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, 2017
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.)
555 17th Street, Suite 3700
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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
DCT Industrial Trust Inc.:
Large accelerated filer
 
x
  
Accelerated filer
 
¨
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
 
 
 
 
Emerging growth company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
 
 
 
 
 
 
¨
DCT Industrial Operating Partnership LP:
Large accelerated filer
 
¨
  
Accelerated filer
 
¨
Non-accelerated filer
 
x  (Do not check if a smaller reporting company)
  
Smaller reporting company
 
¨
 
 
 
 
Emerging growth company
 
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
 
 
 
 
 
 
¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
DCT Industrial Trust Inc.    Yes  ¨    No  x
 
 
 
DCT Industrial Operating Partnership LP     Yes  ¨   No  x

As of October 27, 2017, 93,132,801 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, 2017 of DCT Industrial Trust Inc., a Maryland corporation, and DCT Industrial Operating Partnership LP, a Delaware limited partnership. Except as otherwise indicated herein, the terms “Company,” “we,” “our” and “us” refer to DCT Industrial Trust Inc. and its subsidiaries, including its operating partnership, DCT Industrial Operating Partnership LP. When we use the term “DCT” or “DCT Industrial,” we are referring to DCT Industrial Trust Inc. by itself, and not including any of its subsidiaries, and when we use the term “Operating Partnership,” we are referring to DCT Industrial Operating Partnership LP by itself, and not including any of its subsidiaries.
We are a leading industrial real estate company specializing in the ownership, acquisition, development, leasing and management of bulk-distribution and light-industrial properties located in high-demand distribution markets in the United States. DCT's actively managed portfolio is strategically located near population centers and well-positioned to take advantage of market dynamics. DCT has elected to be treated as a real estate investment trust, or REIT, for U.S. federal income tax purposes. We are structured as an umbrella partnership REIT under which substantially all our current and future business is, and will be, conducted through a majority owned and controlled subsidiary, DCT Industrial Operating Partnership LP, a Delaware limited partnership, for which DCT is the sole general partner. We own our properties through the Operating Partnership and its subsidiaries. As of September 30, 2017, DCT owned approximately 96.5% 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 3.5% of the Operating Partnership were owned by executives and non-affiliated limited partners as of September 30, 2017.
To help investors understand the differences between DCT and the Operating Partnership, this report provides separate Consolidated Financial Statements for DCT and the Operating Partnership; a single set of consolidated notes to such financial statements that includes separate discussions of each entity’s stockholders’ equity or partners’ capital, as applicable; and a combined Management’s Discussion and Analysis of Financial Condition and Results of Operations section that includes distinct information related to each entity.
This report also includes separate Part I, Item 4. Controls and Procedures sections and separate Exhibits 31 and 32 certifications for DCT and the Operating Partnership to establish that the requisite certifications have been made and that DCT and the Operating Partnership are both compliant with Rule 13a-15 or Rule 15d-15 of the Securities Exchange Act of 1934, as amended, and 18 U.S.C. §1350.

1

DCT INDUSTRIAL TRUST INC. AND SUBSIDIARIES
DCT INDUSTRIAL OPERATING PARTNERSHIP LP AND SUBSIDIARIES
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
(unaudited, in thousands, except share information)
 
 
 
September 30, 2017
 
December 31, 2016
ASSETS
 
 
 
 
Land
 
$
1,146,298

 
$
1,075,995

Buildings and improvements
 
3,260,147

 
3,202,293

Intangible lease assets
 
70,497

 
78,356

Construction in progress
 
167,034

 
72,829

Total investment in properties
 
4,643,976

 
4,429,473

Less accumulated depreciation and amortization
 
(918,142
)
 
(839,773
)
Net investment in properties
 
3,725,834

 
3,589,700

Investments in and advances to unconsolidated joint ventures
 
72,223

 
95,606

Net investment in real estate
 
3,798,057

 
3,685,306

Cash and cash equivalents
 
13,446

 
10,286

Restricted cash
 
32,269

 
7,346

Straight-line rent and other receivables, net of allowance for doubtful
   accounts of $809 and $379, respectively
 
79,484

 
79,889

Other assets, net
 
27,226

 
25,315

Assets held for sale
 
1,521

 
—

Total assets
 
$
3,952,003

 
$
3,808,142

 
 
 
 
 
LIABILITIES AND EQUITY
 
 

 
 

Liabilities:
 
 

 
 

Accounts payable and accrued expenses
 
$
113,697

 
$
93,097

Distributions payable
 
29,995

 
29,622

Tenant prepaids and security deposits
 
34,481

 
32,884

Other liabilities
 
36,980

 
37,403

Intangible lease liabilities, net
 
19,287

 
21,421

Line of credit
 
206,000

 
75,000

Senior unsecured notes
 
1,328,435

 
1,351,969

Mortgage notes
 
161,882

 
201,959

Liabilities related to assets held for sale
 
18

 
—

Total liabilities
 
1,930,775

 
1,843,355

 
 
 
 
 
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 93,018,193
   and 91,516,113 shares issued and outstanding as of September 30, 2017
   and December 31, 2016, respectively
 
930

 
915

Additional paid-in capital
 
2,946,446

 
2,884,806

Distributions in excess of earnings
 
(1,009,962
)
 
(1,006,125
)
Accumulated other comprehensive loss
 
(14,985
)
 
(17,530
)
Total stockholders’ equity
 
1,922,429

 
1,862,066

Noncontrolling interests
 
98,799

 
102,721

Total equity
 
2,021,228

 
1,964,787

Total liabilities and equity
 
$
3,952,003

 
$
3,808,142

 
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,
 
 
2017
 
2016
 
2017
 
2016
REVENUES:
 
 
 
 

 
 
 
 
Rental revenues
 
$
104,873

 
$
99,933

 
$
314,514

 
$
289,507

Institutional capital management and other fees
 
307

 
341

 
1,083

 
1,039

Total revenues
 
105,180

 
100,274

 
315,597

 
290,546

 
 
 
 
 
 
 
 
 
OPERATING EXPENSES:
 
 

 
 

 
 
 
 
