Liberty Property Trust F2Q09 (Qtr End 9/27/08) Earnings Call Transcript

Oct.21.08 | About: Liberty Property (LPT)

Liberty Property Trust (LRY) F2Q09 Earnings Call October 21, 2008 1:00 PM ET

Executives

Jeanne A. Leonard – Investor Relations

William P. Hankowsky – Chairman of the Board, President & Chief Executive Officer

George J. Alburger, Jr. – Chief Financial Officer, Executive Vice President & Treasurer

Robert E. Fenza – Chief Operating Officer & Executive Vice President

Michael T. Hagan – Chief Investment Officer

Analysts

Irwin Guzman - Citigroup

Jordan Sadler - Key Bank Capital

[Fone Bowland] - Goldman Sachs & Co.

Louis W. Taylor - Deutsche Bank

John Guinee - Stifel Nicolaus & Company

Christopher Haley - Wachovia Securities

Mitchell Germain - Bank of America

David Harris - [Aurora Capital]

Cedric Lachance – Green Street Advisors

David Aubuchon – Robert W. Baird & Co., Inc.

Operator

My name is Vonda and I will be your conference operator today. At this time I would like to welcome everyone to the Liberty Property Trust third quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question and answer session. (Operator Instructions) Ms. Leonard

Jeanne A. Leonard

Thank you everyone for tuning in today. We are here to discuss our third quarter results. You will hear prepared remarks from Chief Executive Officer Bill Hankowsky, Chief Financial Officer George Alburger and Chief Operating Officer Rob Fenza. Mike Hagan, our Chief Investment Officer is also available to answer questions you may have.

During this call management will be referring to our quarterly supplemental information package. You can access this package on the investor section of Liberty’s website at www.LibertyProperty.com. In this package you will also find a reconciliation of the referenced non-GAAP financial measures to GAAP measures.

I will also remind you that some of the statements made during this call will include forward-looking statements within the meaning of the federal securities law. Although Liberty believes that the expectations reflected in such forward-looking statements are based on reasonable assumptions, we can give no assurances that these expectations will be achieved. As forward-looking statements these statements involve risks, uncertainties and other factors that could cause actual results to differ materially from the expected results.

These factors include without limitation the ability to enter in to new leases or renew leases on favorable terms, the financial conditions of tenants, the uncertainties of real estate developments and construction activity, uncertainties of acquisitions and disposition activities, the cost and availability of financing, the effects of local economic and market conditions, regulatory changes, potential liability relative to environmental matters and other risks and uncertainties detailed from time-to-time in the company’s filings with the Securities & Exchange Commission.

The company assumes no obligation to update or supplement forward-looking statements that become untrue because of subsequent events. Bill, would you like to begin.

William P. Hankowsky

I want to spend most of my remarks discussing how we see the world and where we think the rest of 2008 and 2009 will take us. But, let me start for a minute commenting on our third quarter results. We had another solid quarter, our third for the year. We leased 4 million square feet bringing our total for the year to 14 million square feet leased. Occupancy was 92% down slightly from last quarter due to a decline in our industrial portfolio while office and flex products saw occupancy increases.

We saw rental rate increases of 6.7% and had good renewal activity. Subsequent to quarter end we executed a successful stock offering. The one area that was disappointing was the leasing activity of our development pipeline which remains a major focus of our attention. Last year at this time I said that in 2008 we would face major uncertainties that would create a bumpy year but what we didn’t see was how significant and unprecedented these bumps would be.

We have seen oil prices go to $140 a barrel and then back down to $70 a barrel. We have seen a recasting of America’s financial institutions and we have seen a freezing of the credit markets. Liberty has always provided guidance for the next year in our third quarter call. To be honest with you we seriously thought about postponing guidance this year given the unprecedented environment and uncertainties we face.

But, give our belief in providing our shareholders with as much transparency we can and given the stability of the Liberty REIT business model, even in these unusual times we decided to give you our best thinking as to where the next five quarters will lead us. George will walk you through the numbers in a few minutes but I’d like to frame where we see the economy going and how it will affect the real estate markets as a back drop to our guidance.

2009 will see the continuation and then the bottoming out of a number of trends. Housing prices we believe will continue to decline then bottom out, ending the need for the right off of massive losses by financial institutions. This affect coupled with the execution of the major intervention and the credit and capital markets by the government should provide stability and hopefully a reopening of credit availability. But, we think there will be more pain until we get there.

A good example is job losses. In the first nine months of this year we have lost 760,000 jobs. If we look at job losses as a percentage of total employment in the last two recessions we lost 1.17% and 1.23% of total employment in the recessions of the 1990s and 2001. Our current losses represent just .55% of total employment. If this recession would replicate the past two recessions we’re looking at another 800,000 plus in job losses over the next two to three quarters. We are at the backend of this storm but we have more roughness to handle before things calm down.

The effect on office and industrial markets we think will be as follows. First, sublet space may become more of a market issue as the job losses turn in to vacant space and this affect should vary significantly by market. Landlords will probably see serious pressures on rents, the TI should remain in check due to the preservation of capital by everybody. In this uncertain environment renewal percentages will probably remain higher as firms decide that the best thing to do is stay put.

Development activity should continue to decline and the execution of real estate sales activity will remain challenging. In this context, what is Liberty’s game plan for 2009? First, to remain focused on our core portfolio, retain our customers, maintain occupancy and take the rents the markets will give us. Two, maintain as a top priority the leasing of our development pipeline. Three, be extremely cost conscious in our operations and overhead.

Four, stay on the sidelines in terms of acquisitions until there is better price clarity and capital availability and continue our measured disposition activity. Five, restrict development to build to suits and existing asset repositioning. And six, preserve capital and execute one or more debt transactions based on the market environment. Now, let me turn it over to George to walk you through some of the numbers.

George J. Alburger, Jr.

Firstly, I’d like to review our performance and our activity for the third quarter and then I’d like to provide earnings guidance for 2009 and finally I’d like to cover some of our capital planning for 2009. FFO for the third quarter was $0.80 per share. The operating results for the quarter include $1.2 million in revenue from lease termination fees which is consistent with guidance.

During the quarter we acquired one office property for $17 million and sold six properties for $31 million. During the quarter we brought in to service eight development properties, six of which are wholly owned and have an investment value of $62 million and two of which are owned by a 50% joint venture and have an investment value of $19 million. These properties are 82% leased as of September 30 with a current yield of 7.2% and a projected stabilized yield of 8.8%.

We started two development properties this quarter, a wholly owned $46 million office building that is 50% pre-leased and $24 million warehouse that is owned by a joint venture in which we have a 25% interest. As of September 30th the committed investment in development properties is $600 million. For wholly owned properties it is $437 million and for these properties the projected yield is 8.8%.

