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Executives

Jeanne Leonard – VP of IR

Bill Hankowsky – President, CEO

George Alburger – EVP, CFO

Mike Hagan – Chief Investment Officer

Rob Fenza – COO, EVP

Analysts

Josh Attie – Citigroup

Brendan Maiorana – Wells Fargo

Jordan Sadler – KeyBanc

Craig Mailman – KeyBanc

John Guinee – Stifel Nicolaus

John Stewart – Green Street Advisors

Paul Adornato – BMO

Andrew Schaffer – Sandler O’Neill

Liberty Property Trust (LRY) Q4 2012 Earnings Conference Call February 5, 2013 1:00 PM ET

Operator

Good afternoon. My name is (Tracy) and I will be your conference operator today. At this time, I would like to welcome everyone to the Liberty Property Trust fourth quarter 2012 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) Thank you. I will now introduce and turn the call over to Ms. Jeanne Leonard. You may begin your conference.

Jeanne Leonard

Thank you, (Tracy). Thanks, everyone, for tuning in today. You are going to hear prepared remarks from Chief Executive Officer, Bill Hankowsky; Chief Financial Officer, George Alburger; Chief Investment Officer, Mike Hagan; and Chief Operating Officer, Rob Fenza.

Liberty issued a press release detailing our fourth quarter results earlier this morning as well as a supplemental financial package. You can access these in the investor relations sections of Liberty’s website at www.libertyproperty.com.

In both documents you will find a reconciliation of non-GAAP financial measures with reference today 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 you 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 with 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 afternoon, everyone. We had a very solid and active fourth quarter. We’ve completed a very solid and active year in 2012. On the leasing front, we leased 4.9 million square feet in the quarter, resulting in a leasing production total for 2012 of 18.5 million square feet, an annual record for the company.

Our strong leasing volume coupled with our 73% renewal rate resulted in an increase in occupancy to 92.1%, a 30 basis point increase from the third quarter.

The fourth quarter was active on the acquisition front with $176 million invested. For the year, we acquired 4.3 million square feet of industrial space. We sold 3 million square feet in 2012 of suburban office and high finish flex product.

Our development pipeline grew in 2012 with $98 million in starts and $66 million in deliveries yielding an end-of-year pipeline of $316 million.

The result of all of this activity was that we were both a net investor in 2012 and continue dour repositioning of the portfolio consistent with our long-term strategic goals.

So 2012 was a year where we increased occupancy, had record leasing activity, grew the portfolio and improved the quality and product mix of the overall portfolio. George, Mike and Rob will provide greater details on this activity in just a minute.

Let me spend a moment commenting on where we see the markets and the economy. Eight weeks ago we provided you with our 2013 guidance and at that time laid out our view of events in 2013.

Since then, not much has changed. Uncertainty remains on long-term federal budget issues impacting tenant decision making in certain sectors. The economy continues its slow path forward.

As a result, we continue to believe that 2013 will start slowly both in terms of leasing volume and investment transactions. However, we think the second half will be stronger.

We’re encouraged by the active dialogue we are having with the number of customers regarding build to suit projects. To summarize, the fourth quarter capped off a strong 2012 laying the foundation for growth by Liberty in 2013.

And with that, let me turn it over to George.

George Alburger

Thank you, Bill. FFO for the fourth quarter was $0.63 per share. The operating results for the quarter include $1 million in lease termination fees. For the year, lease termination fees totaled $0.04 per share, which is at the low end of our guidance, which is that lease termination fees would be in the $0.04 to $0.06 per share range for the year.

During the third quarter earnings call in October and again during our December earnings guidance call, we mentioned that acquisitions that were scheduled for the fourth quarter would be approximately $170 million.

I’m happy to report that all the scheduled acquisitions did close and we invested $176 million in 12 industrial properties. We also acquired 110 acres of land for $31 million. Mike will provide some details on our acquisition activity.

We were less active with dispositions. We sold two properties for $18 million.

During the quarter, we brought into service five development properties. The projected yield on this $44 million investment is 10.5%. We started one property which has a projected investment of $11.6 million.

As of December 31, our committed investment in development properties is $316 million and the projected yield on this investment is 9.1%.

For the core portfolio during the quarter, we executed 4.5 million square feet of renewal and replacement leases. For these leases, rents decreased by 1.4% on a straight line basis.

For the 16.7 million square feet of renewal and replacement leases we executed for the year, rents decreased by 3.4% on a straight line basis and decreased by 9.1% on a cash basis.

For the same store group of properties, operating income decreased by 0.3% on a straight line basis and by 0.2% on a cash basis for fourth quarter 2012 compared to the fourth quarter of 2011.

For the year, operating income for the same pool – for the same store pool of properties decreased by 0.8%. Our guidance for the year was a 1% to 2% decrease.

