Liberty Property Trust Q1 2009 Earnings Call Transcript

Apr.28.09 | About: Liberty Property (LPT)

Liberty Property Trust (LRY) Q1 2009 Earnings Call April 28, 2009 12:00 PM ET

Executives

Bill Hankowsky - Chief Executive Officer

George Alburger - Chief Financial Officer

Rob Fenza - Chief Operating Officer

Michael Hagan - Chief Investment Officer

Jeanne Leonard - Investor Relations

Analysts

Irwin Guzman - Citi

Jordan Sadler - KeyBanc Capital

Sloan Bohlen - Goldman Sachs

Alexander Goldfarb - Sandler O'Neill

John Guinee - Stifel

Paul Adornato - BMO Capital Markets

Brendan Meyer - Wachovia

Nick Pirsos - Macquarie

Craig Mailman - KeyBanc Capital

Justin Webb - Robert W. Baird

Stephanie Krewson - Janney

Operator

Good morning. My name is Patricia and I’ll be your conference operator today. At this time I’d like to welcome everyone to the Liberty Property Trust, first quarter earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks there will be a question-and-answer session. (Operator Instructions)

Ms. Jeanne Leonard, you may begin your conference.

Jeanne Leonard

Thank you Patricia and thank you everyone for tuning in. We are here today to discuss our first quarter results and you will hear prepared remarks from Chief Executive Officer Bill Hankowsky; Chief Executive Officer, George Alburger and Chief Operating Officer, Rob Fenza. Our Chief Investment Officer, Mike Hagan is also in the room if you care to ask him any questions during the question-and-answer period.

During this call, management will be referring to our quarterly supplemental information package. You can access this package, as well as the corresponding press release on the investor’s section of Liberty’s website at www.libertyproperty.com. In this package and the press release you will also find a reconciliation of non-GAAP financial measures we 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 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 and uncertainties and other factors that could cause actual results to differ materially from the expected results; risks that were detailed in the 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.

So, would you like to begin?

Bill Hankowsky

Thank you Jeanie and good afternoon everyone. I’m going to cover three topics in my opening remarks; (1) Our capital situation; (2) fundamentals in the market; (3) our view for the rest of 2009. First the capital front, we have been extremely active and successful in accessing capital over the last four months. We closed in the first quarter on $317 million of secured mortgages that we had obtained commitments for in the fall of 2008. We actively utilized our continuous equity offering program, raising $92 million in the first quarter.

As of today, we have raised $135 million by this program at an average share price of $20.74 and finally on the asset sale front, we sold $45.6 million in the first quarter and subsequent to quarter end, we sold an additional $19 million, bringing year-to-date asset sales to $65 million. In total we have raised $517 million in new capital, which represents over 75% of our capital needs for the next two years. We are extremely pleased with the success of this activity and our ability to access multiple capital sources.

Let me turn to our operating performance and real estate fundamentals. Normally, the first quarter is our slowest quarter for the year, but in addition, we clearly felt the full impact of the economic downturn in our markets. We leased $2.8 million square feet in the quarter, down 50% from our leasing productivity in the fourth quarter. This decline is totally consistent with what we are seeing in the markets, a 40% decline in deal activity from 2008 levels.

Occupancy declined to 90.1% driven by a decline in our renewal percentage to 54.1%. This renewal decline was driven by our industrial portfolio. Since our office and flex renewal rates were 72% and 63% respectively. What happened were three large industrial expirations that simply shutdown their operations; a pattern that I think we’re going the see more of throughout the rest of 2009.

Consistent with the competitive nature of the markets, rents were flat. Finally, we were disappoints with our leasing in the development pipeline, which remained at 55.5%. Pipeline leasing is a major focus for us for the remainder of 2009.

So where do we see the rest of 2009? When we gave our 2009 guidance six months ago, the economy had lost 760,000 jobs and we anticipated the loss of another 800,000 to 1 million jobs. Instead, since October, we’ve lost 3.3 million jobs with predictions of up to another 2 million in job losses for the remainder of 2009. We thought it would be an ugly year and it is and it will continue to be.

On the capital front we will continue our efforts to access capital from multiple sources. We are still targeting another $100 million in asset sales this year and $200 million in 2010. Given the success of our continuous equity offering program, our board has decided to do put in place an expansion of this program, for up to an additional $150 million on top of the original $150 million authorization for a total of $300 million.

As I mentioned earlier, we have raised $135 million under the original program of 150 million, giving us $15 million of available capacity under the first phase. Coupled with our new program of $150 million, we will now have the capacity to issue up to $165 million in additional equity.

As a result of the dilutive impact of our $517 million in capital rising and its timing and our revisiting of core performance due to weakening fundamentals, we are revising our guidance for 2009 from $3 to $3.20 a share to $2.70 to $2.90 a share. Approximately, half of this change is due to capital activity dilution and half is due to weakening fundamentals.

Let me now turn it over to George and Rob, who’ll provide some further detail and color.

