined and readable presentation as a substantial portion of the Company’s disclosures apply to both DCT and the Operating Partnership; and
creates time and cost efficiencies through the preparation of one combined report instead of two separate reports.
Stockholders’ equity, partners’ capital and noncontrolling interests are the main areas of difference between the consolidated financial statements of DCT and those of the Operating Partnership. Equity interests in the Operating Partnership held by entities other than DCT are classified within partners’ capital in the Operating Partnership’s financial statements and as noncontrolling interests in DCT’s financial statements. Equity interests of 3.9% of the Operating Partnership were owned by executives and non-affiliated limited partners as of September 30, 2016.
To help investors understand the differences between DCT and the Operating Partnership, this report provides separate consolidated financial statements for DCT and the Operating Partnership; a single set of consolidated notes to such financial statements that includes separate discussions of each entity’s stockholders’ equity or partners’ capital, as applicable; and a combined Management’s Discussion and Analysis of Financial Condition and Results of Operations section that includes distinct information related to each entity.
This report also includes separate Part I, Item 4. Controls and Procedures sections and separate Exhibits 31 and 32 certifications for DCT and the Operating Partnership in order to establish that the requisite certifications have been made and that DCT and the Operating Partnership are both compliant with Rule 13a-15 or Rule 15d-15 of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. §1350.

1


DCT INDUSTRIAL TRUST INC. AND SUBSIDIARIES
DCT INDUSTRIAL OPERATING PARTNERSHIP LP AND SUBSIDIARIES
Index to Form 10-Q
 
 
 
 
  
Page
PART I.
 
FINANCIAL INFORMATION
  
 
 
 
 
Item 1.
 
Consolidated Financial Statements:
  
 
 
 
DCT Industrial Trust Inc.
  
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
DCT Industrial Operating Partnership LP
  
 
 
 
  
 
 
  
 
 
  
 
 
  
 
 
  
 
 
DCT Industrial Trust Inc. and DCT Industrial Operating Partnership LP
  
 
 
 
  
Item 2.
 
  
Item 3.
 
  
Item 4.
 
  
 
 
 
PART II.
 
  
 
 
 
 
Item 1.
 
  
Item 1A.
 
  
Item 2.
 
  
Item 3.
 
  
Item 4.
 
  
Item 5.
 
  
Item 6.
 
  
 
 
 
  

2




DCT INDUSTRIAL TRUST INC. AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except share information)
 
 
 
September 30, 2016
 
December 31, 2015
ASSETS
 
(unaudited)
 
 
Land
 
$
1,026,776

 
$
1,009,905

Buildings and improvements
 
3,099,166

 
2,886,859

Intangible lease assets
 
79,771

 
84,420

Construction in progress
 
114,332

 
159,397

Total investment in properties
 
4,320,045

 
4,140,581

Less accumulated depreciation and amortization
 
(809,408
)
 
(742,980
)
Net investment in properties
 
3,510,637

 
3,397,601

Investments in and advances to unconsolidated joint ventures
 
93,854

 
82,635

Net investment in real estate
 
3,604,491

 
3,480,236

Cash and cash equivalents
 
7,073

 
18,412

Restricted cash
 
2,417

 
31,187

Straight-line rent and other receivables, net of allowance for doubtful
   accounts of $594 and $335, respectively
 
76,803

 
60,357

Other assets, net
 
23,244

 
15,964

Assets held for sale
 
10,138

 
26,199

Total assets
 
$
3,724,166

 
$
3,632,355

 
 
 
 
 
LIABILITIES AND EQUITY
 
 

 
 

Liabilities:
 
 

 
 

Accounts payable and accrued expenses
 
$
106,039

 
$
108,788

Distributions payable
 
27,575

 
26,938

Tenant prepaids and security deposits
 
31,772

 
29,663

Other liabilities
 
40,177

 
18,398

Intangible lease liabilities, net
 
21,126

 
22,070

Line of credit
 

 
70,000

Senior unsecured notes
 
1,351,537

 
1,276,097

Mortgage notes
 
204,102

 
210,375

Liabilities related to assets held for sale
 
365

 
869

Total liabilities
 
1,782,693

 
1,763,198

 
 
 
 
 
Equity:
 
 

 
 

Preferred stock, $0.01 par value, 50,000,000 shares authorized, none
   outstanding
 

 

Shares-in-trust, $0.01 par value, 100,000,000 shares authorized, none
   outstanding
 

 

Common stock, $0.01 par value, 500,000,000 shares authorized 90,882,190
   and 88,313,891 shares issued and outstanding as of September 30, 2016
   and December 31, 2015, respectively
 
909

 
883

Additional paid-in capital
 
2,861,623

 
2,766,193

Distributions in excess of earnings
 
(997,015
)
 
(992,010
)
Accumulated other comprehensive loss
 
(27,756
)
 
(23,082
)
Total stockholders’ equity
 
1,837,761

 
1,751,984

Noncontrolling interests
 
103,712

 
117,173

Total equity
 
1,941,473

 
1,869,157

Total liabilities and equity
 
$
3,724,166

 
$
3,632,355

 
The accompanying notes are an integral part of these Consolidated Financial Statements.


3




DCT INDUSTRIAL TRUST INC. AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited, in thousands, except per share information)
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
REVENUES:
 
 
 
 

 
 
 
 
Rental revenues
 
$
99,933

 
$
88,092

 
$
289,507

 
$
264,269

Institutional capital management and other fees
 
341

 
333

 
1,039

 
1,134

Total revenues
 
100,274

 
88,425

 
290,546

 
265,403

 
 
 
 
 
 
 
 
 
OPERATING EXPENSES:
 
 

 
 

 
 
 
 
Rental expenses
 
8,795

 
8,900

 
27,830

 
27,456

Real estate taxes
 
15,074

 
14,056

 
44,729

 
42,082

Real estate related depreciation and amortization
 
40,273

 
39,431

 
120,244

 
116,876

General and administrative
 
7,370

 
7,720

 
20,990

 
24,912

Impairment losses
 

 
371

 

 
371

Casualty gain
 
(2,440
)
 

 
(2,278
)
 

Total operating expenses
 
69,072

 
70,478

 
211,515

 
211,697

Operating income
 
31,202

 
17,947

 
79,031

 
53,706

 
 
 
 
 
 
 
 
 
OTHER INCOME (EXPENSE):
 
 

 
 

 
 
 
 
Development profit, net of taxes
 

 

 

 
2,627

Equity in earnings of unconsolidated joint
ventures, net
 
1,164

 
4,493

 
2,983

 
6,336

Gain on dispositions of real estate interests
 

 

 
43,052

 
41,086

Interest expense
 
(15,773
)
 
(13,078
)
 
(47,830
)
 
(40,591
)
Interest and other income (expense)
 
18

 
(42
)
 
581

 
(71
)
Income tax expense and other taxes
 
(222
)
 
(241
)
 
(510
)
 
(712
)
Consolidated net income
of DCT Industrial Trust Inc.
 