For the core portfolio, during the quarter we executed 3.3 million square feet of renewal and replacement leases. For these leases rents increased by 6.7%. Lease transaction costs were $22 million. Of this amount, $10 million was for two office leases, a 110,000 square foot lease and a 133,000 square foot lease. Both of these leases were long term leases, 10 years and 12 years respectively and they were both with quality credit tenants.

For the same store group of properties, operating income decreased by 1.2% on a straight line basis and increased by .1% on a cash basis for third quarter 2008 compared to third quarter 2007. These results are consistent with our expectations for the year which was that same store would be relatively flat. At this point, let me move to earnings guidance. The first thing I want to do is outline what we see happening in the fourth quarter, the balance of 2008 to give us a good starting point for 2009 guidance.

The significant item affecting the fourth quarter is the recent equity issuance. In early October we sold 4,750,000 common shares realizing $150 million in proceeds. These proceeds will ultimately be used to satisfy our April, 2009 $250 million senior note maturity. The immediate use of the proceeds however will be to pay down the outstanding balance on our credit facility. This will have a dilutive effect on fourth quarter earnings.

Other items affecting fourth quarter earnings are asset sales. During the third quarter we realized $31 million in proceeds from asset sales. We anticipate $50 million in sales activity in the fourth quarter. And finally, the fourth quarter development deliveries will come in to service under leased. So, depending on the timing of asset sales and the level of lease termination fees, fourth quarter earnings will be in a $0.74 to $0.76 per share range.

For purposes of developing guidance let’s assume the fourth quarter earnings will be at the midpoint, $0.75 per share resulting in 2008 FFO per share of $3.15. I’d like to build 2009 guidance using $3.15 per share as a starting point. Let me start with acquisitions, dispositions and development activities which is our real estate capital activity. Year-to-date in 2008 we have purchased one building which is this quarter’s $17 million acquisition.

We anticipate no other acquisitions for the balance of 2008 or for all of 2009 except for perhaps purchases by joint ventures in which we hold an interest. We believe the gross investment by joint ventures could be in the $50 million to $100 million range. We’ve been more active on dispositions. Through the end of the third quarter we realized $50 million in proceeds from asset sales and we expect approximately $50 million in sales in the fourth quarter.

We believe sales activity in 2009 will be in the $125 million to $200 million range. The cap rate on these sales will be in the 8% to 11% range. This acquisition disposition activity will decrease our FFO run rate by $0.05 to $0.10 per share. Moving on to development, we expect to bring in to service in 2009 $300 million in deliveries from our development pipeline. This follows 2008 development deliveries of approximately $200 million.

This 2008/2009 development activity will increase FFO by $0.06 to $0.08 per share. G&A, we believe our G&A expense will increase in 2009 by $0.03 to $0.04. This increase is primarily due to cost of living salary increases, increased cancelled project costs and less capitalized G&A due to a decreasing development pipeline. Lease termination fees, for 2008 are projected to be $0.04 per share which is on the low side of the guidance we provided of $0.04 to $0.06 per share. For 20098 we would suggest the same range as 2008, $0.04 to $0.06 per share.

On the interest expense side of things we are budgeting a 1% to 1.5% increase in short term rates for our credit facility with an average outstanding on our credit facility of $400 million. Increased interest expense will reduce FFO by $0.04 to $0.06 per share. Staying with interest, we are projecting a $200 million financing in 2009 to term out a portion of the outstanding balance on our credit facility.

This financing may be through an expansion of our credit facility, it may be through a term loan, it may be a new unsecured senior note issuance or it could be through secured debt. So, depending on the rate and the timing, this financing could decrease earnings by $0.03 to $0.05 per share. Finally, what do we expect for the same store group of properties which represent over 90% of our revenue?

For 2008 year-to-date rents have increased by 7.5%. We believe these increases will somewhat level off in 2009. We believe rents for 2009 will increase by 4% to 6%. We expect the average occupancy for 2009 will vary by 1% up or down compared to 2008. The combination of the 4% to 6% increase in rents and a 1% increase or decrease in occupancy will result in an increase in FFO of $0.05 to $0.11 per share.

All of the above items resulted in an FFO estimate for 2009 of $3.01 to $3.21. We will round off this estimate and provide FFO earnings guidance for 2009 of $3.00 to $3.20 per share. Finally, let me discuss our capital plan for 2009. We presently have $290 million outstanding on our $600 million credit facility. Our big capital needs for 2009 are our development pipeline and debt maturities.

It will cost us $145 million to complete the existing development pipeline. With new starts, the capital need for the pipeline could increase to $200 million. Our 2009 debt maturities are $325 million. Depending on development expenditures of $145 million to $200 million, our capital need for 2009 is $470 million to $525 million.

We have $310 million available on our credit facility leaving a capital need of $160 million to $215 million. We have a variety of sources to satisfy this capital need. The first source would be proceeds from asset sales. We estimate that proceeds from asset sales for the next five quarters will be $175 million to $250 million which is adequate to satisfy our capital needs.

Additional sources of capital could be from borrowings. Our credit facility has a $200 million accordion feature. We could exercise our accordion feature but a more likely source would be a bank term loan. We could access secured debt. Very few of our properties are encumbered. Less than 10% of our NOI is encumbered by secured debt so we could mortgage properties. Finally, the unsecured market. It’s presently very expensive. Of bigger concern is that it’s somewhat untested. We have been opportunistic in accessing this market in the past and if it opens up we could issue unsecured debt.

Capital is available. It may be expensive but it is available.

With that I’ll turn it over to Rob.

Robert E. Fenza

I’d like to begin with leasing for the quarter and then shed some color on the leasing environment and tenant behavior. Q3 was another solid quarter for leasing and in an increasingly challenging environment our people executed 237 new and renewal leases totaling nearly 4 million square feet. As Bill mentioned, occupancy moved slightly lower to 92% driven by a drop in industrial occupancy. However both office and flex occupancy improved during Q3.

During last quarter’s call we forecasted a slowing pace in leasing activity for the third quarter, part of which was normal for the summer months. However we have seen little change this fall. The weakness in the economy compounded by uncertainty in the capital markets has left tenants and prospects extremely uneasy about the road ahead.

In normal times, by the end of the third quarter the majority of our tenants would have finished their planning for the coming year and given us a clear idea of their upcoming space needs. While many of our tenants have, a larger number than usual are behaving with uncertainty, unprecedented caution, slower decision-making and protracted negotiations.

Fortunately our cycle-tested team as well as our local market operating platform allows us the opportunity to stay very close to our customers and utilize our experience to know when flexibility is in order. Even though most of our leasing in this environment remains more standard in its lease terms and provisions, we have responded to tenants with uncertain plans with creative solutions and more flexibility. Shorter lease terms or even month-to-month leases have made it easier for tenants to stay put in our buildings and ride out the storm.

