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Executives

Jeanne Leonard, VP, Corporate Communications

Bill Hankowsky, President & CEO

George Alburger, EVP & CFO

Analysts

Alex Goldfarb – Sandler O'Neill

Jordan Sadler – KeyBanc Capital Markets

Josh Attie – Citi

Paul Adornato – BMO Capital Markets

John Stewart – Green Street Advisors

Liberty Property Trust (LRY) 2013 Expectations Conference Call December 11, 2012 11:00 AM ET

Operator

Good morning. My name is Simon and I will be your conference operator today. At this time, I would like to welcome everyone to the Liberty Property Trust 2013 Guidance 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, you may begin your conference.

Jeanne Leonard

Thank you, Simon. Thanks, everybody, for tuning in today. You're going to hear prepared remarks from Chief Executive Officer, Bill Hankowsky, and Chief Financial Officer, George Alburger.

Mike Hagan, our Chief Investment Officer, and Rob Fenza, our Chief Operating Officer are also here in the room should you have any questions for them.

Liberty issued a press release detailing our 2013 guidance as well as a supplemental fact sheet this morning and you can access these in the Investors section of Liberty's website at www.libertyproperty.com.

In these documents, you will also find a reconciliation of 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 assurance 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, risks that were detailed in the issued press release and from time to time in the company's filings with the Securities and 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?

Bill Hankowsky

Thank you, Jeanne, and good morning. I want to thank all of you for joining us to discuss Liberty's plans for 2013. I'm going to begin by spending a few moments giving you our sense of where the economy and the real estate markets will be over the next 12 months and how that potential reality is shaping our thinking.

George will then walk you through the specific guidance numbers and I'll close with some strategic thoughts on Liberty for 2013 and beyond.

We think 2013 continues the path established in 2011 and 2012. The economy will grow at the long, slow, upward pace we have seen. GDP we feel will be between 1.5% and 2.5% increase. Unemployment will decline and will be in a range of around 7% to 8%.

To state the obvious, we all await the deliberations in Washington on the fiscal cliff. Though some economic uncertainty was resolved with the presidential election, much remains. As a result, we do see some customer tenant uncertainty and deferred decision making.

Our projections for 2013 do not envision an economic downturn should Washington misplay their current negotiations. That being said, we do think the first half of 2013 will start slow and the second half of the year will be stronger.

One specific area where we think we'll be slowest in early 2013 is real estate transaction activity. The potential for tax changes has driven a number of sellers to seek a deal now before year end.

So if you want to sell, you're in the market now and, therefore, we think there will be little product to acquire in the first half of 2013. Hence, we have lowered our acquisition thinking for 2013 and believe it will be back end loaded.

In terms of leasing for 2013, we see a continued bifurcation between the office and the industrial markets. On the office side, the anemic job market plus firms optimizing their space needs will yield positive but modest demand.

This should help tighten markets that will not yield market rent growth. We see build-to-suit office opportunities among large, cash-rich corporate users but very minimal speculative development.

We saw strength in the industrial markets in 2012 and expect to see that strength continue in 2013. Here again, large users are more active, retailers, consumer products, ecommerce, logistics firms. This activity will continue to move up industrial market rents though not yet to their 2007, 2008 peaks.

Industrial build-to-suit activity continues and several industrial markets will support new inventory products. We will continue to improve our portfolio through prudent asset management, focused on the sale of suburban office and high finish flex products.

The combinations of acquisitions and development activity will exceed our sales activity making Liberty a net investor in 2013. With that, let me now turn it over to George to walk you through the specific numbers.

George Alburger

Thank you, Bill. I'm going to provide earnings guidance for 2013 using the same format I've used for the last several years, which is to use the expected results for the current year as a starting point for developing earnings guidance for the next year. So the first thing I'd like to cover is activity for the fourth quarter of 2012.

During the third quarter earnings call, we suggested that FFO for the fourth quarter would be in the $0.62 to $0.64 per share range. To date, the fourth quarter performance is as expected.