George Alburger

Thank you, Bill. FFO for the first quarter of 2009 was $0.72 per share. The operating results for the quarter include $300,000 in lease termination fees, which is less than our guidance, which would be that lease termination fees would be in the $0.04 to $0.06 per share range for the year. The operating results also include a $700,000 impairment charge and a $500,000 gain on extinguishment of debt.

General and administrative expense included $3.8 million of additional expense, relating to the amortization of long term incentive compensation. The increase this quarter is because the investing schedule was accelerated for certain individuals, because of their ages or years of service.

The overall cost, associated with long term incentive compensation hasn’t increased. The amortization timeframe was just compressed. The increase this quarter is a one-time hit. The amortization charge for subsequent quarters will be similar to the historical quarterly average of $1 million and $1.4 million.

During the quarter we brought into service, one development property with investment value of $15.7 million. This property is 86% occupied and has a current yield of 8.3%. The projected stabilized yield is 9.2%. We didn’t start any development properties this quarter. As of March 31, the committed investment and development property is $550 million; for wholly-owned properties, it is $360 million and for these properties, the projected yield is 8.5%.

We didn’t have any acquisitions this quarter, but we were active with dispositions. During the quarter, we realized $35 million in proceeds from the sales of six properties and we sold the Phase II partial of land in Philadelphia to Comcast for $11 million. For the core portfolio, during the quarter we executed 2.5 million square feet of renewal and replacement leases, for these leases rents increased by 0.2%.

For the same store group of property, operating income increased by 1.9% on a straight line basis and increased by 1.8% on a cash basis from the first quarter 2009, compared to the first quarter 2008. Most of the increase this quarter is due to the lease up of the Horsham space, which you may recall had a significant vacancy in the first quarter of 2008, because of two build-to-suit properties we developed for existing tenants.

As Bill mentioned, fundamentals are very tough. As a result we are revising our guidance for the same-store group of properties. We now feel that occupancy for the same-store portfolio will be flat to down by 2% and rental rates will be flat to down by 5%.

The execution of our capital plan also affected earnings. We are very pleased that we have accessed $500 million of capital in early 2009, but our original capital plan anticipated different sources and different timing. Our original capital plan had sources metered in during the year. Our capital plan as executed has been front loaded, so the timing of the capital and the nature of the capital has diluted earnings.

As a result of accessing $500 million of capital, at March 31 there was nothing outstanding on our credit facility and we had $135 million in unrestricted cash. On April 15, we paid off the $240 million Senior Notes that matured. Remaining debt maturities for 2009 and 2010 totaled $190 million, and it will cost us $120 million to complete our development pipeline, a total of $310 million in obligations.

In Bill’s opening remarks, he identified $450 million of capital we can access from asset sales and from our continuous equity offering program to address these obligations. So we think we are in good shape on the capital standpoint and we will stay on top of this.

With that I’ll turn it over to Rob.

Rob Fenza

Thank you, George. Good afternoon. I’m going to spend the next few minutes reviewing leasing activity, the current leasing environment and market conditions and then discuss the development pipeline.

Liberty leased 2.8 million square feet of new, renewal and development space and 188 transactions during the first quarter. We are seeing an overall slowing of leasing activity, due to the stagnant economy and severely constrained capital. Occupancy dipped to 90.1%, but remains 400 basis points higher than the national average of 86.2%.

As Bill mentioned during the first quarter, Liberty renewed 54.1% of expiring leases. This overall renewal rate is typical for a first quarter; however, this quarter the office and flex renewal rate was higher than normal and the industrial renewal rate was driven down by three large warehouse spaces, where tenants simply just closed down their operations at the end of their expiring leases. Without these events our renewal rate would have been 64%.

For the most part, tenant behavior continues to have a bias towards renewing in place. As this is the most efficient and lease disruptive choice in a challenging economic environment. The amount of sublet space available in our markets also increased to nearly 2% in Q1. However, sublet space in our 77 million square feet portfolio remained flat at 925,000 square feet or about 1.2% in 36 spaces spread over 12 of our markets.

In an effort to gather first-hand, up to the moment customer feedback on how the economic turmoil is impacting their businesses, we have recently conducted a series of tenant round tables that I have participated in personally in a half dozen of our markets.

I would characterize the tenant discussions in three buckets. The first bucket would be tenants that are in tough straits. They are downsizing and they are taking extraordinary measures. The second bucket which is the bulk of our round table tenants, are saying business is tough, revenues are down, but we should be okay and the third bucket are tenants that are still seeing growth, but not as much growth as in 2008.

We are seeing the manifestation of the first two buckets as more tenants downsize at the end of their lease. On last quarters call we discussed a recent trends, where tenants were asking for rent relief and for the most part we were saying, no, but more recently we were seeing an additional trend where good tenants with strong credit come to us before the ends of their lease looking for rate reduction in current rent, in exchange for additional lease term.