16,389

 
9,079

 
77,307

 
62,381

Net income attributable to noncontrolling
interests
 
(829
)
 
(622
)
 
(3,938
)
 
(6,882
)
Net income attributable to common
stockholders
 
15,560

 
8,457

 
73,369

 
55,499

Distributed and undistributed earnings allocated
to participating securities
 
(163
)
 
(166
)
 
(497
)
 
(510
)
Adjusted net income attributable
to common stockholders
 
$
15,397

 
$
8,291

 
$
72,872

 
$
54,989

 
 
 
 
 
 
 
 
 
NET EARNINGS PER COMMON SHARE:
 
 

 
 

 
 
 
 
Basic
 
$
0.17

 
$
0.09

 
$
0.81

 
$
0.62

Diluted
 
$
0.17

 
$
0.09

 
$
0.81

 
$
0.62

 
 
 
 
 
 
 
 
 
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
 
 
 
 
Basic
 
90,250

 
88,207

 
89,464

 
88,162

Diluted
 
90,723

 
88,526

 
89,906

 
88,472

 
 
 
 
 
 
 
 
 
Distributions declared per common share
 
$
0.29

 
$
0.28

 
$
0.87

 
$
0.84

 
The accompanying notes are an integral part of these Consolidated Financial Statements.


4




DCT INDUSTRIAL TRUST INC. AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(unaudited, in thousands)
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
Consolidated net income
of DCT Industrial Trust Inc.
 
$
16,389

 
$
9,079

 
$
77,307

 
$
62,381

Other comprehensive income (loss):
 
 

 
 

 
 
 
 
Net derivative loss on cash flow
hedging instruments
 
(9
)
 
(518
)
 
(9,875
)
 
(973
)
Net reclassification adjustment on cash flow
hedging instruments
 
1,618

 
1,155

 
5,030

 
3,466

Other comprehensive income (loss)
 
1,609

 
637

 
(4,845
)
 
2,493

Comprehensive income
 
17,998

 
9,716

 
72,462

 
64,874

Comprehensive income attributable
to noncontrolling interests
 
(1,022
)
 
(576
)
 
(3,767
)
 
(6,930
)
Comprehensive income attributable
to common stockholders
 
$
16,976

 
$
9,140

 
$
68,695

 
$
57,944

 
The accompanying notes are an integral part of these Consolidated Financial Statements.


5




DCT INDUSTRIAL TRUST INC. AND SUBSIDIARIES
Consolidated Statement of Changes in Equity
(unaudited, in thousands)
 
 
 
Total Equity
 
Common Stock
 
Additional
Paid-in
Capital
 
Distributions
in Excess
of Earnings
 
Accumulated Other Comprehen-
sive Loss
 
Non-controlling
Interests
 
 
 
Shares
 
Amount
 
 
 
 
Balance at December 31, 2015
 
$
1,869,157

 
88,314

 
$
883

 
$
2,766,193

 
$
(992,010
)
 
$
(23,082
)
 
$
117,173

Net income
 
77,307

 

 

 

 
73,369

 

 
3,938

Other comprehensive loss
 
(4,845
)
 

 

 

 

 
(4,674
)
 
(171
)
Issuance of common stock, net
of offering costs
 
80,571

 
1,895

 
19

 
80,552

 

 

 

Issuance of common stock, stock-based compensation plans
 
(690
)
 
63

 
1

 
(691
)
 

 

 

Amortization of stock-based compensation
 
5,090

 

 

 
1,237

 

 

 
3,853

Distributions to common stockholders and noncontrolling interests
 
(82,851
)
 

 

 

 
(78,374
)
 

 
(4,477
)
Capital contributions from noncontrolling interests
 
134

 

 

 

 

 

 
134

Redemptions of noncontrolling interests
 
(2,400
)
 
610

 
6

 
14,332

 

 

 
(16,738
)
Balance at September 30, 2016
 
$
1,941,473

 
90,882

 
$
909

 
$
2,861,623

 
$
(997,015
)
 
$
(27,756
)
 
$
103,712

 
The accompanying notes are an integral part of these Consolidated Financial Statements.


6


DCT INDUSTRIAL TRUST INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited, in thousands)
 
 
Nine Months Ended September 30,
 
 
2016
 
2015
OPERATING ACTIVITIES:
 
 

 
 

Consolidated net income of DCT Industrial Trust Inc.
 
$
77,307

 
$
62,381

Adjustments to reconcile consolidated net income of DCT Industrial Trust Inc.
   to net cash provided by operating activities:
 
 

 
 

Real estate related depreciation and amortization
 
120,244

 
116,876

Gain on dispositions of real estate interests
 
(43,052
)
 
(41,086
)
Distributions of earnings from unconsolidated joint ventures
 
4,423

 
4,310

Equity in earnings of unconsolidated joint ventures, net
 
(2,983
)
 
(6,336
)
Impairment losses
 

 
371

Stock-based compensation
 
4,153

 
3,882

Casualty gain
 
(2,278
)
 

Straight-line rent
 
(16,402
)
 
(4,293
)
Other
 
3,242

 
(447
)
Changes in operating assets and liabilities:
 
 

 
 

Other receivables and other assets
 
(8,563
)
 
4,639

Accounts payable, accrued expenses and other liabilities
 
22,280

 
11,406

Net cash provided by operating activities
 
158,371

 
151,703

INVESTING ACTIVITIES:
 
 

 
 

Real estate acquisitions
 
(54,594
)
 
(154,833
)
Capital expenditures and development activities
 
(229,955
)
 
(162,538
)
Proceeds from dispositions of real estate investments
 
106,126

 
136,128

Investments in unconsolidated joint ventures
 
(15,081
)
 
(840
)
Proceeds from casualties
 
3,446

 

Distributions of investments in unconsolidated joint ventures
 
1,509

 
9,488

Change in restricted cash
 
28,406

 
3

Other investing activities
 
(4,377
)
 
(2,513
)
Net cash used in investing activities
 
(164,520
)
 
(175,105
)
FINANCING ACTIVITIES:
 
 

 
 

Proceeds from senior unsecured revolving line of credit
 
173,000

 
210,000

Repayments of senior unsecured revolving line of credit
 
(243,000
)
 
(61,000
)
Proceeds from senior unsecured notes
 
250,000

 

Repayments of senior unsecured notes
 
(174,000
)
 
(40,000
)
Principal payments on mortgage notes
 
(5,001
)
 
(5,999
)
Net settlement on issuance of stock-based compensation awards
 
(690
)
 
(605
)
Proceeds from issuance of common stock
 
81,769

 

Offering costs for issuance of common stock and OP Units
 
(1,198
)
 

Redemption of noncontrolling interests
 
(2,400
)
 
(1,714
)
Dividends to common stockholders
 
(77,610
)
 
(74,102
)
Distributions to noncontrolling interests
 
(4,604
)
 
(8,207
)
Contributions from noncontrolling interests
 
134

 

Other financing activity
 
(1,590
)
 
(2,819
)
Net cash provided by (used in) financing activities
 
(5,190
)
 
15,554

NET CHANGE IN CASH AND CASH EQUIVALENTS
 
(11,339
)
 
(7,848
)
CASH AND CASH EQUIVALENTS, beginning of period
 
18,412

 
19,631

CASH AND CASH EQUIVALENTS, end of period
 
$
7,073

 
$
11,783

 
 
 

 
 

Supplemental Disclosures of Cash Flow Information
 
 
 
 
Cash paid for interest, net of capitalized interest
 
$
40,956

 
$
35,706

Supplemental Disclosures of Non-Cash Activities
 
 

 
 

Retirement of fully depreciated and amortized assets
 
$
23,871

 
$
21,850

Redemptions of OP Units settled in shares of common stock
 
$
14,338

 
$
2,164

Assumption of mortgage notes in connection with real estate acquired
 
$

 
$
22,958

Change in capital expenditures accrual
 
$
8,096

 
$
(2,929
)
 The accompanying notes are an integral part of these Consolidated Financial Statements.