In a distribution building in North Carolina a tenant signed a short-term lease with the right to expand while working on a large contract. Once the contract was secured, the tenant grew and signed a more standard five-year lease.

Where new office tenants can use an existing space in as-is condition, we are willing to provide a shorter lease term or an option to expand or contract their business as their business finds normalcy.

In some instances for new distribution tenants where we have more space available than current demand, we are signing leases uses the rubber wall technique which is simply a piece of tape on the floor dimensioning a set amount of space for a certain time period. As the customer signs new contracts and builds its business, we amend the lease and move the tape.

This quarter alone, this flexible leasing netted us two transactions for over 0.5 million square feet that were headed to competitors’ buildings.

Naturally given this scenario I’ve outlined, 2009 expirations are of paramount importance. In 2009 our lease expirations represent about 12% of the portfolio which is average for us. Fortunately our portfolio is naturally resilient with no concentrated exposure to one tenant or one industry sector. In addition, seven of the largest 10 expirations for 2009 have indicated a desire to renew; two remain unsure; and only one of the 10, a defense contractor in Northern Virginia, plans to vacate our space.

Turning to individual markets. The majority of our markets could be described as sluggish but not necessarily overstressed with only amounts of new supply with little space available for sublease and no significant tenant failures. Southeastern Pennsylvania, our largest suburban office market, and Houston experienced solid activity with continued rent growth. One of the more challenging markets continues to be Phoenix but Liberty has had good success here. We had an active quarter signing more than 210,000 square feet of new leases. These leases will increase our occupancy from 73% to 92% when they commence.

As Bill mentioned in his opening remarks, we expect sublet space to become more of a market factor in the future. At the moment only two of our markets saw a modest increase in sublet space during the third quarter and overall sublet space in Liberty’s portfolio remains very low at less than 0.75%.

Let me now shift to the development pipeline. Since the first quarter we have reduced our pipeline from 34 projects at 6.5 million square feet to 23 projects at 5 million square feet. 13 of these projects are lead high performance buildings. As we mentioned last quarter, two distribution buildings under the development pipeline in the Lehigh Valley represent more than 40% of the vacancy and we are currently in counter-proposal stages of negotiations on one of these buildings.

Obviously we’re not pleased with the progress we made in our development pipeline in the third quarter. We signed four leases for 250,000 square feet compared with previous leasing volumes earlier this year closer to 1 million square feet per quarter. Clearly we are in a unique environment. Currently there are leases under negotiation and outstanding active proposals for over a third of the vacant space and active prospects for an additional third of the pipeline.

We started two developments during the third quarter. The first is a 211,000 square foot lead high performance office project in Orlando. This project started 50% pre-leased, now has active negotiations underway that would bring it to over 80% leased. The second is a 460,000 square foot distribution project in our Chicago joint venture where our portfolio is 96% leased. We are currently working with prospects here for 300,000 square feet of this building.

With that I’ll turn the call back to Bill.

William P. Hankowsky

Let me end with a final thought. We at Liberty have always believed in the value of the traditional REIT model: Consistent earnings from long-term leases providing dependable cash flow to our shareholders via dividends. At Liberty we’ve adapted to this model with our business model, multiple products in multiple markets with a wide multi-tenant customer base to provide for maximum risk diversification. There’s no better circumstance than the current financial and economic turmoil to see the value of this Liberty REIT model.

With that let me turn it over for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Irwin Guzman - Citigroup.

Irwin Guzman - Citigroup

George, can you clarify something on this new store? It looked like you reported flat results for the third quarter but same-store occupancies were actually down over 300 basis points year-over-year. How did that work?

George J. Alburger, Jr.

If you look at page 9 of our supplemental information package, the basket of what’s in same-store kind of changes because of asset sales during the intervening quarters. It is down; it’s just not down quite that dramatically. I think it’s down 200 basis points. It’s down a full 2%. Basically what’s happening is we are losing occupancy; it’s down 2%; but we are getting rent bumps and our renewal and replacement leases are being signed at rental rate increases. So our decline in occupancy is basically being offset by increases in rents that we’re receiving.

Irwin Guzman - Citigroup

Can you clarify the development lease up that’s embedded in your guidance? Should we be assuming something on the lines of under 12 month leasing period or 18 months?

George J. Alburger, Jr.

It is a more refined budgeted lease up than just a standardized 12 month lease up. For instance, the deliveries in the fourth quarter are primarily going to have some leasing improvement but they will not be stabilized and they will to some extent burden if you will fourth quarter results.

William P. Hankowsky

Just to amplify George’s point, basically we’ve gone through every development project and looked at what we think it will take to lease them. Some of them we think will happen within our traditional 12-month period and some we think will take longer than that. That’s what’s embedded in the guidance.

Irwin Guzman - Citigroup

Bill, when you went through that, had you changed at all what you expected your yields to turn out?

William P. Hankowsky

Well, obviously what happens is to the degree it’s a longer period of time, there’s a little bit more expense to it and so it may have some impact but it has been much more about duration of leasing than it’s been about rent obtained. We still are I think on the whole I would say for that pipeline expecting the rents to roughly come in at what we programmed for them when we developed them.

Irwin Guzman - Citigroup

Rob talked a little bit about the 10 largest expirations next year and seven being that you’ve had some indication that they’re going to renew. What does the Top 10 represent of the total expirations for next year?

Robert E. Fenza

It’s $25 million of revenue on what’s expiring. I don’t know that percentage. We can do it for you.

Operator

Our next question comes from Jordan Sadler - Key Bank Capital.

Jordan Sadler - Key Bank Capital

Could you maybe provide a little bit more clarity George on the capital situation? The way you laid it out was helpful. You said you have $310 million available on the line and $470 million to $525 million of commitments if I heard correctly. I guess that leaves you with a shortfall and I think the way you’re thinking about it is through the end of ’09 of about $160 million to $215 million?

George J. Alburger, Jr.

That’s correct.

Jordan Sadler - Key Bank Capital

So you’ve got a handful of potential sources including asset sales. Have you thought about the dividend as a potential source of capital given this environment?

William P. Hankowsky

I know you asked the question to George but no we have not. I think you’re right. I think George laid it out pretty clearly. Our game plan is to both have asset sales activity over the course of the next five quarters that’ll yield us between $150 million and $215 million. Then also hope to execute on a debt transaction, and as George laid out there’s a variety of ways that might happen, and that that would be kind of in the order of magnitude of $200 million. That would more than cover the need we have and we think we should in fact cover more than we have. We think that between those two we’ll be fine.