Rental expenses
 
9,183

 
8,795

 
27,871

 
27,830

Real estate taxes
 
16,023

 
15,074

 
48,318

 
44,729

Real estate related depreciation and amortization
 
42,427

 
40,273

 
125,479

 
120,244

General and administrative
 
7,138

 
7,370

 
22,151

 
20,990

Casualty gain
 
—

 
(2,440
)
 
(270
)
 
(2,278
)
Total operating expenses
 
74,771

 
69,072

 
223,549

 
211,515

Operating income
 
30,409

 
31,202

 
92,048

 
79,031

 
 
 
 
 
 
 
 
 
OTHER INCOME (EXPENSE):
 
 

 
 

 
 
 
 
Equity in earnings of unconsolidated joint ventures, net
 
982

 
1,164

 
5,235

 
2,983

Gain on dispositions of real estate interests
 
11,556

 
—

 
39,658

 
43,052

Interest expense
 
(16,022
)
 
(15,773
)
 
(49,582
)
 
(47,830
)
Interest and other income (expense)
 
(1
)
 
18

 
(13
)
 
581

Impairment loss on land
 
—

 
—

 
(938
)
 
—

Income tax benefit (expense) and other taxes
 
56

 
(222
)
 
(147
)
 
(510
)
Consolidated net income of DCT Industrial Trust Inc.
 
26,980

 
16,389

 
86,261

 
77,307

Net income attributable to noncontrolling interests
 
(1,199
)
 
(829
)
 
(3,887
)
 
(3,938
)
Net income attributable to common stockholders
 
25,781

 
15,560

 
82,374

 
73,369

Distributed and undistributed earnings allocated to participating securities
 
(159
)
 
(163
)
 
(482
)
 
(497
)
Adjusted net income attributable to common stockholders
 
$
25,622

 
$
15,397

 
$
81,892

 
$
72,872

 
 
 
 
 
 
 
 
 
NET EARNINGS PER COMMON SHARE:
 
 

 
 

 
 
 
 
Basic
 
$
0.28

 
$
0.17

 
$
0.89

 
$
0.81

Diluted
 
$
0.28

 
$
0.17

 
$
0.89

 
$
0.81

 
 
 
 
 
 
 
 
 
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
 
 
 
 
Basic
 
92,981

 
90,250

 
92,351

 
89,464

Diluted
 
93,078

 
90,723

 
92,467

 
89,906

 
 
 
 
 
 
 
 
 
Distributions declared per common share
 
$
0.31

 
$
0.29

 
$
0.93

 
$
0.87

 
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,
 
 
2017
 
2016
 
2017
 
2016
Consolidated net income of DCT Industrial Trust Inc.
 
$
26,980

 
$
16,389

 
$
86,261

 
$
77,307

Other comprehensive income (loss):
 
 

 
 

 
 
 
 
Net derivative loss on cash flow hedging instruments
 
(285
)
 
(9
)
 
(1,445
)
 
(9,875
)
Net reclassification adjustment on cash flow hedging instruments
 
1,253

 
1,618

 
4,153

 
5,030

Other comprehensive income (loss)
 
968

 
1,609

 
2,708

 
(4,845
)
Comprehensive income
 
27,948

 
17,998

 
88,969

 
72,462

Comprehensive income attributable to noncontrolling interests
 
(1,269
)
 
(1,022
)
 
(4,050
)
 
(3,767
)
Comprehensive income attributable to common stockholders
 
$
26,679

 
$
16,976

 
$
84,919

 
$
68,695

 
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, 2016
 
$
1,964,787

 
91,516

 
$
915

 
$
2,884,806

 
$
(1,006,125
)
 
$
(17,530
)
 
$
102,721

Net income
 
86,261

 
—

 
—

 
—

 
82,374

 
—

 
3,887

Other comprehensive income
 
2,708

 
—

 
—

 
—

 
—

 
2,545

 
163

Issuance of common stock, net
of offering costs
 
59,437

 
1,179

 
12

 
59,425

 
—

 
—

 
—

Issuance of common stock, stock-based compensation plans
 
(1,459
)
 
72

 
1

 
(1,460
)
 
—

 
—

 
—

Amortization of stock-based compensation
 
5,603

 
—

 
—

 
1,518

 
—

 
—

 
4,085

Distributions to common stockholders and noncontrolling interests
 
(90,276
)
 
—

 
—

 
—

 
(86,211
)
 
—

 
(4,065
)
Capital contributions from noncontrolling interests
 
1,277

 
—

 
—

 
—

 
—

 
—

 
1,277

Redemptions of noncontrolling interests
 
(7,110
)
 
251

 
2

 
2,157

 
—

 
—

 
(9,269
)
Balance at September 30, 2017
 
$
2,021,228

 
93,018

 
$
930

 
$
2,946,446

 
$
(1,009,962
)
 
$
(14,985
)
 
$
98,799

 
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,
 
 
2017
 
2016
OPERATING ACTIVITIES:
 
 

 
 

Consolidated net income of DCT Industrial Trust Inc.
 
$
86,261

 
$
77,307

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

 
 

Real estate related depreciation and amortization
 
125,479

 
120,244

Gain on dispositions of real estate interests
 
(39,658
)
 
(43,052
)
Distributions of earnings from unconsolidated joint ventures
 
5,219

 
4,423

Equity in earnings of unconsolidated joint ventures, net
 
(5,235
)
 
(2,983
)
Impairment loss on land
 
938

 
—

Stock-based compensation
 
4,552

 
4,153

Casualty gain
 
(270
)
 
(2,278
)
Straight-line rent
 
(4,222
)
 
(16,402
)
Other
 
4,248

 
3,242

Changes in operating assets and liabilities:
 
 

 
 

Other receivables and other assets
 
1,945

 
(8,749
)
Accounts payable, accrued expenses and other liabilities
 
5,086

 
22,280

Net cash provided by operating activities
 
184,343

 
158,185

INVESTING ACTIVITIES:
 
 

 
 

Real estate acquisitions
 
(123,273
)
 
(54,594
)
Capital expenditures and development activities
 
(162,967
)
 
(229,955
)
Proceeds from dispositions of real estate investments
 
83,029

 
106,126

Investments in unconsolidated joint ventures
 
(13,711
)
 
(15,081
)
Proceeds from casualties
 
300

 
3,446

Distributions of investments in unconsolidated joint ventures
 
36,396

 
1,509

Other investing activities
 
(4,166
)
 