Core portfolio performance is in line with expectations. There has been a modest amount of dispositions and we're still comfortable with our estimate that we would invest approximately $170 million in acquisitions in the fourth quarter.

Given that the fourth quarter activity is generally in line with expectations, we are comfortable using the midpoint of our fourth quarter range, which is $0.63 per share, which would result in FFO for 2012 of $2.58 per share.

Included in this $2.58 estimate is a $3.7 million gain on the preferred redemption that we had earlier in the year. I'd like to take this $0.03 per share, one-time gain out of the $2.58 2012 midpoint estimate and use $2.55 per share as a good starting point for developing earnings guidance for 2013.

I'm going to start the 2013 guidance presentation with a discussion of expected capital activity.

In 2012 we invested approximately $215 million in property acquisitions. We believe there will be less product that meets our requirements for quality, acceptable pricing and an opportunity to add value available in the market in 2013 than there was in 2012.

We believe acquisitions for 2013 will be in the $100 million to $200 million range and the cap rate will be in the 6% to 8% range.

For 2012, proceeds from the disposition of primarily suburban office and high finish flex properties will be approximately $235 million. Approximately $200 million of these proceeds came from a portfolio sale that was under contract in 2011 and closed in early 2012.

The significant market-specific portfolio repositioning we wanted to accomplish is behind us and asset sales on a going forward basis although they will be concentrated in suburban office portion of our portfolio will be more routine.

Our disposition activity for 2013 should be in the $150 million to $250 million range and the cap rate will be in the 8% to 10% range.

Moving on to development, you have heard us discuss during the last several earnings calls that we have a significant list of build-to-suit prospects and you know we are willing to undertake speculative development in select markets.

As a result, development starts for 2013 could be in the $300 million to $400 million range. We’ve been building up our development pipeline for over two years. We had no completed developments that came into service in 2011. Development deliveries for 2012 would be approximately $60 million.

Development deliveries in 2013 which will be a little bit more heavily weighted towards the second half of 2013 should be in the $300 million to $400 million range and the yield on this investment will be in the 9% to 10% range.

The combination of this acquisition, disposition and development activity will increase 2013 earnings compared to 2012 by $0.01 to $0.03 per share.

For the last several years, the combination of acquisition, disposition and developments have resulted in decreased earnings, as Bill mentioned. For 2013, we see ourselves as a net investor and, as a result, the combination of this activity is now resulting in an increase in earnings and an increase in the value of our portfolio.

Staying with capital, we just covered the investing of capital. Let's move on to the sourcing of capital. Last week, we issued $300 million of 10.5 year notes at three and three-eights percent and yesterday we filed a $200 million ATM program.

We had an ATM in late 2008 and early 2009. We have not had an ATM since that time. We didn't need to source capital. We were not a net investor in real estate. Proceeds from disposition were greater than investment and acquisitions and development.

For 2013, we will be a net investor in real estate and we will need to source capital to fund this investment.

The recent debt transaction and the ATM program are sources of this capital. Today's interest rate environments are rather extraordinary. The interest rate on the $300 million loan we issued last week was very attractive and savings on interest rates and preferred costs for 2013 will increase 2013 earnings compared to 2012 by $0.01 to $0.04 per share.

Moving on to G&A expense, G&A expense for 2012 should be approximately $63 million. For 2013, we believe G&A expense will be $1 million less than it was in 2012 primarily because of less acquisition related expense.

One other observation on G&A, I'm sure you will recall there is an accelerated investing or portion of our long-term incentive compensation award which results in higher G&A expense in the first quarter.

For 2013, this accelerated investing will result in $4.2 million more G&A expense in the first quarter of 2013 compared to the remaining three quarters of the year.

For lease termination fees, our historical experience has been in the $0.04 to $0.06 per share range. For 2012, it appears that lease termination fees will be close to the low end of our range. For 2013, we'll stick with our historical range of $0.04 to $0.06 per share.

For 2012, we expect to recognize approximately $0.08 in earnings from a variety of miscellaneous items. These miscellaneous items include land sales in the UK, interest income, management fees and a few other miscellaneous items.