We executed a capital transaction this quarter. We issued $300 million of 10.5 year notes at three and three-eighths percent interest rates. The proceeds from this borrowing were used to pay down borrowings on our credit facility which borrowings were primarily used for fourth quarter acquisitions.

There wasn’t any activity in the quarter for the ATM program that we launched in the fourth quarter.

And one last item I want to cover is a reminder about the impact that the accelerated vesting of long-term incentive compensation will have on operating results in the first quarter of 2013.

This accelerated vesting will result in $4 million more G&A expense in the first quarter of 2013 compared to a level charge for this item for the remaining three quarters of 2013.

And with that, I’ll turn it over to Mike.

Mike Hagan

Thanks, George. Let me start by summarizing our 2012 investment activity. For the year, we acquired 4.3 million square feet at a purchase price of $212 million. Consistent with our stated objective of increasing our industrial footprint, 98% of this square footage was industrial and concentrated in the Chicago, Tampa, Phoenix and Minneapolis markets.

These acquisitions were 84% leased when acquired with a current yield of 6.8% and upon stabilization we’ll have a total investment of $228 million and a stabilized yield of 7.3%.

Our largest acquisition during the year occurred in the fourth quarter. We acquired a 12-building portfolio of multitenant industrial properties totaling 1.2 million square feet in Tampa for $74 million.

These buildings are primarily located in the Sable Park, a park where Liberty owned four buildings prior to this acquisition. Sable Park is a desired location in Tampa because of its proximity to Interstates 4 and 75.

The bulk of the portfolio is Class A product with clear heights ranging from 24 to 30 feet and an average age of 11 years. The tenant size for the portfolio is approximately 47,000 square feet. The portfolio was 98% leased at acquisition.

In addition to our Tampa acquisition, we acquired two big box warehouses in Chicago in the fourth quarter. These buildings have leases expiring in the short term and, as a result, we believe, fell under the radar of core buyers.

These acquisitions, along with a few other acquisitions brought our total for the quarter to approximately $176 million.

As a result of the buildup of our development pipeline, we acquired 259 acres of land for approximately $57 million during the year. This is industrial land and located in the LeHigh Valley, Houston and VWI markets.

We anticipate an estimated build out of approximately 3.2 million square feet on these land parcels.

During the fourth quarter, we acquired 110 acres of land for $31 million. Offsetting the additions to our land inventory, we sold 106 acres of land, primarily office land in Milwaukee and Greensborough and an industrial parcel in Greeville. In addition, we placed in the development 82 acres.

On the disposition side, we sold 3 million square feet of primarily office and high finish flex during the year for a total sales price of $236 million. The bulk of this sales activity was the sale of 2.5 million square feet of office and flex space which closed in the second quarter.

During the fourth quarter, we sold two properties totaling 257,000 square feet. One of these properties was a 66,000 square foot vacant office building sold to a user.

As you can see from our acquisition activity and as Bill has mentioned, the first half of 2012 started out slow but the activity picked up in the second half. We expect 2013 to be more of the same.

Let me give you some color on the investment sales market. There is a great deal of capital both on the debt and equity side looking to invest in real estate. Currently there is not a great deal of product available.

We expect as the year goes on this may change. Because of the shortage of product, we expect pricing for core industrial real estate in top markets to command premium pricing. Class A product in top markets will continue to trade in a 6% to 6.5% cap range with some markets trading below a 6%.

We will continue to be opportunistic in both our acquisition and disposition activity. With that, I’ll turn it over to Ron.

Ron Fenza

Thank you, Mike. Good afternoon. The fourth quarter was another strong quarter for Liberty in terms of leasing and occupancy gain. Our people leased nearly 4.9 million square feet of space in 208 separate transactions pushing overall occupancy to 92.1%.

For the year, as Bill mentioned, we leased a record 18.5 million square feet of space and 817 transactions. Prospect activity during the fourth quarter remains steady and so far for this year activity is up slightly.

We mentioned last quarter that tenants’ decision making process was becoming more layered and more protracted and we see this continuing. As tenants work hard to assess their needs in an unpredictable economy, they are more commonly revising their requirements, the scope, timing of their projects even in the late stage of negotiation.

An example of this can be found on our LeHigh Valley Central Pennsylvania market. This is a very active industrial market. The changing tenant needs have resulted in a more lengthy leasing process for our two inventory distribution developments than you would typically see in a market with this much tenant demand.

For tenants looking to make decisions on existing space this can translate into a willingness to stay in place, thus our renewal rate for the fourth quarter was over 73% which was the highest rate for the year.

Moving now to the development front, Liberty’s development pipeline continued to delivery outstanding returns for our shareholders. We delivered five completed projects into service during the fourth quarter.

Projects containing 290,000 square feet and investment of $44 million were 77% occupied and 97.7% leased with yields above 10%.

The underdevelopment pipeline now contains 10 projects for 3,443,000 square feet and an investment of $316 million spread over six of our markets. Five of these projects are build to suits and five are inventory. Three are office and seven are industrial.