7


DCT INDUSTRIAL OPERATING PARTNERSHIP LP AND SUBSIDIARIES
Consolidated Balance Sheets
(in thousands, except unit information)
 
 
September 30, 2016
 
December 31, 2015
ASSETS
 
(unaudited)
 
 
Land
 
$
1,026,776

 
$
1,009,905

Buildings and improvements
 
3,099,166

 
2,886,859

Intangible lease assets
 
79,771

 
84,420

Construction in progress
 
114,332

 
159,397

Total investment in properties
 
4,320,045

 
4,140,581

Less accumulated depreciation and amortization
 
(809,408
)
 
(742,980
)
Net investment in properties
 
3,510,637

 
3,397,601

Investments in and advances to unconsolidated joint ventures
 
93,854

 
82,635

Net investment in real estate
 
3,604,491

 
3,480,236

Cash and cash equivalents
 
7,073

 
18,412

Restricted cash
 
2,417

 
31,187

Straight-line rent and other receivables, net of allowance
   for doubtful accounts of $594 and $335, respectively
 
76,803

 
60,357

Other assets, net
 
23,244

 
15,964

Assets held for sale
 
10,138

 
26,199

Total assets
 
$
3,724,166

 
$
3,632,355

 
 
 
 
 
LIABILITIES AND CAPITAL
 
 

 
 

Liabilities:
 
 

 
 

Accounts payable and accrued expenses
 
$
106,039

 
$
108,788

Distributions payable
 
27,575

 
26,938

Tenant prepaids and security deposits
 
31,772

 
29,663

Other liabilities
 
40,177

 
18,398

Intangible lease liabilities, net
 
21,126

 
22,070

Line of credit
 

 
70,000

Senior unsecured notes
 
1,351,537

 
1,276,097

Mortgage notes
 
204,102

 
210,375

Liabilities related to assets held for sale
 
365

 
869

Total liabilities
 
1,782,693

 
1,763,198

 
 
 
 
 
Partners' Capital:
 
 

 
 

General Partner:
 
 

 
 

OP Units, 945,384 and 923,532 issued and outstanding
as of September 30, 2016 and December 31, 2015, respectively
 
19,577

 
18,806

Limited Partners:
 
 

 
 

OP Units, 93,593,051 and 91,429,694 issued and outstanding
as of September 30, 2016 and December 31, 2015, respectively
 
1,938,104

 
1,861,809

Accumulated other comprehensive loss
 
(28,871
)
 
(24,137
)
Total partners' capital
 
1,928,810

 
1,856,478

Noncontrolling interests
 
12,663

 
12,679

Total capital
 
1,941,473

 
1,869,157

Total liabilities and capital
 
$
3,724,166

 
$
3,632,355

 
The accompanying notes are an integral part of these Consolidated Financial Statements.


8


DCT INDUSTRIAL OPERATING PARTNERSHIP LP AND SUBSIDIARIES
Consolidated Statements of Operations
(unaudited, in thousands, except per unit information)
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
REVENUES:
 
 
 
 

 
 
 
 
Rental revenues
 
$
99,933

 
$
88,092

 
$
289,507

 
$
264,269

Institutional capital management and other fees
 
341

 
333

 
1,039

 
1,134

Total revenues
 
100,274

 
88,425

 
290,546

 
265,403

 
 
 
 
 
 
 
 
 
OPERATING EXPENSES:
 
 

 
 

 
 
 
 
Rental expenses
 
8,795

 
8,900

 
27,830

 
27,456

Real estate taxes
 
15,074

 
14,056

 
44,729

 
42,082

Real estate related depreciation and amortization
 
40,273

 
39,431

 
120,244

 
116,876

General and administrative
 
7,370

 
7,720

 
20,990

 
24,912

Impairment losses
 

 
371

 

 
371

Casualty gain
 
(2,440
)
 

 
(2,278
)
 

Total operating expenses
 
69,072

 
70,478

 
211,515

 
211,697

Operating income
 
31,202

 
17,947

 
79,031

 
53,706

 
 
 
 
 
 
 
 
 
OTHER INCOME (EXPENSE):
 
 

 
 

 
 
 
 
Development profit, net of taxes
 

 

 

 
2,627

Equity in earnings of unconsolidated joint ventures, net
 
1,164

 
4,493

 
2,983

 
6,336

Gain on dispositions of real estate interests
 

 

 
43,052

 
41,086

Interest expense
 
(15,773
)
 
(13,078
)
 
(47,830
)
 
(40,591
)
Interest and other income (expense)
 
18

 
(42
)
 
581

 
(71
)
Income tax expense and other taxes
 
(222
)
 
(241
)
 
(510
)
 
(712
)
Consolidated net income of DCT Industrial
Operating Partnership LP
 
16,389

 
9,079

 
77,307

 
62,381

Net income attributable to noncontrolling
interests
 
(215
)
 
(226
)
 
(638
)
 
(4,203
)
Net income attributable to OP Unitholders
 
16,174

 
8,853

 
76,669

 
58,178

Distributed and undistributed earnings allocated
to participating securities
 
(163
)
 
(166
)
 
(497
)
 
(510
)
Adjusted net income attributable
to OP Unitholders
 
$
16,011

 
$
8,687

 
$
76,172

 
$
57,668

 
 
 
 
 
 
 
 
 
NET EARNINGS PER OP UNIT:
 
 

 
 

 
 
 
 
Basic
 
$
0.17

 
$
0.09

 
$
0.81

 
$
0.62

Diluted
 
$
0.17

 
$
0.09

 
$
0.81

 
$
0.62

 
 
 
 
 
 
 
 
 
WEIGHTED AVERAGE OP UNITS OUTSTANDING:
 
 
 
 
Basic
 
94,047

 
92,424

 
93,487

 
92,419

Diluted
 
94,520

 
92,743

 
93,929

 
92,729

 
 
 
 
 
 
 
 
 
Distributions declared per OP Unit
 
$
0.29

 
$
0.28

 
$
0.87

 
$
0.84

 
The accompanying notes are an integral part of these Consolidated Financial Statements.

9




DCT INDUSTRIAL OPERATING PARTNERSHIP LP AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(unaudited, in thousands)
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
Consolidated net income of DCT Industrial
Operating Partnership LP
 
$
16,389

 
$
9,079

 
$
77,307

 
$
62,381

Other comprehensive income (loss):
 
 

 
 

 
 
 
 
Net derivative loss on cash flow
hedging instruments
 
(9
)
 
(518
)
 
(9,875
)
 
(973
)
Net reclassification adjustment on cash flow
hedging instruments
 
1,618

 
1,155

 
5,030

 
3,466

Other comprehensive income (loss)
 
1,609

 
637

 
(4,845
)
 
2,493

Comprehensive income
 
17,998

 
9,716

 
72,462

 
64,874

Comprehensive income attributable
to noncontrolling interests
 
(240
)
 
(141
)
 
(527
)
 
(4,135
)
Comprehensive income attributable
to OP Unitholders
 
$
17,758

 
$
9,575

 
$
71,935

 
$
60,739

 
The accompanying notes are an integral part of these Consolidated Financial Statements.