We are projecting that earnings from these items will be flat to 1% per share more in 2013 compared to 2012.

The final item I want to discuss is the most significant: what do we expect for the same-store group of properties which represent over 90% of our revenue? For the first nine months of 2012, rents for renewal and replacement leases decreased by 4.2%.

We expect – we have been experiencing rent rolldowns for the past several years and expect this to continue in 2013. For 2013, we project that rents for renewal and replacement leases will decrease by 2% to 7%. This decrease is a result of decreases in rents for office offset by increases in rents for industrial.

Moving on to occupancy, for 2012 year-to-date average occupancy compared to 2011 improved by approximately 1.5%. We expect this trend to continue and are projecting that average occupancy for 2013 will increase by 1% to 2% compared to 2012.

One other item to cover with respect to same-store performance is the 215,000 square foot (Glaxo Smith Klein) building we own in downtown Philadelphia.

(Glaxo) will take occupancy of the new headquarters we are building for them in the first quarter of 2013. We are projecting that the building (Glaxo) is leaving will remain vacant for the balance of 2013.

The combination of the change in same-store rents and the change in same-store occupancy, which considers the (Glaxo) vacancy, will result in an increase in same-store performance for 2013 compared to 2012 of $0.02 to $0.04 per share.

All of the above items result in an FFO earnings guidance for 2013 of $2.60 to $2.70 per share.

The last item I want to cover is the dividend. During last year's earnings call, we suggested the cash flow from operations would not cover the dividend and that the shortfall would be in the $15 million to $25 million range.

We believe actual results for the year will be closer to break even. For 2013, we believe there will be a shortfall. The increase in occupancy we are projecting brings with it more leasing transaction costs and higher straight line rent differences.

For 2013, we are also projecting an increase in capital expenditures to upgrade and reposition certain specific properties. As a result, we believe there will be a dividend shortfall in 2013 of $15 million to $20 million and with that I'll turn it back to Bill.

Bill Hankowsky

Thank you, George. As George's presentation shows you, 2013 advances Liberty's strategy on multiple fronts. At the beginning of this year, we stated that 2012 would be the inflection year where we would begin to grow earnings.

2013 continues this growth with an estimated 2% to 6% growth in FFO. We see Liberty continuing to outperform our markets in 2013 with the resulting increase in portfolio occupancy of 1% to 3%.

Our development pipeline will increase and become a greater contributor too our earnings growth. We will also continue to decrease our suburban office product while increasing our industrial portfolio to 63% of our projected 86 million square feet by year end creating a more valuable company.

We will do all of this while maintaining our strong balance sheet as evidenced by our team's terrific execution on last week's (deck) deal.

2013 builds on 2012 on all fronts and positions us for even further growth once the economy picks up momentum in late 2013. And with that, we'd like to open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Alex Goldfarb with Sandler O'Neill.

Alex Goldfarb – Sandler O'Neill

Just, George, just covering up on the line items, can you – maybe you mentioned it. Can you just mention what your expected average share count is? And then we appreciate the color on the dividend shortfall but can you just give what your expectation is for total straight line rent, TIs and CapEx?

George Alburger

Let me tell you – there were a couple questions there, Alex. Let me do this on average share count and that is that you know that we have said that let's just look at one kind of balance sheet measure, which is debt to gross assets.

And you know that historically we've told you that 40% to 45% debt to gross assets would be a reasonable number for us to bounce around in. But we have probably trended towards the lower end of that range, kind of the 40% to 41% range.

In 2011, I think we got as low as 36% debt to gross assets. By the end of this year we'll be probably closer – we'll be a little bit over 40%, so we're back to that historical range that we've operated in.

In the press release, I know we laid out what our capital needs were and if you just look at some of the midpoints of those capital needs, you see that acquisitions, midpoint would be $150 million, land acquisitions another $50 million, development starts another $250 million and maybe we get $200 million midpoint from dispositions.