The yield on these projects is projected to be over 9.1%. For the year, Liberty commenced construction on eight projects containing 1.1 million square feet for an investment of $98 million and delivered into service eight projects containing 700,000 square feet at an investment of $66 million and a stabilized yield of 10.2%.

On the build to suit front, Liberty began one industrial warehouse build to suit containing 181,000 square feet and an investment of $11.6 million in Houston during the fourth quarter.

We also are about to commence construction on a 100% pre-leased office build to suit for the Vanguard Group. This $55 million project will be a six story, high performance building with structured parking and represents the next generation of state-of-the-art buildings at the Great Valley Corporate Center.

Overall, the build to suit prospect activity remains strong with two projects in active negotiations and over 8 million square feet of prospects spread over 10 of our markets.

As we stated last quarter and pointed out earlier, the pervasive cautiousness of prospects due to the uncertainty in Washington and the slow pace of the economic recovery suggests that some of this activity will translate into real development projects and some will remain on the sidelines.

Either way, we remain very well positioned to continue to ramp up our development pipeline in 2013 with additional build to suit and inventory developments.

And with that, I’ll turn the call back to Bill for questions. Thank you.

Bill Hankowsky

Thanks, Rob and Mike and George. And (Tracy), with that, we’d be prepared to take questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Josh Attie – Citigroup.

Josh Attie – Citigroup

Can you talk a little bit about the Vanguard project? I know they’re an existing tenant of yours. If they’re coming out of any space to move into the build to suit and, if so, how much space and what’s the net gain to Liberty?

Bill Hankowsky

You’re right, Josh, they are, from a revenue perspective, our largest customer, so we have multiple lease relationships with them in many buildings, both in Philadelphia and also we have space with them in Arizona.

The result of this build to suit transaction of 200,000 square feet is we will be building, as Rob laid out, a new building with structured parking. They’ll be moving into it and they will be exiting certain existing space that they’re in with Liberty. It’s a little bit complicated but I think the most – the simplest way net-net-net, is it’s probably basically a push.

They will end up being in roughly the same number of square feet with Liberty at the end of all this as they are with Liberty today but it will be a different space, newer space, reconfigured. And it’s coincident with certain expirations as some of the space to rent.

Josh Attie - Citigroup

And is some of the space to rent – can you just talk about the quality and the releasability of those buildings or if those buildings you think will require a lot of capital to reposition?

Bill Hankowsky

Yes, one of them I would say requires no capital. It’s a building that we totally redeveloped about five, six, seven years ago. They took it in its entirety at the time because, quite candidly, at that time, which was more robust market, 2007 world, it was one of few available spaces, so they took the entire building and it’s a little bit further away from their campus and their other assets with us, so this allows them to bring those people closer back to campus and we’re totally comfortable with that asset and reletting that asset.

The other space is in an existing multitenant situation, so, again, it was a situation where they needed additional space. They like to be in their own buildings. Here they accompany other tenants in the building, so it’s a Class A building and it’ll just be basically leased to others, maybe even people already in the building. So either space requires significant CapEx.

Josh Attie - Citigroup

And also on the development pipeline, it sounds like it might be taking a little bit longer to lease up the industrial projects in Bethlehem and Carlisle. From a timing perspective, do you still feel comfortable with the back half of the year for those projects to lease up?

Bill Hankowksy

Yes, we’re like 99% leased in that market right now. We have good activity on the buildings. What we’ve experience, Rob laid this out a little bit, is companies coming to the edge of a decision and then changing their mind, changing the requirement, changing the timing, so we’re comfortable they’re going to be at least – it might be later than what’s on that development schedule.

I think right now it’s the third quarter. Is it the fourth quarter? Is it the first quarter? But I don’t think it’ll take very long but it might be a little different than that schedule.

Josh Attie - Citigroup

And has there been any change to your view of what the economics could be?

Bill Hankowsky

No, basically not.

Josh Attie - Citigroup

So the move down in the yield on the pipeline was just due to the composition, not the change in any of …

Bill Hankowsky

Yes, that’s right, very good, Josh. It’s the – it’s the blended average of what came in, what came out, exactly.

Josh Attie - Citigroup

If I could ask one more question on the pipeline, have you started South Florida yet and, if not, are you going to soon?

Bill Hankowsky

I fly out tomorrow night for ground breaking on Thursday. So it’ll be very soon, within the next 48 hours we’ll start that one.

Josh Attie - Citigroup

Can you just remind us the potential size of that project?

Bill Hankowsky

Oh, I’m sorry, yes. It’s about 158,000 square feet, I think, 160,000 square foot building. 147,000 square foot, I’m sorry. Yes, yes. And it’s about – and it’s the kick off of a park that can accommodate 1.5 million to 1.7 million square feet but it’s the first building.

Operator

Your next question comes from the line of Brendan Maiorana – Wells Fargo.