(4,377
)
Net cash used in investing activities
 
(184,392
)
 
(192,926
)
FINANCING ACTIVITIES:
 
 

 
 

Proceeds from senior unsecured revolving line of credit
 
287,000

 
173,000

Repayments of senior unsecured revolving line of credit
 
(156,000
)
 
(243,000
)
Proceeds from senior unsecured notes
 
51,940

 
250,000

Repayments of senior unsecured notes
 
(76,000
)
 
(174,000
)
Principal payments on mortgage notes
 
(39,411
)
 
(5,001
)
Net settlement on issuance of stock-based compensation awards
 
(1,459
)
 
(690
)
Proceeds from issuance of common stock
 
60,694

 
81,769

Offering costs for issuance of common stock and OP Units
 
(1,257
)
 
(1,198
)
Redemption of noncontrolling interests
 
(7,110
)
 
(2,400
)
Dividends to common stockholders
 
(85,749
)
 
(77,610
)
Distributions to noncontrolling interests
 
(4,154
)
 
(4,604
)
Contributions from noncontrolling interests
 
532

 
134

Other financing activity
 
(790
)
 
(1,590
)
Net cash provided by (used in) financing activities
 
28,236

 
(5,190
)
NET CHANGE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
 
28,187

 
(39,931
)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of period
 
18,074

 
49,878

CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of period
 
$
46,261

 
$
9,947

 
 
 

 
 

Supplemental Disclosures of Cash Flow Information
 
 
 
 
Cash paid for interest, net of capitalized interest
 
$
45,123

 
$
40,956

Supplemental Disclosures of Non-Cash Activities
 
 

 
 

Retirement of fully depreciated and amortized assets
 
$
25,228

 
$
23,871

Redemptions of OP Units settled in shares of common stock
 
$
2,159

 
$
14,338

Contributions from noncontrolling interests
 
$
745

 
$
—

Decrease (increase) in capital expenditures accruals
 
$
(15,674
)
 
$
8,096

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

7

DCT INDUSTRIAL OPERATING PARTNERSHIP LP AND SUBSIDIARIES
Consolidated Balance Sheets
(unaudited, in thousands, except unit information)
 
 
September 30, 2017
 
December 31, 2016
ASSETS
 
 
 
 
Land
 
$
1,146,298

 
$
1,075,995

Buildings and improvements
 
3,260,147

 
3,202,293

Intangible lease assets
 
70,497

 
78,356

Construction in progress
 
167,034

 
72,829

Total investment in properties
 
4,643,976

 
4,429,473

Less accumulated depreciation and amortization
 
(918,142
)
 
(839,773
)
Net investment in properties
 
3,725,834

 
3,589,700

Investments in and advances to unconsolidated joint ventures
 
72,223

 
95,606

Net investment in real estate
 
3,798,057

 
3,685,306

Cash and cash equivalents
 
13,446

 
10,286

Restricted cash
 
32,269

 
7,346

Straight-line rent and other receivables, net of allowance
   for doubtful accounts of $809 and $379, respectively
 
79,484

 
79,889

Other assets, net
 
27,226

 
25,315

Assets held for sale
 
1,521

 
—

Total assets
 
$
3,952,003

 
$
3,808,142

 
 
 
 
 
LIABILITIES AND CAPITAL
 
 

 
 

Liabilities:
 
 

 
 

Accounts payable and accrued expenses
 
$
113,697

 
$
93,097

Distributions payable
 
29,995

 
29,622

Tenant prepaids and security deposits
 
34,481

 
32,884

Other liabilities
 
36,980

 
37,403

Intangible lease liabilities, net
 
19,287

 
21,421

Line of credit
 
206,000

 
75,000

Senior unsecured notes
 
1,328,435

 
1,351,969

Mortgage notes
 
161,882

 
201,959

Liabilities related to assets held for sale
 
18

 
—

Total liabilities
 
1,930,775

 
1,843,355

 
 
 
 
 
Partners' Capital:
 
 

 
 

General Partner:
 
 

 
 

OP Units, 963,492 and 950,442 issued and outstanding
as of September 30, 2017 and December 31, 2016, respectively
 
20,221

 
19,699

Limited Partners:
 
 

 
 

OP Units, 95,385,684 and 94,093,805 issued and outstanding
as of September 30, 2017 and December 31, 2016, respectively
 
2,001,842

 
1,950,191

Accumulated other comprehensive loss
 
(15,520
)
 
(18,220
)
Total partners' capital
 
2,006,543

 
1,951,670

Noncontrolling interests
 
14,685

 
13,117

Total capital
 
2,021,228

 
1,964,787

Total liabilities and capital
 
$
3,952,003

 
$
3,808,142

 
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,
 
 
2017
 
2016
 
2017
 
2016
REVENUES:
 
 
 
 

 
 
 
 
Rental revenues
 
$
104,873

 
$
99,933

 
$
314,514

 
$
289,507

Institutional capital management and other fees
 
307

 
341

 
1,083

 
1,039

Total revenues
 
105,180

 
100,274

 
315,597

 
290,546

 
 
 
 
 
 
 
 
 
OPERATING EXPENSES:
 
 

 
 

 
 
 
 
Rental expenses
 
9,183

 
8,795

 
27,871

 
27,830

Real estate taxes
 
16,023

 
15,074

 
48,318

 
44,729

Real estate related depreciation and amortization
 
42,427

 
40,273

 
125,479

 
120,244

General and administrative
 
7,138

 
7,370

 
22,151

 
20,990

Casualty gain
 
—

 
(2,440
)
 
(270
)
 
(2,278
)
Total operating expenses
 
74,771

 
69,072

 
223,549

 
211,515

Operating income
 
30,409

 
31,202

 
92,048

 
79,031

 
 
 
 
 
 
 
 
 
OTHER INCOME (EXPENSE):
 
 

 
 

 
 
 
 
Equity in earnings of unconsolidated joint ventures, net
 
982

 
1,164

 
5,235

 
2,983

Gain on dispositions of real estate interests
 
11,556

 
—

 
39,658

 
43,052

Interest expense
 
(16,022
)
 
(15,773
)
 
(49,582
)
 