So all those plusses and minuses needs adds up to $250 million worth of capital needs. And if you think about historically they've had debt at a 40%, 41% range, the rest is coming from equity.

So that could be a source of capital for us, so we might be looking to access type of equity capital that would hit with those numbers.

Do we look at other sources and how does it come in? Do we exceed some disposition levels or do we exceed some acquisition levels which will balance some of it out? Do we look at the preferred market and some of those things?

But regardless, you could look at all of that and say wouldn't it be extraordinary for our share count to go up by 5 million shares? It wouldn't be extraordinary.

Alex Goldfarb – Sandler O'Neill

And then the straight line, TIs, CapEx?

George Alburger

On – let's do the CapEx first. CapEx I think if you look at 2012, maybe it'll get in the $15 million, $16 million range. It could be $10 million more than that in 2013. Straight line rent differences, that could also – that could be – it'll be – what's it run?

It usually runs about a little more than $2 million a quarter. It could run meaningfully in excess of that with some of the new leases that we're looking to do, perhaps even double that amount.

And TI, I think on a square footage basis, will probably fall in with historical levels but given the increased leasing activity, could it be in the $70 million range plus or minus? Yes.

Bill Hankowsky

Alex, just a couple pieces of color to the numbers we just gave you – from a leasing perspective, the roll up of the business plans for 2013 we anticipate leasing around 17 million square feet, which would be higher than we're doing this year, so that TI delta that George mentioned.

And on the CapEx side, as George mentioned, one of the things we're looking at in 2013 is the potential to invest in some assets, particularly focused in the Great Valley western suburbs, to upgrade them as a reaction and response to the fact that there's been this significant increase in access, highway access to this area.

We're actually this afternoon going to open a new turnpike interchange, literally up the street here and then Route 202 is widening. So we want to reposition some of our assets here, so we're actually, as George said, ratcheting up our CapEx investment in some of these assets.

So more leasing and some investment in some real estate is what's driving that additional outflow of dollars.

Alex Goldfarb – Sandler O'Neill

And just my second question just goes to the leasing front. If you look at this year's press release, the guidance break out versus last year's, last year you guys were expecting straight line rents to be down, the re-leasing spreads down, flat to down 4%.

This year down 2% to down 7% but in your commentary you talk about improving, slowly improving fundamentals. So can you just help us understand why the straight line rent spreads are going more negative this year despite the fact that incrementally your commentary sounds like things are getting better?

George Alburger

Let me just comment one piece there. Yes, we did put out a guidance range of 0% to flat to down 4%. Year-to-date it's been down 4.2%. So we were at the high end of that range. I think the numbers we're laying out for 2013 better wrap that range. I'll let Bill talk about the market.

Bill Hankowsky

Yes. Just to pick up on that, so experience in 2012 is, as George just said, it's more like 4%-ish, 4% to 5%. We're going into '13. As I said in our opening remarks, we think '13 begins soft, so we don't think there's a whole lot of lift we're going to see on rents in the market.

We also think that there are some pockets of particular softness on the office side, so areas like Northern Virginia and Baltimore and Virginia Beach, places that have a defense security firm aspect to them, government-related aspect to them, we're projecting softness.

So when we look at the office side, we don't think we're going to see any real lift in rents and so we think that's coming in where it was.

In the industrial side, yes, it's going to be somewhat better but it's better in pockets and when you roll it all up we still think we're in this range.

Operator

Your next question comes from the line of Jordan Sadler with KeyBanc Capital Markets.

Jordan Sadler – KeyBanc Capital Markets

I'm going to double back to the view for the year how we start off slow next year and build in the second half. What's giving you the conviction or the optimism surrounding the second half?

Bill Hankowsky

I think the way we're thinking about this – again, I think we also made the caveat that this is assuming that there is not some significant event that takes the whole thing off kilter, whether it be fiscal cliff or Euro or something. Let's just assume the world reacts the way it's – down the fairway, down the middle.

Our thinking goes something like this. I think there has been tremendous uncertainty that has permeated the business environment for lots of business decision makers and that uncertainty comes in waves.