Jordan Sadler - Key Bank Capital

Are you guys out to market with any of the debt transactions or are you just speculating that these are some of the things you’d hope to get done at this point?

George J. Alburger, Jr.

We talk to mortgage lenders all the time so we’re familiar with what type of properties they’re looking for and what rates are. Clearly we have continuing dialogue with our banking relationships, especially the banks that are involved in our line facility. So we’re pretty familiar with what’s going on in the term loan work out there and what’s doable. But have we launched a deal or a transaction? We have not launched anything.

Jordan Sadler - Key Bank Capital

Bill, I see the guidance and everything. It says that the retention rate’s going to be pretty good so maybe the cap ex spend isn’t going to be too onerous next year. But I assume the dividend coverage is going to be quite thin and the economic prospects from even your view don’t necessarily seem robust over the next couple of years. So I’m trying to bridge if you guys are paying out let’s say 100% plus of free cash flow or FFO, is that sensible in an environment where capital seems pretty scarce?

William P. Hankowsky

I understand the question and as you know the let’s say Board consideration about our dividend policy and we have I think for 12 years running increased the dividend every year and we made the decision this year not to. I think that is reflective of the notion that we should be thoughtful here about capital but as I said in my prepared remarks, we are very strong believers that part of this business model is about providing a dividend to our shareholders and though it is clearly something you need to think about, it is not a total in any way we need to use to deal with our capital needs over the next five quarters.

Jordan Sadler - Key Bank Capital

My last question’s just on the development pipeline. I notice that the overall yield on the total pipeline came down by about 40 basis points sequentially to 8% overall including your joint venture development. I’m curious, what were the causes of that? Do the new developments that you brought on line have lower expected stabilized yields than the stuff that you completed this quarter or I didn’t see a cost escalation in there so is it a function of lower rents or delayed stabilization times or what?

Robert E. Fenza

One is you have some properties moving out so you sort of have a subtraction effect in what was delivered for the quarter. There is as I said earlier to an earlier question, we revisit every quarter what we think the rental assumptions are, we revisit every quarter what we think the time it is going to take us to lease these properties, and therefore we revise what the expected yield is against our best information when we close the quarter out. There’s a bit of movement in and out and then there’s a bit of it being a function of literally project-by-project re-evaluating the yields.

Jordan Sadler - Key Bank Capital

So it’s just a bottom up approach then.

Robert E. Fenza

Yes. We recalculate on every property in the development pipeline based on the most current information what our new projected yields are. So it’s not the same information as the quarter before that or the quarter before that. It’s revised every quarter. And then of course the in and outs.

Operator

Our next question comes from [Fone Bowland] - Goldman Sachs.

[Fone Bowland] - Goldman Sachs

A question on the sales guidance. Do you guys have a sense for timing, when the $175 million to $200 million would fall throughout 2009? And as a follow on to that, are there separate markets where you’d be closer to the 8% cap rate versus the 11% cap rate or is that just a wide range for the unpredictability?

William P. Hankowsky

In terms of when the sales might happen, as George indicated we currently would look to do about $50 million this quarter, meaning the fourth quarter. Then in terms of the activity next year, I think it’ll be spread out throughout the year. Clearly one of the things that’s affecting sales activity today is the capacity of buyers to finance and close. So this isn’t so much about marketing and finding buyers of interest and agreeing on the parameters of the sale; it’s about the buyer then needing more than normal time in many cases to put their financing together. Our expectation is it would be kind of even throughout the year but it’ll clearly depend on the circumstances of particular buyers.

In terms of the nature of the assets, what we try to do here is sell assets that make sense to us either from a portfolio positioning and sort of keeping the portfolio fresh or in a case where we might see an interesting opportunity to harvest some value. So the range I think is reflective of where these assets are and most of these assets are going to be suburban office, that’ll be the general characteristic of most of them, and they’re across a number of our markets. And you’re right; part of it is cap rates are moving around a bit so we think this is the range where they’re going to fall.

[Fone Bowland] - Goldman Sachs

George, with regard to the rent guidance for next year you were talking about 4% to 6%. Is that currently what your mark-to-market is on your ’09 expirations or have you made some adjustment from where market comes down?

George J. Alburger, Jr.

The 4% to 6% is a straight line number. That’s what goes into the GAAP accounting if you will. From the standpoint of cash, we think that rents are going to be down on a cash basis anywhere from 4% to 9% for 2009 expirations. We thought they’d be down 6% to 8% for 2008 and they’ve come in at about 5.8% year-to-date down. Just to give you another benchmark.

[Fone Bowland] - Goldman Sachs

Rob, which of the two markets where you said subleasing had basically moved up?

Robert E. Fenza

It was Northern Virginia, DC market and New Jersey.

Operator

Our next question comes from Louis W. Taylor - Deutsche Bank.

Louis W. Taylor - Deutsche Bank

Bill, maybe go back to the sales a little bit in terms of that fourth quarter sales around $50 million. What stage is that in and how firm is that number?

William P. Hankowsky

The stage it’s in is identified by buyers, agreed upon prices; it’s not about documentation; it’s not about due diligence. It’s about those buyers being able to close. They need to be able to bring home a lender to make it happen and that’s probably the biggest variable that affects it.

George J. Alburger, Jr.

Just one other piece of information. About $15 million of it’s already closed in October.

Louis W. Taylor - Deutsche Bank

As you look at the ’09 sales and then the timing of your debt maturities, are you concerned a little bit if there’s a mismatch with the sales where the financings occur later where all the debt maturities are earlier in the year? What’s Plan B there if the sales aren’t happening or if the mortgages are taking longer? When do you start that process of working on the term loan or working on some mortgage financings ahead of that April maturity?

William P. Hankowsky

I’ll take it and then George can amplify it if he wants. We’re not going to put ourselves in a position where we’re weeks away from the maturity and had an expectation about a sale and it doesn’t happen. We’ve got roughly five months here to see how the sales activity’s going and we will not wait for Plan B till close to the end. It’s really not Plan B; maybe that’s even a better way to answer your question. Our game plan is to do both. Our game plan is to both do around $200 million of debt action and to do the sales. Without putting a specific date on it, presumably we would like to have that debt deal done before the maturity.

Louis W. Taylor - Deutsche Bank

George, in terms of when you walk through your sources and uses of funding, did I hear correctly that you’re capital needs for new development starts were in that $150 million range for next year? And if that’s so, why even start anything in this environment until you really have got all your financing done and put to bed for ’09?

George J. Alburger, Jr.

I don’t think we back ourselves into a corner with respect to that. The existing development pipeline, it would cost $145 million to complete that pipeline. Then what we said was could we end up spending another and we said $55 million if you will on new starts that made sense to us that would increase our total obligation from $145 million to $200 million. We’re sensitive to the point you’ve just raised of being careful of what you start.