(47,830
)
Interest and other income (expense)
 
(1
)
 
18

 
(13
)
 
581

Impairment loss on land
 
—

 
—

 
(938
)
 
—

Income tax benefit (expense) and other taxes
 
56

 
(222
)
 
(147
)
 
(510
)
Consolidated net income of DCT Industrial Operating Partnership LP
 
26,980

 
16,389

 
86,261

 
77,307

Net income attributable to noncontrolling interests
 
(262
)
 
(215
)
 
(742
)
 
(638
)
Net income attributable to OP Unitholders
 
26,718

 
16,174

 
85,519

 
76,669

Distributed and undistributed earnings allocated to participating securities
 
(159
)
 
(163
)
 
(482
)
 
(497
)
Adjusted net income attributable to OP Unitholders
 
$
26,559

 
$
16,011

 
$
85,037

 
$
76,172

 
 
 
 
 
 
 
 
 
NET EARNINGS PER OP UNIT:
 
 

 
 

 
 
 
 
Basic
 
$
0.28

 
$
0.17

 
$
0.89

 
$
0.81

Diluted
 
$
0.28

 
$
0.17

 
$
0.89

 
$
0.81

 
 
 
 
 
 
 
 
 
WEIGHTED AVERAGE OP UNITS OUTSTANDING:
 
 
 
 
Basic
 
96,377

 
94,047

 
95,877

 
93,487

Diluted
 
96,474

 
94,520

 
95,993

 
93,929

 
 
 
 
 
 
 
 
 
Distributions declared per OP Unit
 
$
0.31

 
$
0.29

 
$
0.93

 
$
0.87

 
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,
 
 
2017
 
2016
 
2017
 
2016
Consolidated net income of DCT Industrial Operating Partnership LP
 
$
26,980

 
$
16,389

 
$
86,261

 
$
77,307

Other comprehensive income (loss):
 
 

 
 

 
 
 
 
Net derivative loss on cash flow hedging instruments
 
(285
)
 
(9
)
 
(1,445
)
 
(9,875
)
Net reclassification adjustment on cash flow hedging instruments
 
1,253

 
1,618

 
4,153

 
5,030

Other comprehensive income (loss)
 
968

 
1,609

 
2,708

 
(4,845
)
Comprehensive income
 
27,948

 
17,998

 
88,969

 
72,462

Comprehensive income attributable to noncontrolling interests
 
(267
)
 
(240
)
 
(750
)
 
(527
)
Comprehensive income attributable to OP Unitholders
 
$
27,681

 
$
17,758

 
$
88,219

 
$
71,935

 
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, 2016
 
$
1,964,787

 
950

 
$
19,699

 
94,094

 
$
1,950,191

 
$
(18,220
)
 
$
13,117

Net income
 
86,261

 
—

 
855

 
—

 
84,664

 
—

 
742

Other comprehensive income
 
2,708

 
—

 
—

 
—

 
—

 
2,700

 
8

Issuance of OP Units, net of selling costs
 
59,437

 
—

 
—

 
1,179

 
59,437

 
—

 
—

Issuance of OP Units, share-based
   compensation plans
 
(1,459
)
 
—

 
—

 
259

 
(1,459
)
 
—

 
—

Amortization of share-based compensation
 
5,603

 
—

 
—

 
—

 
5,603

 
—

 
—

Distributions to OP Unitholders
   and noncontrolling interests
 
(90,276
)
 
—

 
(898
)
 
—

 
(88,919
)
 
—

 
(459
)
Capital contributions from
   noncontrolling interests
 
1,277

 
—

 
—

 
—

 
—

 
—

 
1,277

Redemption of limited partner OP Units, net
 
(7,110
)
 
—

 
—

 
(133
)
 
(7,110
)
 
—

 
—

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

 
14

 
565

 
(14
)
 
(565
)
 
—

 
—

Balance at September 30, 2017
 
$
2,021,228

 
964

 
$
20,221

 
95,385

 
$
2,001,842

 
$
(15,520
)
 
$
14,685

 
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,
 
 
2017
 
2016
OPERATING ACTIVITIES:
 
 

 
 

Consolidated net income of DCT Industrial Operating Partnership LP
 
$
86,261

 
$
77,307

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
 
125,479

 
120,244

Gain on dispositions of real estate interests
 
(39,658
)
 
(43,052
)
Distributions of earnings from unconsolidated joint ventures
 
5,219

 
4,423

Equity in earnings of unconsolidated joint ventures, net
 
(5,235
)
 
(2,983
)
Impairment loss on land
 
938

 
—

Share-based compensation
 
4,552

 
4,153

Casualty gain
 
(270
)
 
(2,278
)
Straight-line rent
 
(4,222
)
 
(16,402
)
Other
 
4,248

 
3,242

Changes in operating assets and liabilities:
 
 

 
 

Other receivables and other assets
 
1,945

 
(8,749
)
Accounts payable, accrued expenses and other liabilities
 
5,086

 
22,280

Net cash provided by operating activities
 
184,343

 
158,185

INVESTING ACTIVITIES:
 
 

 
 

Real estate acquisitions
 
(123,273
)
 
(54,594
)
Capital expenditures and development activities
 
(162,967
)
 
(229,955
)
Proceeds from dispositions of real estate investments
 
83,029

 
106,126

Investments in unconsolidated joint ventures
 
(13,711
)
 
(15,081
)
Proceeds from casualties
 
300

 
3,446

Distributions of investments in unconsolidated joint ventures
 
36,396

 
1,509

Other investing activities
 
(4,166
)
 
(4,377
)
Net cash used in investing activities
 
(184,392
)
 
(192,926
)
FINANCING ACTIVITIES:
 
 

 
 

Proceeds from senior unsecured revolving line of credit
 
287,000

 
173,000

Repayments of senior unsecured revolving line of credit
 
(156,000
)
 
(243,000
)
Proceeds from senior unsecured notes
 
51,940

 
250,000

Repayments of senior unsecured notes
 
(76,000
)
 
(174,000
)
Principal payments on mortgage notes
 
(39,411
)
 
(5,001
)
Net settlement on issuance of share-based compensation awards
 
(1,459
)
 
(690
)
Proceeds from the issuance of OP Units in exchange for contributions from the REIT, net
 