So one wave was the election. So were we going to have national healthcare? Was it going to be repealed, massively altered? I think the answer – we now know that answer. No, we're going to have it. It's going to proceed relatively according to plan.

So if I'm a healthcare provider, if I'm in that insurance space, I may now be thinking to myself I see growth opportunities there. If I'm somebody who supplies medical equipment, I may say, I see growth opportunities.

But other pieces of it are still uncertain. So with the cliff, we still have issues related to defense spending. We have issues related to the general budget. We have issues related to consumer spending, to the degree tax rates change enough that they zap that.

So if I’m in one of those spaces, I still don't have clarity. Maybe we get clarity next week. Maybe we get clarity by the end of the month. Maybe they end up with an intermediate step and we don't really figure it out until January or February.

So my ability as a business person to click on a business plan is held up until I see which way it's going – am I on Plan A or Plan B?

By the time I then say go, I have to then go out into the market for our product being real estate and say I'm ready to get some more space. I'm ready to open that office, put out the proposal, hire the broker, get going.

By the time that process happens, I'm already into the second quarter. So the lift comes later in the process.

And I think the third uncertainty that hangs out there is the big budget deficit question. Where does that all go? What does that do to financial markets, the US rating, et cetera? And is that going to get resolve co-terminous with the cliff or subsequent?

So in our heads, we've seen the uncertainty headed to the fog of the uncertainty gets dissipated in three waves: election, cliff, debt. And by the time that plays out, I don't think people can execute until later in the year.

Once it's all out there, whether you like the answer or don't like the answer as a business person, you have clarity. And our belief has been the lack of clarity has been a major impediment to people pulling the trigger on decisions. And once that's out of the way they'll pull the trigger.

Hopefully these will be positive decisions from a consumption of space perspective, but they'll be decisions. So that's our thinking about why it's slow to start, picks up speed and there's lots of factors that I think point to not – it's potentially not a bad economic scenario.

What's happening with energy, if housing can pick up, if there can be clarity for decision makers, if business invests, that becomes its own driver. So that's where our head is and how we think about it.

Jordan Sadler – KeyBanc Capital Markets

And then as a follow up, on the sales side, you're laboring in another sizeable chunk relative to what you did in 2012, a similar type of number. And I noticed there's a significant embedded (inaudible) in the guidance of $35 million at the midpoint. Can you maybe speak to that a little bit? What would you be selling that would have such significant gains? It sounds like suburban office.

Bill Hankowsky

Well, I think, as George put it on his comments and maybe a little bit in mine, Liberty is always thinking about a couple of things when it comes to the portfolio. One thing we're thinking about is prudent asset management.

So we should move out assets that don't make sense over time and our focus on that has been suburban office and high finish flex or you can assume that some decent share of those dollars are in that product type.

As George said, we're not at the moment in 2013 thinking about a specific city we're going to exit. We're not doing that. We're going to be talking about a building here, two buildings there across the portfolio in places where we just think they should move out.

The second thing, though, prudent asset management could also mean reaping value creation so that there may be an asset in this portfolio, one or two where we think we have optimized the value and it may be a good thing to take advantage of that and we all know – as George and his team did last week – when you look at these debt levels, the other side of that is you could get some decent pricing because we know what people can do to put leverage on a very good real estate asset.

So there may be something in there that we're going to do, a value creation harvest and that could yield a significant gain. I'll leave it at that.

Jordan Sadler – KeyBanc Capital Markets

That would probably come from the office space as well, I'd imagine.

Bill Hankowsky

No, we are trying to decrease our office profile, so you can add the pieces together.

Operator

Your next question comes from the line of Josh Attie – Citi.

Josh Attie - Citi

Can you talk a little bit about the $300 million to $400 million of starts for 2013? I guess first, how might that break down between office and industrial and also between speculative and build-to-suit.

Bill Hankowsky

The $300 million to $400 million would represent around 14, 15 projects. I'm going to be talking – when you think about those projects, about half of them would be build-to-suit and half would be inventory.