Robert E. Fenza

And just to be clear, those starts are basically build-to-suits and they’re for activity that we’re aware of but whether we land them or not is a whole other question. But that’s what we’re thinking about.

Operator

Our next question comes from John Guinee - Stifel Nicolaus & Company.

John Guinee - Stifel Nicolaus & Company

Obviously your AFFO is largely dependent on two or three leases each quarter and you had a couple good quarters earlier and then you had a big negative this quarter. Do you have any clarity on ’09 as to whether you think you can cover your dividend out of the FAD?

William P. Hankowsky

I’m going to let George respond to that but I just want to make a comment about the leasing comment. As George indicated, there were two big leases. These were not renewals; these were companies going into space. I’d be glad to see some people take our occupancy further up than we anticipate but the major foundation of activity for next year is probably renewals. But I understand your point and I’m going to let George comment from then on the coverage.

George J. Alburger, Jr.

There were two leases this quarter as I mentioned during the prepared remarks that were aggregated $10 million. If you strip them out, we performed in the third quarter much like we performed in the first and second quarter. Of course you can’t go stripping them out. We did spend the money so that money has been spent, but even considering the amount of money we spent in the third quarter, the average for the first three quarters of 2008 is running less than what we averaged in 2007. So we’ve kind of pulled it back a little bit even with the burden of these two leases.

To really go to the substance of your question, are we going to cover the dividend in 2009? I don’t think so. I think we’re still going to have a shortfall. It’ll be $20 million, maybe a little less, but we still think we’re going to have a shortfall.

John Guinee - Stifel Nicolaus & Company

I think we all know how this works. It’s kind of the 80/20 rule where 20% of the leases whether they’re new or renewals account for 80% of the TI and leasing commission dollars. So my question is, do you have any of those big spaces 50,000 to 100,000 square feet where you already know that you’ve got the space down to the shell and start from scratch which appears to be what you had to do with these two 100,000 square foot leases?

William P. Hankowsky

One of these leases was in the Horsham portfolio and we’ve talked about Horsham a lot this year, which was where we had GMAC and [Retechnology] move out. So that whole 500,000 square foot of exposure kind of had that characteristic and we’re now north of 80% signed for those deals and what we’re dealing with now is actually smaller spaces because the big blocks on the whole have been taken care of.

There could be a few like that out there but there will not be an unusual number in ’09 any different than there were in ’08. We’re not faced with some peculiar exposure that’s different than normal. I think that’s a fair way to say it.

John Guinee - Stifel Nicolaus & Company

Land strategy for 2009/2010? Net acquire or net disposition of land?

William P. Hankowsky

Right now we’ve got about 1,300 acres that Liberty has and there’s about another I think 700-ish in our joint venture activity. That’s a fairly decent land bank that can see us through from a development perspective, so I would not anticipate significant land activity in ’09. Whatever it is inside the numbers that George already talked about in terms of activity.

George J. Alburger, Jr.

Our notion for our capital planning in 2009 is that to the extent that we have land acquisition, it probably would have a similar amount of land disposition.

Operator

Our next question comes from Christopher Haley - Wachovia Securities.

Christopher Haley - Wachovia Securities

George, did I understand you correctly that the potential financings of $200 million or $0.03 or $0.05 is it could impact your guidance or is that already factored in?

George J. Alburger, Jr.

It’s factored into my guidance.

Christopher Haley - Wachovia Securities

My apologies if someone has already asked this question and you’ve answered it regarding the ’09 sales. Have you assumed even distribution or first-half ’09 impact?

George J. Alburger, Jr.

It’s even throughout the year.

Christopher Haley - Wachovia Securities

Related to operations, if we look at your same-store numbers nine months and you just look at operating expenses including taxes, you’ve done a great job on reimbursement levels but one of the things that we’re a little bit concerned about on the suburban side is, particularly with lower occupancies expected over the next 12 to 24 months, the reimbursement levels coming down. Operating expenses continue to grow at an inflation plus level versus rental revenues growing sub inflation, likely negative.

I wanted to get your view when you look at same-store NOI cash or whatever you care to offer over the next 12 to 24 months, what kind of confidence you have in your ability to generate revenue growth rates that are comparable to your expense growth rates net of reimbursements?

William P. Hankowsky

I think fundamentally that’s basically baked into the way we think about this. Remember, our occupancy thoughts are kind of plus or minus 1% and again remember how we do this. This is a very bottoms up approach here. We have looked at every expiration and every vacancy and thought about what we think is going to happen over the next five quarters but it obviously is about the guidance for ’09. That’s basically factored into the way we think about the earnings and the modeling for the year.

You’re right that there have been pressure on some of these costs, and I think by the way even with oil going down we’re going to still see pressure on energy because of the whole separate issue which is about deregulation and how a number of these states now are facing some pretty decent jumps. We’ve seen it in Maryland. It’s a big issue on the horizon here in Pennsylvania.

On the tax side quite candidly what happens in an environment is you often are appealing taxes on the argument that the pricing of these assets has changed, which I think may be good news for real estate and bad news for municipalities that are going to depend on that. George, do you want to add something?

George J. Alburger, Jr.

I was just going to add that these numbers do reflect increases in operating expenses and to the extent that we have a decrease in occupancy the burden of those increased operating expenses will reflect itself in same-store performance. That’s how the numbers were developed.

Christopher Haley - Wachovia Securities

The way the math works, how does your same-store guidance look for ’09?

George J. Alburger, Jr.

Probably if you look at the numbers, we said occupancy up or down 1% and then we said we would have a growth of 4% to 6% on expiring leases. That translates to about a 1% to 2.5% increase in same-store.

Christopher Haley - Wachovia Securities

On a GAAP basis?

George J. Alburger, Jr.

On a GAAP basis. But as you see the GAAP numbers and the cash numbers end up coming pretty close. To the extent you don’t get the bump in the cash numbers for straight lining new leases, you do get the rent bumps that are baked into the existing leases.

Christopher Haley - Wachovia Securities

I have a question that goes back a couple years. In the field there have been a variety of data points that we’ve picked up over the last couple months and your field officers are quite frank in their expectations. Over the last month business expectations have taken a turn for the worst. Being in the field I’ve picked up subtle changes to the negative. I’m wondering how much this expectation that you have regarding occupancy or same-store has originated from maybe late summer expectations versus another cut that’s been taken in the last three or four weeks?

William P. Hankowsky

We had an expectation level that was candidly much higher when we did the budget’s first cut in the late summer. We were together a month or five weeks ago or something like that as a team and we went back and revisited all of that. So what we’re talking about here is maybe 30 days old but it is not several months old, and it was in part exactly for the reason you’re citing, which is that the world had gotten gloomier in terms of prospects for the economy, etc.