59,437

 
80,571

OP Unit redemptions
 
(7,110
)
 
(2,400
)
Distributions paid on OP Units
 
(89,444
)
 
(81,538
)
Distributions to noncontrolling interests
 
(459
)
 
(676
)
Contributions from noncontrolling interests
 
532

 
134

Other financing activity
 
(790
)
 
(1,590
)
Net cash provided by (used in) financing activities
 
28,236

 
(5,190
)
NET CHANGE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
 
28,187

 
(39,931
)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of period
 
18,074

 
49,878

CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of period
 
$
46,261

 
$
9,947

 
 
 
 
 
Supplemental Disclosures of Cash Flow Information
 
 

 
 

Cash paid for interest, net of capitalized interest
 
$
45,123

 
$
40,956

Supplemental Disclosures of Non-Cash Activities
 
 

 
 

Retirement of fully depreciated and amortized assets
 
$
25,228

 
$
23,871

Contributions from noncontrolling interests
 
$
745

 
$
—

Decrease (increase) in capital expenditures accruals
 
$
(15,674
)
 
$
8,096


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

12



DCT INDUSTRIAL TRUST INC. AND SUBSIDIARIES
DCT INDUSTRIAL OPERATING PARTERNSHIP LP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
 
Note 1 – Organization
DCT Industrial Trust Inc. is a leading industrial real estate company specializing in the ownership, acquisition, development, leasing and management of bulk-distribution and light-industrial properties located in high-demand distribution markets in the United States. DCT's actively managed portfolio is strategically located near population centers and well-positioned to take advantage of market dynamics. As used herein, the terms “Company,” “we,” “our” and “us” refer to DCT Industrial Trust Inc. and its subsidiaries, including its operating partnership, DCT Industrial Operating Partnership LP. When we use the term “DCT” or “DCT Industrial,” we are referring to DCT Industrial Trust Inc. by itself, and not including any of its subsidiaries, and when we use the term “Operating Partnership,” we are referring to DCT Industrial Operating Partnership LP by itself, and not including any of its subsidiaries.
DCT was formed as a Maryland corporation in April 2002 and has elected to be treated as a real estate investment trust, or REIT, for U.S. federal income tax purposes. We are structured as an umbrella partnership REIT under which substantially all our current and future business is, and will be, conducted through a majority owned and controlled subsidiary, DCT Industrial Operating Partnership LP, a Delaware limited partnership, for which DCT is the sole general partner. DCT owns properties through the Operating Partnership and its subsidiaries. As of September 30, 2017, DCT owned approximately 96.5% of the outstanding equity interests in the Operating Partnership.
As of September 30, 2017, the Company owned interests in approximately 73.7 million square feet of properties leased to approximately 870 customers, including:
•
64.1 million square feet comprising 400 consolidated operating properties, including one property totaling 14,000 square feet classified as held for sale, that were 98.0% occupied;
•
7.6 million square feet comprising 21 unconsolidated properties that were 98.4% occupied and which we operated on behalf of one institutional capital management partner and an unconsolidated joint venture; 
•
0.2 million square feet comprising two consolidated value-add acquisitions;
•
0.1 million square feet comprising one consolidated property under redevelopment; and
•
1.7 million square feet comprising six consolidated properties developed by DCT which are shell-construction complete and in lease-up.
In addition, the Company has 18 projects under construction and several projects in pre-development. See “Note 3 – Investment in Properties” for further details related to our development activity.

Note 2 – Summary of Significant Accounting Policies
Interim Financial Information 
The accompanying unaudited Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and with the instructions to Form 10-Q and Article 10 of Regulation S-X for interim financial information. Accordingly, these statements do not include all the information and notes required by GAAP for complete financial statements. In the opinion of management, the accompanying unaudited Consolidated Financial Statements include all adjustments, consisting of normal recurring items, necessary for their fair presentation in conformity with GAAP. Interim results are not necessarily indicative of results for a full year. The information included in this Form 10-Q should be read in conjunction with our audited Consolidated Financial Statements as of December 31, 2016 and related notes thereto included in our Form 10-K filed on February 17, 2017.
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 (or equivalent body), the size of our investment (including loans), our obligation or right to absorb its losses or receive its benefits and our ability to participate in major decisions.  
If a joint venture does not meet the characteristics of a VIE, we apply the voting interest model to determine whether the entity should be consolidated. Our ability to assess our influence or control over an entity affects the presentation of these investments in the Consolidated Financial Statements and our financial position and results of operations.
We concluded our Operating Partnership meets the criteria of a VIE as the Operating Partnership’s limited partners do not have the right to remove the general partner and do not have substantive participating rights in the operations of the Operating Partnership. Under the Amended and Restated Limited Partnership Agreement of the Operating Partnership (the “Partnership Agreement”), DCT is the primary beneficiary of the Operating Partnership as we have the obligation to absorb losses and receive benefits, and the power to control substantially all the activities which most significantly impact the economic performance of the Operating Partnership. Accordingly, the Operating Partnership is consolidated within DCT’s financial statements.
Use of Estimates
The preparation of the Consolidated Financial Statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the Consolidated Financial Statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash, Cash Equivalents and Restricted Cash
Cash and cash equivalents include cash held in financial institutions and other highly liquid short-term investments with original maturities of three months or less. We have not realized any losses in our cash and cash equivalents and believe that these short-term instruments are not exposed to any significant credit risk. Restricted cash consists of escrow deposits held by lenders for real estate taxes, insurance and capital replacement reserves, security deposits and amounts held by intermediary agents to be used for tax-deferred, like-kind exchange transactions. As of September 30, 2017, approximately $29.7 million of restricted cash was included in “Cash, Cash Equivalents and Restricted Cash” in our Consolidated Statements of Cash Flows related to tax deferred, like-kind exchange transactions. For the nine months ended September 30, 2016, all funds that had been obtained in tax deferred, like-kind exchange transactions were utilized during 2016.