They would be predominantly in square footage industrial across both the build-to-suits and the inventory. In fact, the inventory is basically industrial.

And they represent 4 million to 5 million square feet of potential development. Now, I'll be honest with you. The way we – some of this we have higher certainty on because we're looking through four quarters. Some of it we're a little bit projecting, so those numbers could move a little bit because one thing we think is going to happen might not and another one that has lower probability might show up. These also probably are across eight or nine of our markets.

Josh Attie - Citi

Should we expect similar yields to what you're getting on the current pipeline?

Bill Hankowsky

Yes, I think we did put in the material we distributed this morning we anticipate the yields on these – oh, actually we don't.

George Alburger

Yes, (inaudible) the call. The starts is nine to 10. I think it's roughly the same.

Bill Hankowsky

Yes, sorry, you're right, we didn't. I think they're roughly the same, maybe eight to 10.

Josh Attie - Citi

And how should we think about the net growth to Liberty? And I guess by that I mean is there a component to next year's starts where a tenant might be moving out of an existing Liberty building into a build-to-suit that you're going to build for them?

Bill Hankowsky

Yes, that is conceivable but the way I would think about that, Josh, is that there could be a couple of these build-to-suits where they are Liberty clients and they are making a move. But they could be net adds.

So I'm in 400,000 square feet of Liberty industrial space, got in a couple buildings and I need 700,000. So I – and that plus three but I've got a back (build of) four.

So there is a – but out of the 4 million to 5 million square feet it's not 1 million that's affected that way. These don't really represent – they're not quite a (Glaxo) phenomenon where we're literally just yanking them entirely out of one building and putting them in another building.

These are – these tend to be expansion-type projects but they could represent some presence in the portfolio.

Josh Attie - Citi

As you think about renovating and repositioning some buildings, you mentioned putting capital into some of the assets that you own. Do you have any capability or desire to convert some assets to another product type like multifamily or any of your land holdings could they have a higher and better use like, for example, multifamily?

Bill Hankowsky

Yes, when we look at our assets, we do think about do they fit, can they be converted, what do we do with them? I don't really see any that jump in my mind where an existing asset lends itself easily to a multifamily conversion.

In terms of land, we do go through the land inventory and I can think of maybe one place in Florida where there is a piece we might work – currently working on that we think is better as a residential piece and we will sell it. We will not be a residential developer.

And we go through that – we do go through that process of saying, hey, maybe this market has changed and this asset isn't an office site anymore; it's a residential. But are there two or three of them? Maybe. But there's – on the whole, the land that we have is pretty much inventory for us to develop out of parks and the big amount of land is basically industrial land obviously because that's just very land intense.

Operator

Your next question comes from the line of Paul Adornato – BMO Capital Markets.

Paul Adornato – BMO Capital Markets

Just a follow-up question on the development pipeline, given that the expected yields are stable compared to the current pipeline, can we assume that the competitive environment is also still pretty muted at this point?

Bill Hankowsky

I think the competitive environment varies by product and markets a little bit. So in the world of inventory industrial development, (inaudible) world, it can run the gamut from Houston where this calendar year we will have started about five buildings down there, which, in our heads when we started them were all inventory, many of which got leased during construction.

But as you well know, a number of other very competent REIT players have also started inventory product in that market. But I do think that what's muted is the capacity for the historic merchant builder who would enter a market that was pretty robust and just start throwing product up.

The capacity to get an old-fashioned construction loan on a (speculatory) building remains, to use your phrase, muted. So our competition is our peers, which is fine because I think all of us are thoughtful, disciplined allocators of capital and so I don't see the REITs overbuilding a market. I think we'll all do it apace appropriately.

That's where – so that's the story I would say in the markets where you're talking about inventory industrial.

On the build-to-suit industrial, there can be competition. It's a competitive market. And obviously the difference in a build-to-suit is I've got a lease in my hands, so maybe I can go mortgage it and finance it and, therefore, the private guy can come to the scene.