Brendan Maiorana – Wells Fargo

Guys, so I was a little bit surprised when I read, I guess maybe I had just forgotten that your lease – your development starts for 2012 were only around $100 million. I think in your original guidance it was significantly higher than that. And your guidance for ’13 I think is significantly higher than that as well. I think you’re at $300 million to $400 million.

Was the lower starts in ’12 just a function of maybe some build to suit projects that got pushed in to ’13 that you thought were going to get done in ’12 or was there something else that happened and what gives you confidence that the development starts in ’13 will be as high as you’ve got in guidance?

Bill Harkowsky

You’re right about – half of it you’re right which is to say what we try to do when we develop guidance and share it with you in December prior to the upcoming year is basically we look out and we make judgments about deals we think we’re going to land. We don’t have them at the time, so part of it is build to suit.

And we also make judgments about inventory product we think we’re going to start and sometimes that doesn’t happen. An example is the – literally, the question that just occurred before you got on, which was that Florida building we thought might have been in December of 2012, it’s now going to be the first week of February of 2013 because it took a little longer to clear the site and get some permitting done, so that was a little bit of slippery just schedule.

So a few things are movement of schedule. A few things are people decided not to proceed with something or didn’t make a decision or we held up on a project. So that’s the 2012, so things we thought were going to happen didn’t or are happening later. So a piece of it slid into ’13.

In terms of ’13 – and we were just looking at this – we put together our guidance for development starts based on specific projects and right now I would say 505 of those feel very good and the others are all happening, whether they happen exactly in ’13, slide or people have made up, finally sign the lease or decided to proceed.

But I’m still relatively comfortable that ’13 will have a dollar value of starts that will clearly exceed ’12. So we’re comfortable with the $300 million to $400 million range we gave you.

Part of it too, by the way, is there’s a couple bigger things, so when they happen they’re just bigger and they can do that number.

Brendan Maiorana – Wells Fargo

I guess is that – by bigger is that largely office and would probably be build to suit just for dollar wise.

Bill Harkowsky

It could be there are large build to suit industrial or it could be a large – you’re right, an office building – office buildings just per pound cost more.

Brendan Maiorana – Wells Fargo

And then the land acquisitions, Mike, I missed part of your comments. I think you said 3.2 million square feet. I was unsure if that was the land that you acquired, that 260 acres during the year or the 110 that was in the fourth quarter? And I guess it sounds like it was largely LeHigh Valley, Houston and then Baltimore as well.

So is Baltimore an area where you’re comfortable with new development starts? I think that’s a new one for you guys versus ’12.

Mike Hagan

Brendan, the 3.2 million was one for all the land for the year, the 257 acres that we acquired. And, yes, the Baltimore marketplace is a marketplace where we’ve been looking to get deeper into from a development perspective and we have a parcel that we have acquired and are looking to bring, get it through the approval process and start construction on that shortly.

Brendan Maiorana – Wells Fargo

And then just …

Bill Hankowsky

By the way, just we – that corridor, we have assets today, the VWI corridor and we have industrial assets there. I think I’m right, Mike. They have never been vacant. So the biggest issue there, if you’re familiar with that corridor actually literally is finding sites, so we’re actually pretty excited that we were able to find some sites where we could start some development.

Brendan Maiorana – Wells Fargo

Yes, and I think my recollection is that your optimism on development is more that you have land available now as opposed to that market has gotten better there in ’13 versus ’12. It’s just now that you have land availability.

Mike Hagan

Well, I think it’s both. I think you do want to have land down there. It creates an opportunity. But I think if you truly look at the Class A product down there, it’s tight.

Brendan Maiorana – Wells Fargo

And then just last one for George, just for my recollection, the G&A I think it seemed like it was a little bit higher in the quarter. I assume that’s largely acquisition cost related and as we think about the first quarter sequentially from the fourth quarter, acquisition costs should be down but your non-cash comp would be up, so it’s probably flat sequentially Q4 to Q1.

George Alburger

Well, I’m not sure if I would say flat but we have about $2.1 million of G&A expense in the fourth quarter, so and – I’m sorry, did I – I’m sorry, acquisition-related G&A costs in the fourth quarter.

And so that’s that piece and as I mentioned – and I think we gave guidance on the G&A in its total and we suggested that it would be somewhere in the $62 million to $63 million range for 2013. We’re still comfortable with that number but just understand that you need to have about $4 million more of that in the first quarter than you do in the subsequent quarters.

Operator

Your next question comes from the line of Jordan Sadler – KeyBanc.

Jordan Sadler – KeyBanc

Wanted to see if we could just go back to the thought process when you guys provided guidance and you had posted the call now almost two months ago. I think at that point in time, the discussion surrounded the pervasive uncertainty much as it did on this call.

But we were unsure as to what would happen with the fiscal cliff and obviously debt ceiling negotiations but some part of us obviously thought we could see some resolution sooner rather than later at that point.