14



The following table presents a reconciliation of cash, cash equivalents and restricted cash reported within our Consolidated Balance Sheets to amounts reported within our Consolidated Statements of Cash Flows (in thousands):
 
 
As of September 30,
 
 
2017
 
2016
Cash and cash equivalents
 
$
13,446

 
$
7,073

Restricted cash
 
32,269

 
2,417

Restricted cash included in Other assets, net
 
546

 
457

Total cash, cash equivalents and restricted cash
 
$
46,261

 
$
9,947

Revenue Recognition
At the inception of a new lease arrangement, including new leases that arise from amendments, we assess the terms and conditions to determine the proper lease classification. A lease arrangement is classified as an operating lease if none of the following criteria are met: (i) transfer of ownership to the lessee, (ii) lessee has a bargain purchase option during or at the end of the lease term, (iii) the lease term is equal to 75% or more of the underlying property’s economic life, or (iv) the present value of future minimum lease payments (excluding executory costs) are equal to 90% or more of the excess estimated fair value (over retained investment tax credits) of the leased building. Generally, our leases do not meet any of the listed criteria above and are classified as operating leases.
We record rental revenues on a straight-line basis under which contractual rent increases are recognized evenly over the lease term. Certain properties have leases that provide for tenant occupancy during periods where no rent is due or where minimum rent payments change during the term of the lease. Accordingly, receivables from tenants that we expect to collect over the remaining lease term are recorded on the balance sheet as straight-line rent receivables. The total increase to “Rental revenues” due to straight-line rent adjustments was approximately $8,000 and $4.2 million for the three and nine months ended September 30, 2017, respectively, and approximately $5.2 million and $16.4 million for the three and nine months ended September 30, 2016, respectively.
If the lease provides for tenant improvements, we determine whether the tenant improvements are owned by the tenant or us. When we are the owner of the tenant improvements, the tenant generally is not considered to have taken physical possession or have control of the leased asset until the tenant improvements are substantially complete. When we are the owner of the tenant improvements, any tenant improvements funded by the tenant are treated as lease payments which are deferred and amortized into rental revenues over the lease term. When the tenant is the owner of the tenant improvements, we record any tenant improvement allowance funded as a lease incentive and amortize it as a reduction of rental revenue over the lease term. Tenant recovery income includes reimbursements due from tenants pursuant to their leases for real estate taxes, insurance, repairs and maintenance and other recoverable property operating expenses and is recognized as “Rental revenues” during the period the related expenses are incurred. The reimbursements are recognized and presented on a gross basis, as the Company 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 $25.5 million and $76.1 million for the three and nine months ended September 30, 2017, respectively, and approximately $23.3 million and $67.8 million for the three and nine months ended September 30, 2016, 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 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 $0.8 million and $2.2 million for the three and nine months ended September 30, 2017, respectively, and approximately $0.7 million and $2.1 million for the three and nine months ended September 30, 2016, respectively.

15



Early lease termination fees are recorded in “Rental revenues” on a straight-line basis over the estimated remaining contractual lease term or upon collection if collectability is not assured. Early lease termination fees were approximately $0.3 million and $1.2 million for the three and nine months ended September 30, 2017, respectively, and approximately $0.2 million and $0.9 million for the three and nine months ended September 30, 2016, 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.
New Accounting Standards
New Accounting Standards Adopted
In March 2016, the Financial Accounting Standards Boards (“FASB”) issued an accounting standard update (“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. Effective January 1, 2017, we elected to account for forfeitures as they occur, rather than estimate expected forfeitures. The adoption of the guidance was applied prospectively and did not have a significant impact on our Consolidated Financial Statements or Consolidated Statements of Cash Flows.
In January 2017, the FASB issued an ASU that clarifies the definition of a business. The ASU is effective for reporting periods beginning after December 15, 2017, with early adoption permitted. We adopted this standard prospectively effective January 1, 2017. As a result, we anticipate that fewer of our acquisitions made in the normal course of business will meet the definition of a business, as our typical acquisitions consist of properties whereby substantially all the fair value of gross assets acquired is concentrated in a single asset (land, building and in-place leases).
In August 2017, the FASB issued an ASU that modifies existing accounting standards for hedging to better align a company's financial reporting for hedging activities with its economic objectives. The new standard changes the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results, expands and refines hedge accounting for both nonfinancial and financial risk components, and aligns the recognition and presentation of the effects of the hedging instrument and the hedged item in the financial statements. The ASU is effective for reporting periods beginning after December 15, 2018. Early adoption is permitted, and we adopted this standard using the modified retrospective transition method in September 2017. The adoption of this standard resulted in a cumulative adjustment of $414,000 recorded as a decrease to Accumulated Other Comprehensive Loss and an increase to Distributions in Excess of Earnings as of December 31, 2016. Additionally, the effects of this standard were applied to the current period resulting in an increase to Other Comprehensive Loss and a decrease to Interest Expense of $6,000 for the three and nine months ended September 30, 2017.
New Accounting Standards Issued but not yet Adopted
In May 2014, FASB issued ASU 2014-09 Revenue from Contracts with Customers (“ASU 2014-09”), that requires companies to recognize revenue from contracts with customers based upon the transfer of goods or services to customers in amounts that reflect the consideration to which the company expects to be entitled in exchange for those goods or services. The new standard also results in enhanced disclosures about revenue, provides guidance for transactions that were not previously addressed comprehensively and improves guidance for multiple-element arrangements. The FASB subsequently issued additional ASUs which improve guidance and provide clarification of the new standard. The guidance is effective for fiscal years beginning after December 15, 2017, with early adoption permitted for fiscal years beginning after December 15, 2016. The Company expects to adopt the standard effective January 1, 2018 and utilize the modified retrospective transition method. We have developed a project plan and are in the process of evaluating and concluding on the appropriate accounting for our revenue streams. Given the nature of our business, our primary revenue stream is from relatively short-term operating leases with tenants. Additionally, our historical property dispositions have been cash sales with no contingencies and no future involvement in the property operations. We do not expect the adoption of this standard will have a significant impact on our Consolidated Financial Statements and related disclosures.