What we see is that large corporate users find some efficiency and I think comfort in working with a large, well-capitalized real estate player. So there's no financing uncertainty. You know if Liberty and you agree on a transaction we're going to build it for you.

There's no development uncertainty because you know we're experienced in executing. For those who are looking for state-of-the-art, sustainable, green product, you know we know all about it and can deliver it, so I think that on the whole we're seeing less competitive environment.

On the build-to-suit side, there aren't a whole lot of people in the space in some of the markets we're looking at, so these, again, tend to be – I don't want to say they're not talking to other people. They are.

But maybe they're talking to two people or another person. But this isn't the environment where there's seven or eight. And therefore, that's partially why these yields are holding up. These yields aren't getting bid down because these are being heavily marketed. That's not the way it's being done.

Operator

Your next question comes from the line of John Stewart – Green Street Advisors.

John Stewart – Green Street Advisors

George, I don't mean to parse your words too finely, but I wanted to zero in on the rental rate roll downs and same-store guidance and specifically, if I understand what you're saying, it sounds like the mark-to-market on industrial leases will be flat to maybe slightly positive and that will be dragged down by office.

And so I'm just – is there something in particular we should focus on to get to 7% to 12% cash roll down across the portfolio? It seems like you'd have to have much weaker than that on suburban office just to offset presumably the volume that you'll do in industrial.

George Alburger

I agree with your first observation on mark-to-market. Now, of course, mark-to-market is the entirety of the portfolio, so mark-to-market would include those leases that were signed in 2009 and 2010, which are – have a totally different rental rate than those leases that were signed in 2006 and 2007.

And I think what you're seeing in terms of what's rolling over in 2013 is those rents that are at the higher end of the – or at the higher rental rates.

So I don't think they're inconsistent, John. So I would stick with if you look at mark-to-market for the entirety of the portfolio we've said that rents are probably 10% higher than market. It's – the office is probably 12% higher than market, maybe a tad higher than that and the industrial is flattish.

Bill Hankowsky

George, I think there is one other component, which is the mix of the leasing, the replacement leasing, which is the highest TI and the highest – and you're going out to the market. You're not renewing (the guy).

Our flex and our office square footage in the business plans are about 50% higher on a square footage basis in '13 replacement leasing than they were in '12, whereas the industrial is flattish, just for footage.

So that weighted average …

George Alburger

So you had a different weighted average mix there also, John.

John Stewart – Green Street Advisors

I realize this is a '13 guidance call and not necessarily a portfolio update, but can you give us any update on the two inventory projects in (Carlisle) and Bethlehem?

Bill Hankowsky

In Bethlehem, we remain very active with – to be blunt – with two potential customers and are hopeful but we don't have it done that we'll have something to talk about in the first quarter.

And in (Carlisle) there is also a few prospects in the market we're a little further behind process-wise. But again, we think both buildings will be leased up prior to the end of their lease up period in the development pipeline, which I think is the second quarter.

John Stewart – Green Street Advisors

George, sorry, I missed the number that you gave for land sales and other. Will you walk us through those numbers again just real quick?

George Alburger

For dispositions?

John Stewart – Green Street Advisors

No, I thought you had a contribution for UK land sales and other bucket.

George Alburger

(inaudible), that would go up – it's either flat or up by a penny.

John Stewart – Green Street Advisors

Then lastly, just should – on the balance sheet front, your comments and response to Alex's question were helpful. Should we infer from the relatively small capital requirement that you don't contemplate another debt offering or preferred issuance next year?

George Alburger

I'm not sure if you can totally infer that.

John Stewart – Green Street Advisors

Then what is – what should we expect from the balance sheet front?

George Alburger

Well, we did lay out that if you even take the midpoint of our guidance you're talking about $250 million worth of capital needs.

John Stewart – Green Street Advisors

But if you assume 60% of that is equity, then what's left is going to be less than a bond deal that you would typically do.

George Alburger

Yes, we try and be opportunistic on this and I know what you're saying. It's just that these numbers do bounce around a little bit. I don' know if we'll exactly hit the midpoint of all of these numbers. So I'm just trying to say we need to have a little bit of flexibility here on this.