10




DCT INDUSTRIAL OPERATING PARTNERSHIP LP AND SUBSIDIARIES
Consolidated Statement of Changes in Capital
(unaudited, in thousands)
 
 
 
Total Capital
 
General Partner
 
Limited Partners
 
Accumulated Other
Comprehensive Loss
 
Non-controlling Interests
 
 
 
OP Units
 
OP Units
 
 
 
 
 
Units
 
Amount
 
Units
 
Amount
 
 
Balance at December 31, 2015
 
$
1,869,157

 
924

 
$
18,806

 
91,429

 
$
1,861,809

 
$
(24,137
)
 
$
12,679

Net income
 
77,307

 

 
767

 

 
75,902

 

 
638

Other comprehensive loss
 
(4,845
)
 

 

 

 

 
(4,734
)
 
(111
)
Issuance of OP Units, net of selling costs
 
80,571

 

 

 
1,895

 
80,571

 

 

Issuance of OP Units, share-based
   compensation plans
 
(690
)
 

 

 
345

 
(690
)
 

 

Amortization of share-based compensation
 
5,090

 

 

 

 
5,090

 

 

Distributions to OP Unitholders
   and noncontrolling interests
 
(82,851
)
 

 
(822
)
 

 
(81,352
)
 

 
(677
)
Capital contributions from
   noncontrolling interests
 
134

 

 

 

 

 

 
134

Redemption of limited partner OP Units, net
 
(2,400
)
 

 

 
(55
)
 
(2,400
)
 

 

Conversion of limited partner OP Units
   to OP Units of general partner
 

 
21

 
826

 
(21
)
 
(826
)
 

 

Balance at September 30, 2016
 
$
1,941,473

 
945

 
$
19,577

 
93,593

 
$
1,938,104

 
$
(28,871
)
 
$
12,663

 
The accompanying notes are an integral part of these Consolidated Financial Statements.


11




DCT INDUSTRIAL OPERATING PARTNERSHIP LP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(unaudited, in thousands)
 
 
Nine Months Ended September 30,
 
 
2016
 
2015
OPERATING ACTIVITIES:
 
 

 
 

Consolidated net income of DCT Industrial Operating Partnership LP
 
$
77,307

 
$
62,381

Adjustments to reconcile consolidated net income of DCT Industrial Operating
Partnership LP to net cash provided by operating activities:
 
 

 
 

Real estate related depreciation and amortization
 
120,244

 
116,876

Gain on dispositions of real estate interests
 
(43,052
)
 
(41,086
)
Distributions of earnings from unconsolidated joint ventures
 
4,423

 
4,310

Equity in earnings of unconsolidated joint ventures, net
 
(2,983
)
 
(6,336
)
Impairment losses
 

 
371

Share-based compensation
 
4,153

 
3,882

Casualty gain
 
(2,278
)
 

Straight-line rent
 
(16,402
)
 
(4,293
)
Other
 
3,242

 
(447
)
Changes in operating assets and liabilities:
 
 

 
 

Other receivables and other assets
 
(8,563
)
 
4,639

Accounts payable, accrued expenses and other liabilities
 
22,280

 
11,406

Net cash provided by operating activities
 
158,371

 
151,703

INVESTING ACTIVITIES:
 
 

 
 

Real estate acquisitions
 
(54,594
)
 
(154,833
)
Capital expenditures and development activities
 
(229,955
)
 
(162,538
)
Proceeds from dispositions of real estate investments
 
106,126

 
136,128

Investments in unconsolidated joint ventures
 
(15,081
)
 
(840
)
Proceeds from casualties
 
3,446

 

Distributions of investments in unconsolidated joint ventures
 
1,509

 
9,488

Change in restricted cash
 
28,406

 
3

Other investing activities
 
(4,377
)
 
(2,513
)
Net cash used in investing activities
 
(164,520
)
 
(175,105
)
FINANCING ACTIVITIES:
 
 

 
 

Proceeds from senior unsecured revolving line of credit
 
173,000

 
210,000

Repayments of senior unsecured revolving line of credit
 
(243,000
)
 
(61,000
)
Proceeds from senior unsecured notes
 
250,000

 

Repayments of senior unsecured notes
 
(174,000
)
 
(40,000
)
Principal payments on mortgage notes
 
(5,001
)
 
(5,999
)
Net settlement on issuance of share-based compensation awards
 
(690
)
 
(605
)
Proceeds from the issuance of OP Units in exchange for contributions from the REIT, net
 
80,571

 

OP Unit redemptions
 
(2,400
)
 
(1,714
)
Distributions paid on OP Units
 
(81,538
)
 
(78,075
)
Distributions to noncontrolling interests
 
(676
)
 
(4,234
)
Contributions from noncontrolling interests
 
134

 

Other financing activity
 
(1,590
)
 
(2,819
)
Net cash provided by (used in) financing activities
 
(5,190
)
 
15,554

NET CHANGE IN CASH AND CASH EQUIVALENTS
 
(11,339
)
 
(7,848
)
CASH AND CASH EQUIVALENTS, beginning of period
 
18,412

 
19,631

CASH AND CASH EQUIVALENTS, end of period
 
$
7,073

 
$
11,783

 
 
 
 
 
Supplemental Disclosures of Cash Flow Information
 
 

 
 

Cash paid for interest, net of capitalized interest
 
$
40,956

 
$
35,706

Supplemental Disclosures of Non-Cash Activities
 
 

 
 

Retirement of fully depreciated and amortized assets
 
$
23,871

 
$
21,850

Assumption of mortgage notes in connection with real estate acquired
 
$

 
$
22,958

Change in capital expenditures accrual
 
$
8,096

 
$
(2,929
)

The accompanying notes are an integral part of these Consolidated Financial Statements.

12




DCT INDUSTRIAL TRUST INC. AND SUBSIDIARIES
DCT INDUSTRIAL OPERATING PARTERNSHIP LP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
Note 1 – Organization
DCT Industrial Trust Inc. is a leading industrial real estate company specializing in the ownership, acquisition, development, leasing and management of bulk-distribution and light-industrial properties located in high-demand distribution markets in the United States. DCT's actively managed portfolio is strategically located near population centers and well-positioned to take advantage of market dynamics. As used herein, the terms “Company,” “we,” “our” and “us” refer to DCT Industrial Trust Inc. and its subsidiaries, including its operating partnership, DCT Industrial Operating Partnership LP. When we use the term “DCT” or “DCT Industrial,” we are referring to DCT Industrial Trust Inc. by itself, and not including any of its subsidiaries, and when we use the term “Operating Partnership,” we are referring to DCT Industrial Operating Partnership LP by itself, and not including any of its subsidiaries.
DCT was formed as a Maryland corporation in April 2002 and has elected to be treated as a real estate investment trust, or REIT, for U.S. federal income tax purposes. We are structured as an umbrella partnership REIT under which substantially all of our current and future business is, and will be, conducted through a majority owned and controlled subsidiary, DCT Industrial Operating Partnership LP, a Delaware limited partnership, for which DCT is the sole general partner. DCT owns properties through the Operating Partnership and its subsidiaries. As of September 30, 2016, DCT owned approximately 96.1% of the outstanding equity interests in the Operating Partnership.
As of September 30, 2016, the Company owned interests in approximately 73.5 million square feet of properties leased to approximately 900 customers, including:
64.7 million square feet comprising 398 consolidated operating properties, including three buildings totaling 0.8 million square feet classified as held for sale, that were 96.2% occupied;
7.8 million square feet comprising 23 unconsolidated properties that were 97.2% occupied and which we operated on behalf of three institutional capital management partners; 
0.6 million square feet comprising four consolidated properties under redevelopment; and
0.4 million square feet comprising three consolidated properties in development.
In addition, the Company has seven projects under construction and several projects in pre-development.  See “Note 3 – Investment in Properties" for further details.