16



In February 2016, the FASB issued an ASU that modifies existing accounting standards for lease accounting. The new standard requires a lessee to record a lease asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. Leases in which we are the lessee will generally be accounted for as operating leases and we will record a lease asset and a lease liability. Leases in which we are the lessors will be accounted as sales-type leases, direct financing leases or operating leases. Revenue related to the lease components of a lease contract will be recognized on a straight-line basis while revenue related to non-lease components will be recognized under ASU 2014-09. The guidance is effective for fiscal years beginning after December 15, 2018, with early adoption permitted for fiscal years beginning after December 15, 2016. Leases in which we are the lessor will continue to be accounted for as operating leases with minimal impact on the Company's financial condition or results of operation; however, this standard may impact the timing of recognition and disclosures related to our tenant recovery income earned from leasing our consolidated operating properties. Additionally, the standard only allows for the capitalization of the initial direct costs that would have been incurred if the lease had not been obtained. The adoption of this guidance will impact our current policy regarding the capitalization of internal direct costs related to the successful origination of new leases. During the nine months ended September 30, 2017, we capitalized $2.2 million of internal direct costs related to successful origination of new leases. 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 to adopt this standard effective January 1, 2019.
Note 3 – Investment in Properties
Our consolidated investment in properties consists of our operating portfolio, value-add acquisitions, properties under development, properties in pre-development, redevelopment properties and land held for development or other purposes. The historical cost of our investment in properties was (in thousands):
 
 
As of September 30, 2017
 
As of December 31, 2016
Operating portfolio
 
$
4,219,891

 
$
4,123,130

Value-add acquisitions(1)
 
20,972

 
54,512

Properties under development
 
338,982

 
161,381

Properties in pre-development
 
50,858

 
52,998

Properties under redevelopment(2)
 
9,247

 
29,754

Land held(3)
 
4,026

 
7,698

Total investment in properties
 
4,643,976

 
4,429,473

Less accumulated depreciation and amortization
 
(918,142
)
 
(839,773
)
Net investment in properties
 
$
3,725,834

 
$
3,589,700

(1) 
Consolidated properties that were acquired and upon acquisition met either of the following criteria:
•
Occupancy of less than 75% upon acquisition; or
•
Occupancy of less than 75% expected to occur due to known move-outs within 24 months of the acquisition date.
Consolidated properties that were acquired vacant or with known move-outs within 24 months of the acquisition date with the intention to have the property out of service for significant physical renovations are classified as redevelopment properties.
(2) 
Represents properties out of service while significant physical renovation of the property is underway or while the property is in lease-up subsequent to such renovation. May include properties taken out of service to change the properties' use and/or enhance its functionality.
(3) 
Land held that is not intended to be improved or developed in the near future.
Acquisition Activity
During the nine months ended September 30, 2017, we acquired four buildings totaling approximately 0.5 million square feet located in our Denver, Northern California, Orlando and Southern California markets for a total purchase price of approximately $81.7 million.

17



Development Activity
Our properties under development include the following:
•
Six buildings in our Atlanta, Dallas, Miami and Seattle markets totaling approximately 1.7 million square feet that we completed shell-construction as of September 30, 2017 with cumulative costs to date of approximately $108.2 million. These properties are 45.4% leased and occupied based on weighted average square feet as of September 30, 2017.
•
Eighteen projects under construction totaling approximately 4.1 million square feet with cumulative costs to date of approximately $230.7 million.
During the nine months ended September 30, 2017, we acquired approximately 186.8 acres of land for development in our Dallas, Houston, New Jersey, Northern California, Orlando, Pennsylvania and Seattle markets for approximately $39.4 million.
During June 2017, we determined the carrying value of one land parcel in Reno, Nevada, within our West operating segment, exceeded its estimated fair value and recorded an impairment loss on land of approximately $0.9 million. The estimated fair value of the land was based upon a quoted market price, a Level 2 fair value measurement.
Disposition Activity
During the nine months ended September 30, 2017, we sold six consolidated operating properties totaling approximately 1.2 million square feet from our Baltimore/Washington D.C., Cincinnati, Louisville, Northern California and Phoenix markets to third-parties for gross proceeds of approximately $83.3 million. We recognized gains of approximately $39.7 million on the disposition of these 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 $2.5 million and $7.9 million for the three and nine months ended September 30, 2017, respectively, and approximately $2.8 million and $9.0 million for the three and nine months ended September 30, 2016, respectively. Our intangible lease assets and liabilities included the following (in thousands):
 
 
As of September 30, 2017
 
As of December 31, 2016
 
 
Gross
 
Accumulated
Amortization
 
Net
 
Gross
 
Accumulated
Amortization
 
Net
Other intangible lease assets
 
$
67,363

 
$
(38,580
)
 
$
28,783

 
$
75,085

 
$
(39,438
)
 
$
35,647

Above market rent
 
$
3,134

 
$
(1,642
)
 
$
1,492

 
$
3,271

 
$
(1,396
)
 
$
1,875

Below market rent
 
$
(29,460
)
 
$
10,173

 
$
(19,287
)
 
$
(33,029
)
 
$
11,608

 
$
(21,421
)
 
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 May 2017, the Southern California Logistics Airport (“SCLA”) joint venture entered into a $30.0 million secured fixed rate term note with a maturity date of May 2024. The proceeds were used to pay down a portion of the existing term note maturing in October 2017 and as a return of contributions to the joint venture partners.
During June 2017, the TRT-DCT Venture III disposed of its three remaining properties. We received approximately $2.7 million for our share of the gross proceeds and recognized our share of the gain on the sale of approximately $1.2 million, which is included in "Equity in earnings of unconsolidated joint ventures, net" in our Consolidated Statements of Operations.
During June 2017, the SCLA joint venture completed development activities and stabilized one building totaling 0.4 million square feet.