And we will pay – you know we pay attention to the balance sheet. To some extent, one of the reasons why we're able to get a 3.38% deal was we pay attention to the balance sheet and I think that's one of the reasons why in those difficult times of 2008 and 2009 we were never downgraded by any of the rating agencies.

Bill Hankowsky

George, I've got to say, all the capital sources are open.

George Alburger

Yes, all the capital sources are open. This is not to suggest that it's equity debt and 60%, 40%. If you – some of our comments during the third quarter earnings call – we chatted a fair amount about the preferred market and we looked at the preferred market but the senior note market was just so much better than the preferreds at the end of the year that we did the senior note market, so I think we described it as a good problem to have that we had a variety of capital sources. But we'll be selective on them.

Operator

(Operator Instructions) Your next question comes from the line of Alex Goldfarb – Sandler O'Neill.

Alex Goldfarb – Sandler O'Neill

The first one is, George, on the dispositions, did you say that they'd be – I'm assuming that they'd be front end loaded just given the lack of transaction activity. I'm guessing these are spillovers.

George Alburger

I'm not sure about that. I'm not sure if I would say that.

Alex Goldfarb – Sandler O'Neill

So they would be back end loaded then.

Bill Hankowsky

No, probably better to think of them happening throughout the year.

George Alburger

Yes.

Alex Goldfarb – Sandler O'Neill

But if transaction markets have been quiet – oh, because you're saying the transaction markets are quiet because sellers – it's not that the market …

Bill Hankowsky

Yes, what we're saying, Alex, is we don't think we're going to see much we can buy because we think there's a little bit of house cleaning because of fear of – it's sort of – I don't – Mike's here.

It's humorous the calls we get on, hey, do you want to buy this? If you can close by the year end, we'd really – because people are trying to take a tax advantage. So we think there's going to be a lot of – then again, that may actually be a good time for us to sell because we'll be one of the few people out there providing an opportunity.

So the sales side, it's not because the markets are closed. We just think there's sort of this peculiar heavy loading this quarter that will leave a dearth of opportunity as you enter the year.

Alex Goldfarb – Sandler O'Neill

I didn't know if people were trying to match their buys and sales.

George Alburger

Oh, no, no. We weren't saying that. Sorry.

Alex Goldfarb – Sandler O'Neill

The second question is earlier in the MD&A, you guys commented that basically the portfolio repositioning has been basically done. But again, comparing your guidance from last year to this year, the September 30th of last year and this year, the portfolio mix is sort of similar and the year-end targets for '12 and '13 are roughly the same.

So it looks like there's still some more work to be done. Is it just that you feel better about bulking up inventory of warehouse that you don't have to massive sales or why is suddenly – given the portfolio, isn't much change from a year ago. Why now say the major shift is done?

Bill Hankowsky

We didn't mean to say the major shift was done. Let me be clear. What we were saying was that the big sales in (inaudible), exiting a market, selling out of Milwaukie, selling out of Richmond, that kind of activity we have basically got those markets that we wanted to exit exited.

We still are very much of the belief that we will decrease the amount of suburban office we will own as a raw number. It will go down and we will increase the amount of industrial we will own. And so as a raw number that will go up.

It will be done, though, in a more measured way as we do basically – we just do what we talked about a little bit earlier, prudent asset management and say let's sell $150 million to $250 million this year. That's going to be suburban office high finish flex. It'll go out and lets' buy and develop and that's going to be metro office, industrial and that's going to go up. And so this is a continued process.

Alex Goldfarb – Sandler O'Neill

So now it's more shifting within markets rather than exiting.

Bill Hankowsky

That's accurate.

Operator

There are no further questions at this time. I'd like to turn the call back over to our presenters.

Bill Hankowsky

Well, I want to thank everybody for being with us today and I wish everyone a very happy holiday and a great New Year and we'll talk to you at the end of the fourth quarter. Thanks.

Operator

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.

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