Note 2 – Summary of Significant Accounting Policies
Interim Financial Information 
The accompanying unaudited Consolidated Financial Statements have been prepared in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”) and with the instructions to Form 10-Q and Article 10 of Regulation S-X for interim financial information. Accordingly, these statements do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, the accompanying unaudited Consolidated Financial Statements include all adjustments, consisting of normal recurring items, necessary for their fair presentation in conformity with GAAP. Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with our audited Consolidated Financial Statements as of December 31, 2015 and related notes thereto included in our Form 10-K filed on February 19, 2016.
Basis of Presentation and Principles of Consolidation
The accompanying Consolidated Financial Statements include the financial position, results of operations and cash flows of the Company, the Operating Partnership, their wholly-owned qualified REIT subsidiaries and taxable REIT subsidiaries, and their consolidated joint ventures in which they have a controlling interest.

13




Equity interests in the Operating Partnership held by entities other than DCT are classified within partners’ capital in the Operating Partnership’s financial statements and as noncontrolling interests in DCT’s financial statements. Equity interests in entities consolidated into the Operating Partnership that are held by third parties are reflected in our accompanying balance sheets as noncontrolling interests. We also have noncontrolling partnership interests in unconsolidated institutional capital management and other joint ventures, which are accounted for under the equity method. All significant intercompany transactions and balances have been eliminated in consolidation.
We hold interests in both consolidated and unconsolidated joint ventures for the purposes of operating and developing industrial real estate. All joint ventures over which we have financial and operating control, and variable interest entities (“VIEs”) in which we have determined that we are the primary beneficiary, are included in the Consolidated Financial Statements. We use the equity method of accounting for joint ventures over which we do not have a controlling interest or where we do not exercise significant control over major operating and management decisions but where we exercise significant influence and include our share of earnings or losses of these joint ventures in our consolidated results of operations.
We analyze our joint ventures in accordance with GAAP to determine whether they are VIEs and, if so, whether we are the primary beneficiary. Our judgment with respect to our level of influence or control over an entity and whether we are the primary beneficiary of a VIE involves consideration of various factors including the form of our ownership interest, our representation on the entity’s board of directors, the size of our investment (including loans), our obligation or right to absorb its losses or receive its benefits and our ability to participate in major decisions.  
If a joint venture does not meet the characteristics of a VIE, we apply the voting interest model to determine whether the entity should be consolidated. Our ability to assess our influence or control over an entity affects the presentation of these investments in the Consolidated Financial Statements and our financial position and results of operations.
We concluded our Operating Partnership meets the criteria of a VIE as the Operating Partnership’s limited partners do not have the right to remove the general partner and do not have substantive participating rights in the operations of the Operating Partnership.  Under the Amended and Restated Limited Partnership Agreement of the Operating Partnership (the “Partnership Agreement”), DCT is the primary beneficiary of the Operating Partnership as we have the obligation to absorb losses and receive benefits, and the power to control substantially all of the activities which most significantly impact the economic performance of the Operating Partnership.  Accordingly, the Operating Partnership is consolidated within DCT’s financial statements.
Use of Estimates
The preparation of the Consolidated Financial Statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenue Recognition
At the inception of a new lease arrangement, including new leases that arise from amendments, we assess the terms and conditions to determine the proper lease classification. A lease arrangement is classified as an operating lease if none of the following criteria are met: (i) transfer of ownership to the lessee, (ii) lessee has a bargain purchase option during or at the end of the lease term, (iii) the lease term is equal to 75% or more of the underlying property’s economic life, or (iv) the present value of future minimum lease payments (excluding executory costs) are equal to 90% or more of the excess estimated fair value of the leased building. Generally our leases do not meet any of the criteria above and accordingly are classified as operating leases. We record rental revenues on a straight-line basis under which contractual rent increases are recognized evenly over the lease term. Certain properties have leases that provide for tenant occupancy during periods where no rent is due or where minimum rent payments change during the term of the lease. Accordingly, receivables from tenants that we expect to collect over the remaining lease term are recorded on the balance sheet as straight-line rent receivables. When we acquire a property, the terms of existing leases are considered to commence as of the acquisition date for the purposes of this calculation. The total increase to “Rental revenues” due to straight-line rent adjustments was approximately $5.2 million and $16.4 million for the three and nine months ended September 30, 2016, respectively, and approximately $0.9 million and $4.3 million for the three and nine months ended September 30, 2015, respectively.

14




If the lease provides for tenant improvements, we determine whether the tenant improvements are owned by the tenant or us. When we are the owner of the tenant improvements, the tenant is not considered to have taken physical possession or have control of the leased asset until the tenant improvements are substantially complete. When we are the owner of the tenant improvements, any tenant improvements funded by the tenant are treated as lease payments which are deferred and amortized into rental revenues over the lease term. When the tenant is the owner of the tenant improvements, we record any tenant improvement allowance funded as a lease incentive and amortize it as a reduction of rental revenue over the lease term. Tenant recovery income includes reimbursements due from tenants pursuant to their leases for real estate taxes, insurance, repairs and maintenance and other recoverable property operating expenses and is recognized as “Rental revenues” during the period the related expenses are incurred. The reimbursements are recognized and presented on a gross basis, as the Company is generally the primary obligor and, with respect to purchasing goods and services from third party suppliers, has discretion in selecting the supplier and bears the associated credit risk. Tenant recovery income recognized as “Rental revenues” was approximately $23.3 million and $67.8 million for the three and nine months ended September 30, 2016, respectively, and approximately $20.6 million and $62.8 million for the three and nine months ended September 30, 2015, respectively.
We maintain an allowance for estimated losses that may result from the inability of our customers to make required payments. If a customer fails to make contractual payments beyond any allowance, we may recognize additional bad debt expense in future periods equal to the net outstanding balances. In connection with property acquisitions qualifying as business combinations, we may acquire leases with rental rates above or below the market rental rates. Such differences are recorded as an intangible lease asset or liability and amortized to “Rental revenues” over the reasonably assured term of the related leases. We consider a reasonably assured term to be the measurement period equal to the remaining non-cancelable term of the lease for above-market leases and the initial term plus the term of any below-market fixed rate renewal options for below-market leases.  The unamortized balances of these assets and liabilities associated with the early termination of leases are fully amortized to their respective revenue line items in our Consolidated Statements of Operations on a straight-line basis over the estimated remaining contractual lease term. The total net impact to “Rental revenues” due to the amortization of above and below market rents was an increase of approximately $0.7 million and $2.1 million for the three and nine months ended September 30, 2016, respectively, and approximately $0.8 million and $2.3 million for the three and nine months ended September 30, 2015, respectively.
Early lease termination fees are recorded in “Rental revenues” on a straight-line basis over the estimated remaining contractual lease term or upon collection if collectability is not assured. The total net impact to “Rental revenues” due to early lease termination fees was approximately $0.2 million and $0.9 million for the three and nine months ended September 30, 2016, respectively, and approximately $1.2 million and $2.4 million for the three and nine months ended September 30, 2015, respectively.
We earn revenues from asset management fees, acquisition fees, property management fees and fees for other services pursuant to joint venture and other third-party agreements. These are included in our Consolidated Statements of Operations in “Institutional capital management and other fees.” We recognize revenues from asset management fees, acquisition fees, property management fees and fees for other services when the related fees are earned and are realized or realizable.
We develop certain properties for specific buyers, called build-to-suit projects. We make certain judgments based on the specific terms of each project as to the amount and timing of recognition of profits from the project. Projects are generally accounted for using the percentage of completion method or full accrual method. Profits under the percentage of completion method are based on our estimates of the percentage of completion of individual contracts, commencing when the work performed under the contracts reaches a point where the final costs can be estimated with reasonable accuracy. The percentage of completion estimates are based on a comparison of the contract expenditures incurred to the estimated final costs. Changes in job performance, job conditions and estimated profitability may result in revisions to the costs and income and are recognized in the period in which the revisions are determined. If the sale recognition criteria for using the percentage of completion or full accrual methods are not met, we apply another recognition method provided by GAAP, such as the installment or cost recovery methods. The profit recognized from these projects is reported net of estimated taxes, when applicable, and is included in “Development profit, net of taxes” in our Consolidated Statements of Operations.