So I guess my question is has the uncertainty been pushed out a few months in your thinking relative to what you were underwriting a couple months ago?

Bill Hankowsky

Let me broaden the question, if I could because I think there’s a lot going on at once, so it’s not as simple. So we talked actually I think on the guidance call a little bit about a sense that some things people accelerated in 2012 to get them out of the way because they’re worried about tax law, et cetera.

So there was a series of people trying to sell real estate saying if I even close by the end of the year -- I think candidly, a couple of these land sales, people were like if you can close by the end of the year let’s get it done because they were worried about gains and tax rates, et cetera.

If you talk to some bankers, you’ll hear about there was a fair amount of loan activity in the fourth quarter, which is curious given that we’ve got a lousy TDP number for the fourth quarter.

So what people were doing was making financial and tax driven activity, which I think a little bit takes some of the potential activity that would happen in January and February, it got taken out. It got accelerated and pulled into ’12, so there is a little bit of coming into the year and it’s the slate is very clean. There’s very little going on.

You also start a year, which is normal, and I think businesses sat there developing business plans for 2013 trying to figure out where the world was going to be. So in our minds, if you go all the way back to October, there were three waves of uncertainty that people had to sort through.

One wave would be election. Some people thought that was the only wave but I think they misjudged it. So that settled one set of questions. Were we going to have a significant national healthcare program going forward? The answer is yes, heavily underway.

So for some o four tenants who are active in that space, they got their uncertainty resolved in November.

The second uncertainty was the cliff and, as we know, what they did was fundamentally dealt with the tax side of it but they really didn’t look at the expenditure side of it. They kicked sequestration down the road.

So again, some piece of uncertainty got resolved but some uncertainty remains. Now we’ve decided it’s not the debt ceiling that will be the trigger date. It’s some other date.

So I sort of agree with you that for some sectors, which is how we mentioned it in our opening comments, the uncertainty has been pushed down the road. So if you’re a defense contractor, you really still don’t know what the defense budget is going to look like, how it’s going to get right sized, et cetera.

So there is a lot – so depending on where you are in the economy, there are things you don’t know about yet. And that creates a little bit of this “uncertainty” and I think does affect customers.

I also think, therefore, what’s happening and what we’re seeing is companies going through processes getting much deeper in – I mean, LOIs done, lease comments done, people booking hotels to show up to go to a job meeting and stopping. These are all true, right? I didn’t make up any one of those stories, literally stopping because headquarters isn’t sure they want to do it this way. Headquarters isn’t sure about this or that.

So there is this – it’s not every deal. Leases got – we signed a ton of leases last year, so a ton of people were willing to lease 18.5 million square feet of space. That’s all great. But there is still this edginess that we feel is out there.

And I don’t think it gets clarified for a couple more months because I don’t think all this gets sorted out and, therefore, goes back to our premise for the year, which is slow start, strong finish because I think once the uncertainty, the cloud goes away, the fog clears, you may not like the answer but you have an answer and then you can make judgments and make decisions and I think it’ll pick up the pace of the year.

So I do think maybe it’s gotten pushed back but I don’t think from our perspective it’s what we thought it was going to play out, that it was three sets of events that would deal with the uncertainty.

I think all we did realize was that some of the cliff was going ot get pushed into the debt resolution that got rearranged a little bit.

Jordan Sadler - KeyBanc

So all the assumptions are still the same but, of course, we’re still mired here in the first half, so it’s still very much predicated on the second half clarity or visibility.

Bill Hankowsky

Well, I think it’s first half resolution to lead to second half clarity, right.

Jordan Sadler - KeyBanc

Second question just on the acquisitions, any thought regarding the housing? I’m looking at the markets in Tampa and Orlando, Florida, obviously, you’re doing some building. Are you seeing anything in terms of demand on the housing side? I know obviously you get the start in Houston, so energy shows up. Are you seeing any of it in housing?

Bill Hankowsky

I don’t think we’re seeing much of it. You’re absolutely right that there is a category of customer for Liberty in the multitenant industrial world that would be a housing market driven customer – window guys, garage door guys, kitchen cabinet guys. There’s all that stuff.

And I don’t think we’re seeing a big pop in demand by those folks for new space. A lot of it go shrunk in the ’08, ’09. You mentioned a couple of our markets. If a guy had a Tampa operation and Orlando operation, he tended to end up only in one place. We haven’t seen him yet open the other place back up.

But I do think it is a piece of demand that when it begins to happen will be real icing on the cake in those markets that are more housing driven and you’ve named many of them.

Craig Mailman – KeyBanc

Just two quick ones, I was looking at the new leasing in the south region for industrial. Anything going on that you guys saw 11% roll downs on the industrial leasing there?

Bill Hankowsky

I don’t think so. Often what happens is it tends to be one deal or something that happened to be built up with the bumps and everything and showed up and had a result.