18



During July 2017, the SCLA joint venture entered into a $13.5 million secured variable rate term note which bears interest at a variable rate equal to LIBOR plus a margin of 2.50% per annum with a maturity date of July 2024. The proceeds were used as a return of contributions to the joint venture partners. During August 2017, the SCLA joint venture entered into a pay-fixed, receive-floating interest rate swap which effectively fixes the interest rate on the related debt instrument at 4.55% with a maturity date of July 2024.
In October 2017, the SCLA joint venture entered into an agreement to extend the maturity date of its $61.0 million secured construction loan from October 2017 to October 2019.
The following table summarizes our unconsolidated joint ventures (dollars in thousands):
 
 
As of September 30, 2017
 
Investments in and Advances to as of
 
 
Ownership Percentage
 
Number of Buildings
 
September 30,
2017
 
December 31,
2016
Unconsolidated Joint Ventures
 
 
 
 
Institutional Joint Ventures:
 
 

 
 

 
 
 
DCT/SPF Industrial Operating LLC
 
20.0
%
 
13

 
$
36,962

 
$
37,588

TRT-DCT Venture III
 
10.0
%
 
—

 
273

 
1,546

Total Institutional Joint Ventures
 
 

 
13

 
37,235

 
39,134

Other:
 
 

 
 

 
 

 
 

SCLA(1)
 
50.0
%
 
8

 
34,988

 
56,472

Total
 
 

 
21

 
$
72,223

 
$
95,606

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


19



Note 5 – Financial Instruments and Hedging Activities
Fair Value of Financial Instruments
As of September 30, 2017, and December 31, 2016, 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, 2017
 
As of December 31, 2016
 
 
Carrying
Amounts
 
Estimated
Fair Value
 
Carrying
Amounts
 
Estimated
Fair Value
Borrowings:(1)
 
 

 
 

 
 

 
 

Senior unsecured revolving credit facility
 
$
206,000

 
$
206,000

 
$
75,000

 
$
75,000

Fixed rate debt(2)
 
$
1,372,194

 
$
1,436,956

 
$
1,411,349

 
$
1,475,605

Variable rate debt
 
$
125,000

 
$
123,427

 
$
150,000

 
$
150,427

 
 
 
 
 
 
 
 
 
Interest rate contracts:
 
 

 
 

 
 

 
 

Interest rate swap asset(3)
 
$
1,745

 
$
1,745

 
$
2,084

 
$
2,084

 
(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 and Consolidated Balance Sheets 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, 2017 and 2016.
 
 
During the Nine Months Ended September 30,
 
 
2017
 
2016
Level 3 Assets (Liabilities):
 
(in thousands) 
 
(in thousands) 
Interest Rate Swaps:
 
 

 
 

Beginning balance at January 1
 
$
2,084

 
$
219

Net unrealized loss included in accumulated other comprehensive loss
 
(1,443
)
 
(9,777
)
Realized gain recognized in interest expense
 
1,104

 
1,520

Ending balance at September 30
 
$
1,745

 
$
(8,038
)
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.

20



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 “Interest expense” 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 “Interest expense.” 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 rate swaps effectively fix the interest rate on the related debt instruments at 4.72%. As of September 30, 2017, and December 31, 2016, we had borrowings payable subject to these pay-fixed, receive-floating interest rate swaps with aggregate principal balances of approximately $6.5 million and $6.6 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 USD 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 negative spread between USD LIBOR and zero. During the nine months ended September 30, 2016, we recorded a non-cash charge of 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). See “Note 2 – Summary of Significant Accounting Policies” for the impact to the Consolidated Financial Statements from the adoption of the Derivatives and Hedging ASU in September 2017. As of September 30, 2017, and December 31, 2016, the entire $200.0 million principal amount of the term loan was subject to this pay-fixed, receive-floating interest rate swap.
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,
 
 
2017
 
2016
 
2017
 
2016
Derivatives in Cash Flow Hedging Relationships
 
 

 
 
 
 
Interest Rate Swaps:
 
 
 
 

 
 
 
 
Amount of loss recognized in OCI for effective portion of derivatives
 
$
(285
)
 
$
(9
)
 
$
(1,445
)
 
$
(9,875
)
Amount of loss reclassified from accumulated OCI for effective portion of derivatives into interest expense and equity in earnings of unconsolidated joint ventures, net
 
$
(1,253
)
 
$
(1,618
)
 
$
(4,153
)
 
$
(5,030
)
Amount of gain (loss) recognized in interest expense (ineffective portion and amount excluded from effectiveness testing)
 
$
—

 
$
967

 
$
—

 
$
(453
)
 
 

21



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 $4.5 million will be reclassified from “Accumulated other comprehensive loss” to “Interest expense” resulting in an increase in interest expense.

Note 6 – Outstanding Indebtedness
As of September 30, 2017, our outstanding indebtedness of approximately $1.7 billion consisted of mortgage notes, senior unsecured notes and bank unsecured credit facilities, excluding approximately $52.1 million representing our proportionate share of non-recourse debt associated with unconsolidated joint ventures. As of December 31, 2016, our outstanding indebtedness of approximately $1.6 billion consisted of mortgage notes, senior unsecured notes and bank unsecured credit facilities, excluding approximately $35.2 million representing our proportionate share of non-recourse debt associated with unconsolidated joint ventures.
As of September 30, 2017, the gross book value of our consolidated properties was approximately $4.6 billion and the gross book value of all properties securing our mortgage debt was approximately $0.5 billion. As of December 31, 2016, the gross book value of our consolidated properties was approximately $4.4 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, 2017 and December 31, 2016.
Line of Credit
As of September 30, 2017, we had $206.0 million outstanding and $192.1 million available under our $400.0 million senior unsecured revolving credit facility, net of two letters of credit totaling $1.9 million. As of December 31, 2016, we had $75.0 million outstanding and $323.1 million available under our $400.0 million senior unsecured revolving credit facility, net of two letters of credit totaling $1.9 million.
Debt Issuance and Payoffs
During March 2017, we repaid the remaining $25.0 million outstanding on our $100.0 million term loan at par maturing April 2017 using proceeds from our senior unsecured revolving credit facility.
During June 2017, we paid-off our $51.0 million senior unsecured note at par maturing June 2017 using proceeds from our senior unsecured revolving credit facility and proceeds from the issuance of common stock under our continuous equity offering program.
During the nine months ended September 30, 2017, we paid-off four mortgage notes at par totaling $34.5 million maturing in 2017 using proceeds from our senior unsecured revolving credit facility.
During March 2017, the Operating Partnership issued $50.0 million aggregate principal amount of 4.50% senior notes due 2023 at 103.88% of face value in a public offering for net proceeds of approximately $51.2 million after offering costs and excluding accrued interest of approximately $0.9 million. The notes were issued under our indenture dated October 9, 2013 and form part of the same series as our previously issued 4.50% senior notes due 2023. We primarily used the net proceeds to pay down our senior unsecured revolving credit facility and for general corporate purposes.
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, inclu