We went back and basically said to folks, “I know you’re all aggressive and I know you want to take the hill but given -“ and I basically laid out almost laying out the scenario we’ve laid out today about how we see the economy going. I said, “If this is true, tell me what you think is going to happen in this context?” This therefore reflects that and it’s very much consistent with Rob’s comments earlier that we’re seeing little pickup since the summer.

Operator

Our next question comes from Mitchell Germain - Bank of America.

Mitchell Germain - Bank of America

What’s the incremental pickup in square feet related to Horsham embedded for 2009? How much is starting in ’08 and how much is expected to start in ’09?

William P. Hankowsky

Fundamentally all of the Horsham pickup is basically an ’09 phenomenon. I think there’s a little pickup this quarter, the fourth quarter, that’ll start. So some of it will commence this quarter but the real year-long effect is pretty much in ’09. Candidly, that’s sort of another way to think about this. To a degree you’re saying, “Wait a minute.” This kind of goes back to the question that was just asked. The world’s going to be rough. Why is the same-store hanging in there a little bit? Part of this is in fact the lift up of Horsham being leased that offsets actually some deterioration other places to get us in a more flattish kind of world.

Mitchell Germain - Bank of America

George, outside of those new leases with regards to some of the leasing costs, what’s embedded in your forecast for 2009? Is it more consistent with 3Q08 or is it a little more consistent kind of with ex some outliers that might be in those numbers?

George J. Alburger, Jr.

Those big leases that happened in the third quarter, we took them into consideration and kind of blended it in if you will. In other words, if you just tail back, we had first and second quarter TI costs way down, picked up quite a bit in third quarter; the average for all three quarters is close to where it was in 2007. So we kind of ran with those numbers.

Operator

Our next question comes from David Harris - [Aurora Capital].

David Harris - [Aurora Capital]

Bill, could you give us an idea of the tone of the conversations you’re having with your existing joint venture partners and any prospective folks? I mean in terms of their appetite to invest as we look forward? And could you give us in that context any idea as to what unlevered IRR’s folks are looking for today?

William P. Hankowsky

I think the good news from Liberty’s perspective is, and I think you know our joint venture model, we basically have a single institutional partner with a single product and a single market so we really very much try to align our shareholder interests with our JV partner’s interest. I think that has worked well and quite candidly in a down market, in a tough environment it really puts us both on the same side of the table versus across the table.

As you know those JVs included, because it was one of our business objectives, the notion that we would look at acquisitions or look at development, etc., so they’re not just about stabilized assets. These are long-term players and they’re Doughty Hanson and they’re Colorado Public Employees and they’re New York Common, and they have a long-term view of the world. They all have people who are in the real estate business even though they have advisors in some instances who are also obviously experts in the business so they kind of understand where we are and what’s going on.

I think they would be and that’s why we do have a number that was in the guidance about potentially for example, maybe there is an acquisition through the JV structure because if they saw an opportunity to buy something at the right price that would have a value creation over time I think they might have that appetite. If the saw an opportunity to do a build to suit on some of the land that’s in these JVs, I think they might have an appetite.

Obviously, they were comfortable for example, making the decision to proceed with the industrial building in Chicago this quarter. We are in constant communication with these partners and I would say we basically look at the world right now pretty much the same way. It’s going to be rough here in the near term but we’re both interested in long term growing portfolios in the markets where we have these JVs. I think that’s it.

I do think you’re right, and I’ll use yields versus [inaudible], I hope you don’t mind but clearly their expectations and our expectations are higher. So, something that you might have done a year or 18 months ago at a 6.5% or a 7% today you’re going to be looking for a 9% or 9.5%.

David Harris - [Aurora Capital]

Would you characterize there being many opportunities on the distressed selling side?

William P. Hankowsky

I would not.

David Harris - [Aurora Capital]

Is that premature or you just don’t sense where there really aren’t going to be too many?

William P. Hankowsky

That’s a good question. I think at the moment there’s not a lot of distressed product in the market. Where you see it more candidly I’ve seen some more condo kind of projects, residential products in a variety of markets that are clearly having issues and where banks are now at the table or taking action. I haven’t seen it in anywhere near that way on the office or industrial space.

In terms of what might happen, I don’t know. I think we’ve got a variety of factors which again goes back to how we look at the world. I’ve got kind of declining fundamentals and I’ve got a credit crunch. Now, if the credit crunch eases up and I think there are at least signs that all of this liquidity that’s been dumped in the market and intervention may in fact over time have a result but it’s going to take time.

The office that controls the currency and the Fed and all these people and the Treasury they have rules about all these programs and then they have to hire people to run them and then they have to go off and do them so there’s clearly a lag effect to get this credit problem eased up. But, if it eases up or people believe it’s going to ease up over the next couple of months then people I guess will hang in there on the fear that they can finance out their problem.

So, I don’t know whether we’re going to see a lot of distressed assets. My guess is there will just be less credit available. It will be more expensive and these people will have to put in more equity even if they can finance. So the question is do they have the equity? By the way David, I will amend this one, we’ve had a few people ask us, “Are we interested in being their partner on a deal?” Of course, our answer is, “No.”

It’s not as if they’re against the wall but it’s always a sign I think that they realize they better start exploring some options.

David Harris - [Aurora Capital]

A quick question for Rob if I may, Rob how would you characterize the sort of duration of leases that folks are looking for today in these environments? Is it short or is it longer? Is it kind of much the same as you were experiencing over the last couple of years?

Robert E. Fenza

There’s certainly some tenants David, as I said earlier, the uneasiness or their inability to read the tea leaves and where their business is going has forced them to come to the end of their expiration and not know whether they want to expand, stay the same or contract. So, therefore, they look to us to help them make a shorter term decision to stay the same, renew for a year, renew for two years, renew for three years.

There’s more than that today than there was six months ago. There are still a number of tenants that are renewing their leases for five years, and seven years and 10 years and we are signing those leases with new customers as well. But, you get these protracted negotiations and when you peal in to it you realize that the company is still looking for a sign, a signal, a contract that they’re waiting for, something to give them some confidence in making a longer term commitment.

Each situation is different, it’s a little different with office and warehouse, it’s a little different if a tenant is willing to take as is space, we’ll certainly be much more flexible and when we have to put capital in we’re going to push harder and make a better decision and have a longer term lease but generally, we’re responding to a small portion right now of the tenants in front of us. But, it’s more than it was before.

David Harris - [Aurora Capital]

Shorter leases mean that you have lower cap ex presumably, as a quid pro quo from not wanting to commit the capital?