George Alburger

I’ll tell you what. This is George. I don’t know of anything off the top of my head. Why don’t we continue the call – I’ll butt in if I come up with it.

Craig Mailman - KeyBanc

And then, Bill, just can you give us a sense of how the build to suit pipeline’s been trending maybe over the last quarter and, if you can, put goal posts around the value of it and maybe what percent of it is office versus industrial?

Bill Hankowsky

So I think it’s about where it was when we gave guidance, around 8 million square footage of pipeline. It’s classic in that it’s probably 75% of it is industrial square footage and project and 25% is office and then you probably can not quite flip those numbers for investments because the office is – talking a suburban building. It can be $200 a square foot. If you’re talking a metro building it can be $350. And then you’re talking an industrial building you’re $50 to $60, so the math is pretty dramatic.

So it’s probably a little bit more dollar wise office and it’s clearly a lot more square foot wise industrial.

George Alburger

I’ll just chip in. It was a couple deals in the Carolinas where some rents rolled down and then there’s one deal. It’s in a Florida market which is a very short-term deal which had a meaningful roll down. Again, short-term deal, somebody might do a short-term lease just to get the TIs covered and they’re happy to take a meaningful roll down, so nothing concerning about markets.

Operator

Your next question comes from the line of John Guinee – Stifel Nicolaus.

John Guinee – Stifel Nicolaus

We still have this problem of pesky rent roll downs and high CapEx. Is there an inflection point that we can point to where these things reverse direction?

Bill Hankowsky

Yes, well, let me obviously just – I know you know this but I’ll just state it for clarity in terms of a response. Obviously this is not the issue with the industrial side of the portfolio. This is really the issue with the office side.

I mean, the industrial side, the rents have fundamentally rolled down and we’re pretty much a push in terms of rent for ’13. And obviously the TIs are clearly less burdensome for big industrial spaces generally.

So this is about office space and there’s – and you get both aspects of it. So I think in terms of the rent situation, we don’t expect to see relief in ’13. We’ve projected roll downs and we gave guidance in December for ’13 and it is primarily driven by the office portfolio.

The good news, we know, but it’s very slow in coming, is the fact that there has been this continued unfortunately modest increase in absorption and increase in occupancy. I’m talking in the markets now, not our portfolio.

So for the quarter it was, again, down 10 basis points and there’s no inventory development, so there’s no new supply. So over time, these rents will begin to – they will firm up and there will be a little bit where the pendulum will swing.

Of course, going against that is this issue of rationalization of space, so there’s a cyclical problem, which is the downturn and the comeback, exacerbated by a systemic problem which is the change in the utilization of office space.

So does it happen in ‘, exacerbated by a systemic problem which is the change in the utilization of office space.

So does it happen in ’14? I don’t know. I don’t – I think it gets better in ’14. I think clearly unfortunately, to be blunt, one of the ways it gets better is that the rolling rents are rents that will have been done in ’09 and ’10 and so the mix of maturities will begin to be leases that were signed when these market rents went down and that will help on the roll.

I think on the CapEx side, that will get better also over time not because people won’t need CapEx and TIs to do their deals. It’ll get better because to the degree we have moved out assets that are highly dependent on that, we will have less to invest.

The portfolio is getting younger. I think was it – George remind – last year, I think, in the beginning of the year when we revised guidance and we lowered FFO fab didn’t change at all because to the degree we got rid of these older capital intense assets. That’s a good thing on the TI side.

So all the patterns are working to get us there, John, but they are working very slowly, not in ’13.

John Guinee – Stifel Nicolaus

And then the next question is what’s happening in a lot of portfolios, maybe not yours as much as other people’s, but as tenant demand shifts, we’ve got certain land that may be undeveloped five, 10, 15 years from now and we have a certain amount of buildings primarily office and flex, which may never lease again or take negative net present value deals to get someone to occupy them.

Can you give a sense for your land portfolio and your building portfolio what percentage you have in those categories?

Bill Hankowsky

I think on the land side our land portfolio is very specific to the parks and projects we have, so we own land – well, we just talked about one here in Great Valley, so we had a site Vanguard is going to take it for a build to suit.

We’ve got a site in (Horsham). We’ve got – I can think of – we’ve got a couple sites in Jacksonville. We’ve got – so I can think of where all these sites are. I’m not going to take the call up to do them but they all tend to be within parks we already have assets in, so they’re waiting for either us to decide there’s an inventory opportunity or us to decide there’s a build to suit opportunity.

I don’t see any of our land as bad land, so to speak, that’s just useless. Mike talked about the fact that we moved 110 acres in (inaudible). And the stuff we moved, John, was in markets that we weren’t excited about, so we emptied – we got out of these markets in their entirety.

We don’t own land or buildings in Milwaukee. Land, we got rid of our office land in Greensborough. So wherever we made our decision, we got rid of both. In Carolinas, in Greenville, we got rid of some land last year.