15




New Accounting Standards
In May 2014, the Financial Accounting Standards Boards (“FASB”) issued an accounting standards update (“ASU”) that requires companies to recognize revenue from contracts with customers based upon the transfer of goods or services to customers in amounts that reflect the consideration to which the company expects to be entitled in exchange for those goods or services. The new standard also results in enhanced disclosures about revenue, provides guidance for transactions that were not previously addressed comprehensively and improves guidance for multiple-element arrangements. The FASB subsequently issued additional ASU's which improve guidance and provide clarification of the new standard. The guidance is effective for fiscal years beginning after December 15, 2017, with early adoption permitted for fiscal years beginning after December 15, 2016. The Company has not yet selected a transition method and is currently evaluating the effect that the updated standard will have on our Consolidated Financial Statements and related disclosures.
 
In February 2015, the FASB issued an ASU that modifies the evaluation of whether limited partnerships and similar legal entities are VIEs, eliminates the presumption that a general partner should consolidate a limited partnership and affects the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships. The guidance is effective for fiscal years beginning after December 15, 2015. We adopted this standard effective January 1, 2016. We concluded the Operating Partnership meets the criteria of a VIE and DCT is the primary beneficiary. Accordingly, we continue to consolidate the Operating Partnership. As the Operating Partnership was previously consolidated, the adoption of the ASU did not result in any changes to our conclusions regarding consolidation or deconsolidation of entities.

In February 2016, the FASB issued an ASU that modifies existing accounting standards for lease accounting.  The new standard requires a lessee to record an asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. The new standard requires lessors to account for leases using an approach that is substantially the same as existing guidance for sales-type leases, direct financing leases and operating leases. The guidance is effective for fiscal years beginning after December 15, 2018, with early adoption permitted for fiscal years beginning after December 15, 2016. The standard requires a modified retrospective transition approach for all capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with an option to use certain transition relief. The Company expects this guidance to impact our Consolidated Financial Statements and is in the process of evaluating whether the effect will be material.
 
In March 2016, the FASB issued an ASU that simplifies the accounting for share-based payment transactions, including income tax consequences, the classification of awards as either equity or liabilities, and the classification on the statement of cash flows. The guidance is effective for fiscal years beginning after December 15, 2016, with early adoption permitted. The adoption of this guidance will not have a significant impact on our Consolidated Financial Statements.

In August 2016, the FASB issued an ASU that clarifies how companies should classify certain cash receipts and payments on the statement of cash flows, including equity method investee distributions, insurance proceed settlements and contingent consideration payments made following a business combination. The new standard also clarifies the predominance principle applied when cash receipts and payments have aspects of more than one class of cash flows. The guidance is effective for fiscal years beginning after December 15, 2017, with early adoption permitted. The adoption of this guidance will not have significant impact on our Consolidated Financial Statements.

 


16




Note 3 – Investment in Properties
Our consolidated investment in properties consists of operating properties, properties under development, properties in pre-development, redevelopment properties and land held for future development or other purposes. The historical cost of our investment in properties was (in thousands):
 
 
September 30,
2016
 
December 31,
2015
Operating properties
 
$
4,077,582

 
$
3,791,721

Properties under development
 
141,331

 
242,906

Properties in pre-development
 
34,817

 
41,313

Properties under redevelopment
 
58,617

 
56,943

Land held
 
7,698

 
7,698

Total investment in properties
 
4,320,045

 
4,140,581

Less accumulated depreciation and amortization
 
(809,408
)
 
(742,980
)
Net investment in properties
 
$
3,510,637

 
$
3,397,601

Acquisition Activity
During the nine months ended September 30, 2016, we acquired four buildings totaling 0.6 million square feet located in the Cincinnati, Dallas and Southern California markets for a total purchase price of approximately $42.5 million. Related to these acquisitions, we incurred acquisition costs of approximately $0.6 million during the nine months ended September 30, 2016, included in "General and administrative" in our Consolidated Statement of Operations.
Development Activity
Our properties under development include the following:
Three buildings totaling 0.4 million square feet that are currently in lease-up as shell-complete activities have been completed as of September 30, 2016. These properties are 44.2% leased based on weighted average square feet; and
Seven projects are under construction totaling 2.4 million square feet.
During the nine months ended September 30, 2016, we acquired 65.1 acres of land in the Baltimore/Washington D.C., Dallas and Denver markets for approximately $11.6 million that is held for future development.
Disposition Activity
During the nine months ended September 30, 2016, we sold 11 consolidated operating properties totaling 2.0 million square feet from our Chicago, Houston, Louisville and Northern California markets to third-parties for gross proceeds of approximately $108.6 million. We recognized gains of approximately $43.1 million on the disposition of these 11 properties.
Intangible Lease Assets and Liabilities
Aggregate amortization expense for intangible lease assets recognized in connection with property acquisitions (excluding assets and liabilities related to above and below market rents; see “Note 2 – Summary of Significant Accounting Policies” for additional information) was approximately $2.8 million and $9.0 million for the three and nine months ended September 30, 2016, respectively, and approximately $3.6 million and $11.2 million for the three and nine months ended September 30, 2015, respectively. Our intangible lease assets and liabilities included the following (in thousands):
 
 
September 30, 2016
 
December 31, 2015
 
 
Gross
 
Accumulated
Amortization
 
Net
 
Gross
 
Accumulated
Amortization
 
Net
Other intangible lease assets
 
$
75,810

 
$
(39,393
)
 
$
36,417

 
$
79,718

 
$
(35,993
)
 
$
43,725

Above market rent
 
$
3,961

 
$
(1,984
)
 
$
1,977

 
$
4,702

 
$
(2,280
)
 
$
2,422

Below market rent
 
$
(32,063
)
 
$
10,937

 
$
(21,126
)
 
$
(31,565
)
 
$
9,495

 
$
(22,070
)
 