Robert E. Fenza

Yes.

Operator

Our next question comes from the line of Cedric Lachance – Green Street Advisors.

Cedric Lachance – Green Street Advisors

Can you discuss the circumstances relating to the almost 11% yield that you had on the acquisition during the quarter?

William P. Hankowsky

How we got that?

Cedric Lachance – Green Street Advisors

How do you get to find a property at 11% yield if there’s no distress in the market nowadays?

William P. Hankowsky

This particular scenario where there is a case where there is a tenant in the building, there is a fairly early on expiration so there was exposure that the owner had so they were nervous and wanted to move on. It happens to be a tenant that we have multiple relationships with and so from our perspective this was something that we thought we could deal with and handle and it was a risk that the seller was nervous about.

Cedric Lachance – Green Street Advisors

When does that lease expire?

William P. Hankowsky

The lease expires, it’s about a year, maybe five quarters. And, by the way, one other aspect of it Cedric which is again, how we think about things, this is in a park where we have existing assets so for us to take possession of it – we can run this asset with no impact on our overhead in terms of property management, etc. so it is something that is sort of our sweet spot which is a potential value add proposition inside an assemblage of assets that we already own.

Cedric Lachance – Green Street Advisors

Is the lease currently at above market rates?

William P. Hankowsky

No.

Cedric Lachance – Green Street Advisors

In regards to the assets that you sold during the quarter, can you share the cap rate at which those assets were sold?

George J. Alburger, Jr.

They were sold approximately at an 8% cap rate.

Cedric Lachance – Green Street Advisors

And in terms of location and all that, can you give us a little more detail?

William P. Hankowsky

There was an asset in our Baltimore market, there were assets in our southern New Jersey market.

Cedric Lachance – Green Street Advisors

Were those mostly office buildings?

William P. Hankowsky

Yes.

Cedric Lachance – Green Street Advisors

If you look at an 8% to 11% cap rate on potential asset sales next year and if you’re focused primarily on suburban office, are you expecting further upward shifts in cap rates? Or, is it really a function of market and marketing properties that are in areas where cap rates are already probably close to double digits?

William P. Hankowsky

Again, I think two things are going on here, one is the nature of the assets we’re interested in disposing of. I mean, the majority of this would be assets that from our perspective would be pruning the portfolio because we don’t want them in the portfolio anymore. So, they might be somewhat older and just doesn’t work for us. Those will tend to draw higher cap rates.

Then secondly, as we mentioned a little earlier in the call, given that cap rates have moved, we just want to be clear to folks that we’ve put a range out that in addition might pick up some further movement in cap rates. So, it’s a combination of quality assets and our best guess that there might still be some further movement up in cap rates.

Cedric Lachance – Green Street Advisors

Just getting back to the cap ex figure, you signed two large office leases of 100,000 or a little over 100,000 square feet and I ran through the numbers you provided us and it sounds like it is a little more than $4 per foot per year in total lease incentives. I’m curious as to what is the net rent on those deals so that we can calculate what kind of cap ex or percent of NOI you have to provide nowadays?

George J. Alburger, Jr.

It’s about 20% to 25%.

Operator

Our next question comes from David Aubuchon – Robert W. Baird & Co., Inc.

David Aubuchon – Robert W. Baird & Co., Inc.

Can you provide a net proceed number for the asset sales in Q4? And, what you’re expecting in 2009?

George J. Alburger, Jr.

In Q4 about $50 million.

David Aubuchon – Robert W. Baird & Co., Inc.

That’s net proceeds?

George J. Alburger, Jr.

Yes. I mean, there are some closing costs.

David Aubuchon – Robert W. Baird & Co., Inc.

They don’t have any mortgages on them?

George J. Alburger, Jr.

No.

David Aubuchon – Robert W. Baird & Co., Inc.

And then the same for 2009?

George J. Alburger, Jr.

I mean, we don’t know exactly what buildings will be sold in 2009 so I don’t know which ones have mortgages on them and which ones don’t. We don’t have a whole lot of encumbered property.

William P. Hankowsky

[Inaudible] wouldn’t have mortgages.

David Aubuchon – Robert W. Baird & Co., Inc.

So what’s your capacity for mortgage debt? And when you think about that option for 2009 how much can you - ?

George J. Alburger, Jr.

Well of this portfolio, about under 10% of our portfolio is encumbered.

David Aubuchon – Robert W. Baird & Co., Inc.

So as you think about your capital financing plan for the next two or three years, I mean if this environment is not as bad as it is today but it is not as good as it was two or three years ago, where would you like to put that piece?

George J. Alburger, Jr.

Mortgage debt?

David Aubuchon – Robert W. Baird & Co., Inc.

Yes.

George J. Alburger, Jr.

Well, it’s a source of capital for us. I don’t know if it’s our first choice. I mean, our first choice for capital would be the asset dispositions. I would think that we would probably perhaps look to a term loan before we would look at mortgage debt. But, we would selectively take some particular properties that we have that maybe have long term leases and perhaps put some mortgage debt on them.

David Aubuchon – Robert W. Baird & Co., Inc.

What’s sort of quotes do you think you can get today?

George J. Alburger, Jr.

On mortgage debt?

David Aubuchon – Robert W. Baird & Co., Inc.

Yes sir.

George J. Alburger, Jr.

Well, first of all your loan-to-value is going to be less than what it was. You’re going to be looking more at 60% loan-to-value, 65% loan-to-value rather than 80% loan-to-value. We can get inside of 8%. But, I’ve got to tell you that the numbers on financing are just the movement has been pretty significant in the last 30 days. I mean, just even the spreads on senior notes in the last 30 days has gone up by 150 basis points. There’s a lot of movement out there in rates and spreads.

William P. Hankowsky

Our ultimate preference would be to access the unsecured market assuming that that market both had availability and pricing made sense.

George J. Alburger, Jr.

That’s correct but it’s probably gotten a little bit further way from the dock than closer in the last three weeks.

William P. Hankowsky

But, if you’re talking over the next five quarters, before we’d start mortgaging up a bunch of properties we’d look at term loans, is the unsecured going to open up, before we’d go to that path.

David Aubuchon – Robert W. Baird & Co., Inc.

I know it’s tough to peg George but if you had to give kind of a gut feel where you think it all settles out at the end of the day a year from now, what do you think you can do seven or 10 year unsecured debt?

George J. Alburger, Jr.

I think we could do under 8%.

David Aubuchon – Robert W. Baird & Co., Inc.

As it relates to your development starts, the additional $50 million, what do you think about in terms of your yields there? I understand it would be build to suit activity, yields on that capital slice versus what you may see on the acquisition front and kind of how would you balance that activity? In other words, what do you need to see on the acquisition side? What kind of yields do you need to see?