So I think we’ve been, I’ll use the term, housecleaning anything and I think the cupboard is empty. The one thing we’re doing – there’s an idiosyncratic situation in Tampa where we’re going to rezone a piece for residential because we think our use is off somewhat distant, so we think it has a better use somewhere else in the more near term but that’s the only one I can think of where a rezoning and then a disposition will happen.

On the asset side, building side, here again, we’ve sold a ton of stuff in the last, as you know, in the last couple years, cleaning out in certain markets that we were not excited about.

But Liberty is pretty conscientious about our assets, so we maintain them. They’re in good shape. They tend to be in our parks. I cannot think of an asset that we have that’s so bad I can’t lease it or so bad it doesn’t have a value.

So I don’t – we have almost 700 assets, so I’m not sure I can think of every one that quickly. But my gut is I’ve got nothing on the land side or on the asset side that is literally a negative value.

Operator

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

John Stewart – Green Street Advisors

George, it sounds like the unspoken message really is that you are essentially reiterating the assumptions underlining guidance but could you speak specifically to the plus $0.02 to $0.04 same-store growth?

George Alburger

Yes, nothing’s changed on that and we were specific on guidance. We said that occupancy would go up anywhere from 1% to 2% and we would be faced with roll downs of rents on a straight line basis of anywhere from 2% to 7%.

The occupancy increases (or) in terms of that 1% to 2% increase that will be pre-level. Now, we’re going into it with a higher level of occupancy for the industrial. We still expect some pickup there. Office is closer to 90% and we expect some pickup from the office.

In terms of the rent roll downs, the roll downs will be more significant for office I think. On a straight line basis we think of them as being in the plus side for the industrial.

John Stewart – Green Street Advisors

And Mike, could I get you to expound on your cap rate comments, specifically you talked about premium pricing for highly sought after industrial product. But could you give us a little bit of color or distinction between A and B product and primary and secondary markets?

And then, too, I presume some of what you’ve got teed up for dispositions are suburban office product. Could you speak to the bid for that product?

Mike Hagan

John, I would tell you I think the gap is narrowing between A and B product in the marketplace but I still think it’s there. I think depending on where it is and what it is, how well leased it is, you’re going to drive at 25, 75 basis points as opposed to a bigger spread earlier.

Like I said, I think a big piece of it is there’s still equity that wants to get into the industrial sector and there’s debt that wants to get into the industrial sector and so if you have in top tier markets there will be a line that will go around the block trying to acquire that type of real estate.

I think on the office side, I think there’s a bit of a falling going on out there, although I’m not ready to say there’s a – it’s still somewhat at a favor but I think there’s a handful of contrarian investors that will look at it.

And I don’t know that I can – I think we gave your guidance – we’ll stick with the guidance that we gave you in terms of what the sales volume was and what the cap rates were.

I thought that we would do more suburban office than industrial throughout 2013 and I think – again, I think that cap rates are going to fall within that guidance range and it was 8% to 10%.

John Stewart – Green Street Advisors

And lastly for me, Bill, could you give us any update on 3 Franklin Plaza?

Bill Hankowsky

Well, again, to do the whole story, (Galaxo) has begun to move into the new building literally as of yesterday, so there were folks showing up, so that building is beginning to be occupied and they are obviously exiting the other building.

That will take a little bit more time over the rest of the first quarter. So the building really isn’t back to us yet. When it gets back to us, as we mentioned in the past, we have a variety of options here that we are pursuing with a variety of parties.

So those options could include leasing it in its entirety or in part and there are people who have an interest in that. There are also folks who might have an interest in the entire building maybe even to acquire it, so we’re having some dialogue with folks about that.

And we want to play a little bit of that out to be able to make a clear understanding of whether we can do the building with one player, entire building either to own or to lease.

In either case, we had expected that we would, if we keep it and are leasing it, it’ll take some investment in core systems. It was a 15 year lease. It’s a great building but it could use a little refreshing and then you have TI work, et cetera.

So under no instance had we assumed that we’d have any income out of that asset in calendar ’13, so this timing has no affect on ’13 earnings.

I’m still actually feeling pretty good but in a world where people change their mind a lot I’m not comfortable about anything until it’s done but feel pretty good that we will be able to reach closure with a party or parties. We’ll make use of that facility over the next two or three quarters.

John Stewart – Green Street Advisors

And if you were to keep it and lease it, what would the total budget be?

Bill Hankowksy

Let’s see. I think we had order of magnitude we’ve been talking single digit numbers to deal with the systems, $5 million, $6 million to elevators and refresh this and refresh that. Then you’ve got to put a TI number across 215,000 – I get the new building confused with the old building. One’s 205,000, one’s 215,000 – 215,000 and so that’s a question of who’s in it.