17




Note 4 – Investments in and Advances to Unconsolidated Joint Ventures
We enter into joint ventures primarily for purposes of operating and developing industrial real estate. Our investments in these joint ventures are included in “Investments in and advances to unconsolidated joint ventures” in our Consolidated Balance Sheets.
During September 2016, the TRT-DCT Venture III disposed of one property. We received approximately $0.5 million for our share of the gross proceeds and recognized our share of the gain on the sale of approximately $0.1 million, which is included in "Equity in earnings of unconsolidated joint ventures, net" in our Consolidated Statements of Operations.
During September 2016, the Stirling Capital Investment joint venture completed development activities and leased one building totaling 0.4 million square feet.
The following table summarizes our unconsolidated joint ventures (dollars in thousands):
 
 
As of September 30, 2016
 
Investments in and Advances to as of
 
 
Ownership Percentage
 
Number of Buildings
 
September 30,
2016
 
December 31,
2015
Unconsolidated Joint Ventures
 
 
 
 
Institutional Joint Ventures:
 
 

 
 

 
 
 
DCT/SPF Industrial Operating LLC
 
20.0
%
 
13

 
$
37,563

 
$
38,153

TRT-DCT Venture III
 
10.0
%
 
3

 
1,564

 
1,972

Total Institutional Joint Ventures
 
 

 
16

 
39,127

 
40,125

Other:
 
 

 
 

 
 

 
 

Stirling Capital Investments (SCLA)(1)
 
50.0
%
 
7

 
54,727

 
42,510

Total
 
 

 
23

 
$
93,854

 
$
82,635

 
(1) 
Although we contributed 100% of the initial cash equity capital required by the venture, after return of certain preferential distributions on capital invested, profits and losses are generally split 50/50.
Guarantees
There are no lines of credit or side agreements related to, or between, our unconsolidated joint ventures and us, and there are no derivative financial instruments between our unconsolidated joint ventures and us. In addition, we do not believe we have any material exposure to financial guarantees.



18




Note 5 – Financial Instruments and Hedging Activities
Fair Value of Financial Instruments
As of September 30, 2016 and December 31, 2015, the fair values of cash and cash equivalents, restricted cash, accounts receivable and accounts payable approximated their carrying values due to the short-term nature of settlement of these instruments. The fair values of other financial instruments subject to fair value disclosures were determined based on available market information and valuation methodologies we believe to be appropriate estimates for these purposes. Considerable judgment and a high degree of subjectivity are involved in developing these estimates. Our estimates may differ from the actual amounts that we could realize upon disposition. The following table summarizes these financial instruments (in thousands):
 
 
As of September 30, 2016
 
As of December 31, 2015
 
 
Carrying
Amounts
 
Estimated
Fair Value
 
Carrying
Amounts
 
Estimated
Fair Value
Borrowings(1):
 
 

 
 

 
 

 
 

Senior unsecured revolving credit facility
 
$

 
$

 
$
70,000

 
$
70,000

Fixed rate debt(2)
 
$
1,413,448

 
$
1,505,750

 
$
1,268,596

 
$
1,310,388

Variable rate debt
 
$
150,000

 
$
148,380

 
$
225,000

 
$
222,649

 
 
 
 
 
 
 
 
 
Interest rate contracts:
 
 

 
 

 
 

 
 

Interest rate swap asset (liability)(3)
 
$
(8,038
)
 
$
(8,038
)
 
$
219

 
$
219

 
(1) 
The fair values of our borrowings were estimated using a discounted cash flow methodology. Credit spreads and market interest rates used to determine the fair value of these instruments are based on unobservable Level 3 inputs which management has determined to be its best estimate of current market values.
(2) 
The carrying amount of our fixed rate debt includes premiums and discounts and excludes deferred loan costs.
(3) 
The fair value of our interest rate swaps is determined using the market standard methodology of netting the discounted future fixed cash flows and the discounted expected variable cash flows based on an expectation of future interest rates derived from Level 2 observable market interest rate curves. We also incorporate a credit valuation adjustment, which is derived using unobservable Level 3 inputs, to appropriately reflect both our nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurement. The asset or liability is included in “Other assets, net” or “Other liabilities,” respectively, in our Consolidated Balance Sheets.
The following table presents a reconciliation of assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3). The table also displays gains and losses due to changes in fair value, including both realized and unrealized, recognized in the Consolidated Statements of Operations for Level 3 assets and liabilities. When assets and liabilities are transferred between levels, we recognize the transfer at the beginning of the period. There were no transfers between levels during the nine months ended September 30, 2016 and 2015.
 
 
During the Nine Months Ended September 30,
 
 
2016
 
2015
Level 3 Assets (Liabilities):
 
 

 
 
Interest Rate Swaps:
 
 

 
 

Beginning balance at January 1
 
$
219

 
$
(167
)
Net unrealized loss included in accumulated other comprehensive loss
 
(9,777
)
 
(255
)
Realized gain recognized in interest expense
 
1,520

 
111

Ending balance at September 30
 
$
(8,038
)
 
$
(311
)

Hedging Activities
To manage interest rate risk for variable rate debt and issuances of fixed rate debt, we primarily use treasury locks and interest rate swaps as part of our cash flow hedging strategy. These derivatives are designed to mitigate the risk of future interest rate increases by providing a fixed interest rate for a limited, pre-determined period of time. Such derivatives have been used to hedge the variability in existing and future interest expense associated with existing variable rate borrowings and forecasted issuances of debt, which may include issuances of new debt, as well as refinancing of existing debt upon maturity.

19




Accounting for changes in the fair value of derivatives depends on the intended use of the derivative and the designation of the derivative, whether we have elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge.
 
For derivatives designated as “cash flow” hedges, the effective portion of the change in the fair value of the derivative is initially reported in “Other comprehensive income (“OCI”)” in our Consolidated Statements of Comprehensive Income (i.e., not included in earnings) and subsequently reclassified into earnings when the hedged transaction affects earnings or the hedging relationship is no longer effective at which time the ineffective portion of the derivative’s change in fair value is recognized directly into earnings. We assess the effectiveness of each hedging relationship whenever financial statements are issued or earnings are reported and at least every three months. We do not use derivatives for trading or speculative purposes.
During June 2013, certain of our consolidated ventures entered into two pay-fixed, receive-floating interest rate swaps to hedge the variability of future cash flows attributable to changes in the 1 month USD LIBOR rates. The pay-fixed, receive-floating interest rate swaps have an effective date of June 2013 and a maturity date of June 2023. These interest rates swaps effectively fix the interest rate on the related debt instruments at 4.72%. As of September 30, 2016 and December 31, 2015, we had borrowings payable subject to these pay-fixed, receive-floating interest rate swaps with aggregate principal balances of approximately $6.7 million and $6.8 million, respectively.
During December 2015, we entered into a pay-fixed, receive-floating interest rate swap to hedge the variability of future cash flows attributable to changes in the 1 month LIBOR rates on our $200.0 million unsecured term loan. The pay-fixed, receive-floating interest rate swap has an effective date of December 2015 and a maturity date of December 2022. The interest rate swap effectively fixes the interest rate on the related debt instrument at 3.31%, however, there is no floor on the variable interest rate of the swap whereas the current variable rate debt is subject to a 0.0% floor. In the event that USD LIBOR is negative, the Company will make payments to the hedge counterparty equal to the spread between USD LIBOR and zero. During the nine months ended September 30, 2016, we recorded approximately $0.5 million of hedge ineffectiveness in earnings attributable to a 0.0% floor mismatch in the hedging relationships (i.e., there is no floor on the variable interest rate of the swap whereas the current variable rate debt from which the hedged forecasted transactions are expected to flow is subject to a 0.0% floor on the USD LIBOR component of the interest rate). As of September 30, 2016 and December 31, 2015, we had borrowings payable subject to this pay-fixed, receive-floating interest rate swap with aggregate principal balances of approximately $200.0 million.
The following table presents the effect of our derivative financial instruments on our accompanying Consolidated Financial Statements (in thousands):
 