William P. Hankowsky

I want to make sure I answer the right question, we’ve been clear earlier I think on a variety of calls and I don’t want anybody to get confused here so I’m actually probably glad you’re asking this question. Our preference in terms of any new capital investments, our preference would be development because it’s going to be brand new assets, it’s going to be where we want it. 13 of the 23 buildings on the pipelines today are lead certified so we’re looking at having the best assets long term and we think that has value in a variety of ways, operationally, the value of the assets, etc.

So, we’ve been very clear that we’re looking to develop yields north of 9% to make that kind of make sense. When you start talking about buying assets, probably for us it’s got to make more sense than that from an economic consideration because we may have to compromise a little bit about age, or quality or whatever. So, it’s going to be somewhere north than that I think on stuff we might be interested in buying. If that’s responsive to the question.

David Aubuchon – Robert W. Baird & Co., Inc.

Then on the G&A increase George, I think you said $0.03 to $0.04 additional?

George J. Alburger, Jr.

Yes.

David Aubuchon – Robert W. Baird & Co., Inc.

G&A in 2009 and that was inclusive of lower capitalized G&A?

George J. Alburger, Jr.

That is correct.

David Aubuchon – Robert W. Baird & Co., Inc.

Can you quantify that and then also talk about cap interest assumptions for ’09?

George J. Alburger, Jr.

I don’t know if I can quantify it. Cap interest is just a function of the development pipeline. I mean there will be less capitalized interest with a decreasing development pipeline.

Operator

Our next question comes from Chris Haley – Wachovia Capital Markets, LLC.

Chris Haley – Wachovia Capital Markets, LLC.

Six years ago Liberty’s senior officers made a move a little bit more aggressively and likely before any of your then publically traded peers in a preference for occupancy versus rate and concession. This was a move that was predicated upon very little activity that was expected over the next year. I’d be interested in your perspective today going in to 2009? Rob, obviously you would be maybe best to handle this, how does this compare to 2002/2003 in your mind?

William P. Hankowsky

The situation in 2001 which then led to 2002 was a situation where demand evaporated almost overnight, number one. Number two was, you’re right there was a – and in fact, I think the majority of economists even in the first quarter 2001 said it was going to be a V shaped down turn and that by the end of the year it would be fine. We made a judgment that that was not the right call and given there was nobody in the market we said occupancy was key and it was an across the board portfolio wide determination.

Today what you have is a situation where there is still demand. As Rob said, it’s sluggish but there are still people in the market looking for space. Candidly, the one good thing is whoever is in the market, they’re for real. There are no tire kickers in the market today. If somebody is looking for space, there is some business reason they’re doing it and they want to make a deal so they’re for real.

As you also recall, in 2001 we had this wonderful situation where we were basically tenants in over leased space as a function of the tech boom and we had this stunning dumping of space in to the market and a real spike in sublet. Though we have said on this call that we think sublet is going to go up, I think it’s a gradual trend, it’s not a spike so the general fundamentals of the market i.e. supply and demand are more in check today, than they were in 2001/2002.

So, we are not of a mind at the moment to issue a portfolio wide determination that occupancy is key. Having said that, what we are of the mind is where we make a judgment that a submarket or a product type in a market does face kind of those dynamics we may make the determination that we are going to be more aggressive than we have been.

I think a downturn is always a very management intensive time and there’s no question it is for us and we’re going to think about this pretty much vacant space by vacant space in markets. So, if we’ve got 50,000 square foot space in the market, nobody else does and we think there might be prospects out there for it, we’re probably going to hold rent. If we’ve got one of 20 10,000 square foot availabilities, we’re going to be aggressive. It will vary at that level of granularity.

Operator

Our next question comes from Mitchell Germain – Banc of America Securities.

Mitchell Germain – Banc of America Securities

What gets you to your upper end of your guidance at this point?

William P. Hankowsky

In terms of how things will play out?

Mitchell Germain – Banc of America Securities

Exactly.

William P. Hankowsky

Well, what would happen to get us to the upper end would be a variety of factors. That the occupancy would be the plus 1% versus the plus or minus 1% so we’d be on the upper side of that. That the rents would be on the upper side of the 4% to 7% because, as you know the most driving force to our earnings is the same store, the core portfolio. So, that would overwhelmingly drive it.

One other thing that would drive it, in fact, it would be in second place would be much more success leasing up the development pipeline. So, as we said much earlier in this call, we look at this pipeline asset by asset and thought out how long it was going to take us to lease it. If we were able to bring home a significant piece of that pipeline earlier than we have in our estimates, that would be positive.

I think those are the two biggest considerations. I guess the third one is that kind of [inaudible] the debt markets are both stable, available and priced reasonably. So, anything that would help us on the cost of capital side. I think those are your three big drivers.

Mitchell Germain – Banc of America Securities

Just whether you Bill or Rob, are you guys seeing a pull back - I know a lot of us have heard a lot of anecdotal feedback on the financial services sector, have you guys seen a pull back in leasing in any particular industry segment?

William P. Hankowsky

That’s an interesting question. Let me start with financial services since you mentioned it because I do think it’s a sector that you really have to parse. By the way, I think this is actually consistent with my comment about where I think job losses are going to go. Wells and Wachovia, they closed in the fourth quarter, December 1st I think is when Merrill and BOA closed and we haven’t heard what those job losses are going to look like.

We just heard today that National City is laying off 4,000 people so there’s a scenario where I guess I call it the direct banking world where we’re going to be seeing I think some real sublet space, layoff, pullbacks, people paying term fees and going home. But, when you stay in that space, people like Vanguard who just took another building from us of around 75,000 square feet.

We’ve got people like insurance companies, people that for example that do business with AARP or have certain accounts have actually expanded with us over the last couple of quarters. So, interestingly enough the lease we did in Jacksonville with American Home Mortgage, and you might say, “Wait a minute, you just did a deal with a mortgage company, Bill?” But, these guys their whole business is they service mortgages.

They actually have more business because other people are dumping that business activity and somebody has to service all these mortgages so they’re actually in a growth mode. They’re not an originator so they’re actually benefitting from the current kind of turmoil. You really have to be careful but, to your general question I don’t think there’s any other industry.

We’ve already seen all the mortgage brokers go home, we’ve seen anybody that’s in the home building business whether you’re a home builder or a supplier or something, when you’re lease expires you’re going home. That started in the fourth quarter of last year and it’s played out through this year. But, other than those guys I don’t see any other space that is particularly stressed.

Operator

At this time there are no questions. Are there any closing remarks?

William P. Hankowsky

Thanks everybody for being on the call.

Operator

This concludes today’s Liberty Property Trust’s third quarter earnings conference call. You may now disconnect.

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