So is it somebody that needs $40 or is it somebody that needs $60 and will pay rent over term? But think take a $40 number and multiply it times that, add another $4 million to $5 million and you’ve got a budget.

Operator

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

Paul Adornato – BMO

Just a quick follow-up on the land, so should we expect any additional purchases of land this year or next year?

Mike Hagan

Yes, Paul, I would tell you that there’s a piece of what we acquired in 2012 was a component of a larger parcel. The first takedown was in 2012. It’s for a big box site in LeHigh Valley. The idea is that we’ll try to keep it just in time inventory.

There’s a second component of that which we will need to take down in 2013 and there is other pieces around that we’re not under contract or have no obligation but they are looking at, so I would tell you I would expect some land acquisitions in 2013.

Paul Adornato - BMO

Could you quantify that? Would you expect that to be less than $50 million?

Mike Hagan

Yes, for sure, outside of the valley piece that’s already there. It will be much less than another $50 million worth of land.

Bill Hankowsky

Just Mike used a phrase that I think is helpful for you to think about just in time, so that number that Mike gave you assumes the activity level that’s in the development pipeline, goes back to the question we had on starts a little while ago.

If we had more development activity, we might need more land. I just want to get – so it’s a little bit responsive. But as it plays out right now, if the year plays the way we laid it out, then Mike’s answer would be what we would do.

Paul Adornato - BMO

So another way to say that is that you probably have enough land for what you believe to be the development pipeline over the next 18 months. Would that be a fair statement?

Bill Hankowsky

Yes. Again, there are – I just want to – we do anticipate buying some land over the course of this calendar year, so it’s that which we thought about plus what we have that is what we think we’re going to do.

Operator

Your next question comes from the line of Andrew Schaffer – Sandler O’Neill.

Andrew Schaffer – Sandler O’Neill

I’m just looking for some additional color on potential development in Tempe and more specifically how large each phase would be in the breakout of industrial versus flex or office.

Bill Hankowsky

So we’re very excited about the fact that the town of Tempe selected us a couple months ago to be a party with which they would negotiate the potential development project in Tempe. This is land controlled by the town.

It’s a minimum of 85 acres, could be a little over 100 acres. There’s a piece that’s – we’ll have the rights to it but whether or not we would take it down would depend on a couple other things that are still being worked on.

It is gone to the first meeting of the city council. It still has one more to go, so it has not yet been officially fully approved. We’re hopeful that it will be but since it isn’t, we don’t want to take anything for granted.

But assuming we do get an approval, then we’ll proceed and execute what is a fully negotiated document. So that part – we’ve been negotiating it subject to now this getting approved.

And it has some analogies to what happened, what we’re doing at the Philadelphia naval yard in the sense that it contemplates a multiyear development phase where we have requirements on how much to do per annum.

We pay a – we actually pay a ground lease. One could think of it as an option payment but we actually lease the ground with a payment schedule but we actually don’t take down the ground until we use it for development, so there’s modest carry, minimal carry when you think about it.

And it sets amounts for us to take down in a consumption sense but it doesn’t prejudge necessarily exactly what the configuration of the assets are. So this is going to be predominantly – it has a couple of industrial sites.

We could do multitenant industrial. You could also do what we like to term value office, very analogous to the product we have in Cotton Center and this site is not so far from Cotton Center.

So if you know Phoenix, this site it literally is between the airport and the campus of ASU. So if you drew a straight line and picked a medium, that’s where this site is, so very nicely nestled within the core of that MSA and this value office product could be a 60,000 square foot building, it could be a 200,000 square foot building with parking.

So again, the dollar investment value will be there because that’s a somewhat more expensive asset. The total square footage we’re offering for the whole project is roughly 1 million square feet built out.

Andrew Schaffer – Sandler O’Neill

And I read roughly a ’27 completion. Is that more of a deadline or requirement by the city?

Bill Hankowsky

I’m sorry. I just missed the beginning of your question.

Andrew Schaffer – Sandler O’Neill

So I saw an article saying that there is a deadline of 2027. So is that mandated by the city or is that a joint agreement?

Bill Hankowsky

Yes, the way this agreement is structured, again, it’s subject to final approval, is it sets out that in a certain year you’ll build no less than X and then in the next year you’ll build no less than Y.

You could build more than X, so it also provides that suppose there is a downturn in the economy you might not build anything in one year, so we have years where we could basically say, look, we need to stop because there’s no demand at the moment. We have to lease the building we built or whatever.

So that date is the – if you took everything out to its max, my contemplation is it will be done well before that, i.e. that the market would absorb the space, we’d build it out and it would happen much sooner. So that is a legal end date, book end but one should not assume it would take that long.

Operator

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

Bill Hankowsky

Well, thank you very much and I thank everyone for listening in. We appreciate it and we look forward to talking to everyone at the end of the first quarter. Thanks.

Operator

Thank you for joining, ladies and gentlemen. This concludes today’s conference call. You may now disconnect.

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