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
Derivatives in Cash Flow Hedging Relationships
 
 

 
 
 
 
Interest Rate Swaps:
 
 

 
 

 
 
 
 
Amount of loss recognized in OCI for effective portion of derivatives
 
$
(9
)
 
$
(518
)
 
$
(9,875
)
 
$
(973
)
Amount of loss reclassified from accumulated OCI for effective portion of derivatives into interest expense and equity in earnings of unconsolidated joint ventures, net
 
$
(1,618
)
 
$
(1,155
)
 
$
(5,030
)
 
$
(3,466
)
Amount of gain (loss) recognized in interest expense (ineffective portion and amount excluded from effectiveness testing)
 
$
967

 
$

 
$
(453
)
 
$

 
 
Amounts reported in “Accumulated other comprehensive loss” related to derivatives will be amortized to “Interest expense” as interest payments are made on our current debt and anticipated debt issuances. During the next 12 months, we estimate that approximately $6.3 million will be reclassified from “Accumulated other comprehensive loss” to “Interest expense” resulting in an increase in interest expense.

20




Note 6 – Outstanding Indebtedness
As of September 30, 2016, our outstanding indebtedness of approximately $1.6 billion consisted of mortgage notes, senior unsecured notes and bank unsecured credit facilities, excluding approximately $35.3 million representing our proportionate share of debt associated with unconsolidated joint ventures. As of December 31, 2015, our outstanding indebtedness of approximately $1.6 billion consisted of mortgage notes, senior unsecured notes and bank unsecured credit facilities, excluding approximately $35.7 million representing our proportionate share of debt associated with unconsolidated joint ventures.
As of September 30, 2016, the gross book value of our consolidated properties was approximately $4.3 billion and the gross book value of all properties securing our mortgage debt was approximately $0.6 billion. As of December 31, 2015, the gross book value of our consolidated properties was approximately $4.1 billion and the gross book value of all properties securing our mortgage debt was approximately $0.6 billion. Our debt has various covenants with which we were in compliance as of September 30, 2016 and December 31, 2015.
Line of Credit
As of September 30, 2016, we had no balance outstanding and $396.5 million available under our $400.0 million senior unsecured revolving credit facility, net of one letter of credit totaling $3.5 million. As of December 31, 2015, we had $70.0 million outstanding and $326.5 million available under our $400.0 million senior unsecured revolving credit facility, net of one letter of credit totaling $3.5 million.
Debt Issuance and Payoffs
On August 8, 2016, we issued $250.0 million of fixed rate senior unsecured notes in a private placement offering. The notes have an average term of 10 years, a weighted average interest rate of 3.90% and require semi-annual interest payments. We primarily used the proceeds to paydown our senior unsecured revolving credit facility, payoff a $49.0 million senior unsecured note at maturity and payoff a portion of our $25.0 million senior unsecured term loan maturing in April 2017.
Guarantee of Debt
DCT has guaranteed the Operating Partnership’s obligations with respect to the senior unsecured notes and the bank unsecured credit facilities.

Note 7 – Noncontrolling Interests
DCT
Noncontrolling interests are the portion of equity, or net assets, in a subsidiary not attributable, directly or indirectly, to a parent. Noncontrolling interests of DCT primarily represent limited partnership interests in the Operating Partnership and equity interests held by third party partners in consolidated real estate investments, including related parties as discussed in “Note 9 – Related Party Transactions.”
Operating Partnership
Equity interests in the Operating Partnership held by third-parties and LTIP Units, as defined in “Note 8 – Stockholders’ Equity of DCT and Partners’ Capital of the Operating Partnership,” are classified as permanent equity of the Operating Partnership and as noncontrolling interests of DCT in the Consolidated Balance Sheets.

Note 8 – Stockholders’ Equity of DCT and Partners’ Capital of the Operating Partnership
DCT
Common Stock
As of September 30, 2016, approximately 90.9 million shares of common stock were issued and outstanding.

21




On September 10, 2015, we registered a continuous equity offering program to replace our continuous equity offering program previously registered on May 29, 2013. Pursuant to this offering, we may sell up to five million shares of common stock from time-to-time through September 10, 2018 in “at-the-market” offerings or certain other transactions. During the nine months ended September 30, 2016, we issued approximately 1.9 million shares of common stock through the continuous equity offering program, at a weighted average price of $43.14 per share for proceeds of approximately $80.6 million, net of offering expenses. We used the proceeds for general corporate purposes, including funding developments and redevelopments and repaying debt. As of September 30, 2016, approximately 3.1 million shares of common stock remain available to be issued under the current offering.  We did not issue any shares of common stock under the current or previously registered offering programs during 2015.
During the nine months ended September 30, 2016 and 2015, we issued approximately 63,000 and 87,000 shares of common stock in each corresponding period related to vested shares of restricted stock, phantom shares and stock option exercises.
Operating Partnership
OP Units
For each share of common stock issued by DCT, the Operating Partnership issues a corresponding OP Unit to DCT in exchange for the contribution of the proceeds from the stock issuances.
As of September 30, 2016 and December 31, 2015, DCT owned approximately 96.1% and 95.6%, respectively, of the outstanding equity interests in the Operating Partnership. The remaining common partnership interests in the Operating Partnership were owned by executives of the Company and non-affiliated limited partners.
DCT holds its interests through both general and limited partner units. The Partnership Agreement stipulates the general partner shall at all times own a minimum of 1.0% of all outstanding OP Units. As a result, each reporting period certain of DCT’s limited partner units are converted to general partner units to satisfy this requirement as illustrated in the Consolidated Statement of Changes in Capital.
Limited partners have the right to require the Company to redeem all or a portion of the OP Units held by the limited partner at a redemption price equal to and in the form of the Cash Amount (as defined in the Partnership Agreement) provided that such OP Units have been outstanding for at least one year. The Company may, in its sole discretion, purchase the OP Units by paying to the limited partner either the Cash Amount or the REIT Shares Amount (generally one share of DCT’s common stock for each OP Unit), as defined in the Partnership Agreement.
During the nine months ended September 30, 2016 and 2015, approximately 0.5 million and 0.2 million OP Units were redeemed for approximately $1.9 million and $1.7 million in cash and approximately 0.5 million and 0.1 million shares of DCT common stock, respectively. The OP Unit redemptions exclude LTIP Unit redemptions, see "LTIP Units" below for a summary of LTIP Unit redemptions.
As of September 30, 2016 and December 31, 2015, approximately 3.7 million and 4.0 million OP Units were issued, outstanding and held by entities other than DCT in each corresponding period, including approximately 0.7 million and 0.6 million vested LTIP Units issued under our Long-Term Incentive Plan, as amended, respectively.
As of September 30, 2016 and December 31, 2015, the aggregate redemption value of the then-outstanding OP Units held by entities other than DCT was approximately $177.5 million and $150.9 million based on the $48.55 and $37.37 per share closing price of DCT’s common stock on September 30, 2016 and December 31, 2015, respectively.