In these instances, we conduct a thorough economic analysis considering the credit of the tenant, the length of the proposed term, the health of the market and the extent to which we do business or could do business with that customer in multiple markets. To-date we have only completed a few of these blend and extent transactions, but we believe in a tenant driven market credit tenants will continue to ask their landlord to participate.

While our portfolio has higher occupancy than the market in most of our cities, aggressive competitive behavior is rapidly affecting rental rates and concessions. On new leases and to a lesser degree on renewal leases, market rents are generally lower, varying by product type, availability of competitive space, size, credit and term. The range is wide from slightly up to down as much as 20%.

Concessions on new leases, primarily in the form of free rent have increased during the first quarter and also vary by market and by lease term. Some leases have none, some leases a few months and some as much as one month per year, as much as six months in the lease.

On the plus side, Liberty’s operating model with fully staffed local teams managing and leasing our space continues to provide us with a competitive advantage, with enhanced customer service, deep local relationships and a team that is empowered to respond quickly to our tenants’ challenges and needs.

We believe that in uncertain and difficult economic times, most customers put a higher price on a cost of disengagement from a landlord they know and trust and as I stated previously, they have a bias towards renewing in place.

A new phenomenon that is beginning to have a positive impact on our ability to get deals done is the fact that tenants and brokers that represent them are now underwriting landlords. This bodes well for Liberty, since we are one of a few landlords with a strong balance sheet and the ability to pay for tenant improvements and broker commissions. In addition, our stability coupled with our reputation for integrity and fair dealing; make an even more compelling case for tenants to choose Liberty.

In the first quarter we maintained leaving levels in the development pipeline at 55.5%. There are over 1.8 million square feet of active prospects, transactions that are in negotiations or leases out for signature in the development pipeline. The overall development pipeline is substantially smaller than it was in the first quarter of ‘08 when it contained $6.5 million square feet in 34 projects at an investment of $750 million. The pipeline today is 4.4 million square feet at an investment of $550 million in 20 projects spread over 13 of our markets.

About 50% of the buildings are industrial and about 50% are office. 10 projects are high performance lead projects and three are build-to-suits. There were no new development starts in the first quarter and deliveries are spread through the fourth quarter of 2010. While 2009 will be a year of head down, shoulder to the wheel effort, we were extremely well-positioned to not only weather the storm, but to take advantage of opportunities to grow the business as the economy improves.

With that I will turn the call back to Bill for questions. Thank you.

Bill Hankowsky

Thanks Rob and thanks George. Let me sum this up by giving you a sense of how we feel here at Liberty about the world. We are living through unprecedented time. The worst recession in modern U.S. history, in conjunction with a major overall haul and upheaval in our financial and capital markets. We have brought in $517 million in fresh capital in four months, to give us a balance sheet that can withstand this storm and we have potential access through additional capital sources that could provide us with up to $465 million in the next seven quarters.

We have a seasoned and experienced team that is totally focused on two issues; leasing and operational efficiency. We will continue to outperform our markets today and will be prepared with the capital and talent, to take advantage of the opportunities that will present themselves in the future.

With that I’d open it up for questions.

Question-and-Answer Session

(Operator Instructions) Your first question comes from Irwin Guzman - Citi.

Irwin Guzman - Citi

You talked about the $300 million mortgage that you closed on at the end of the first quarter. Can you remind us how much more capacity there it is in the system for additional secured debt without coming up against any covenants and how much more in mortgage financing you’re targeting over the next 12 to 18 months and sort of where you are in that process?

Bill Hankowsky

I’m going to have George answer the first part and I will answer the second part about our goals.

George Alburger

Let me answer the first part, which was the line and the credit facility have a variety of covenants, probably the most restrictive of which is limitations on secured debt and as of December 31 we had under 8% of our assets were secured. After this financing that we just completed of $317 million, we have under 15% of our assets are secured, so we can go up to 40%.

We did a calculation of how much more debt we could layer on and we could layer on in excess of $700 million more debt, without breeching a covenant. I think covenants might change on a going forward basis, so certainly you wouldn’t take one of those covenants up to the threshold, but that’s the capacity we have.

Bill Hankowsky

Irwin, with regard to our intent, I think our intent is relatively clear from how we laid out our capital situation and let me just recap it for you. I mean, basically looking this year and next year, we’ve got about $190 million of debt that we have to pay off over the next two years, that we haven’t addressed already and about $120 million for the pipeline. So you need about $310 million.

We are looking to do $300 million of asset sales, 100 this year and 200 next year and as I indicated, we have expanded our continuous equity offering program by another 150 million and given the 15 we had available from the first program and that 150, that’s 165 million. So really we at the moment think that somewhere within that $465 million of activity we would cover the $310 million of obligations.

So our intent right now is not necessarily to access more secured debt, but as George points out, we clearly have the capacity to do it, we have the portfolio that we could do it on, so it remains a weapon in our arsenal if in fact we think it would be necessary.

Irwin Guzman - Citi

Thank you and George, just following up on that, maybe one other question regarding the line and I realize it doesn’t show out for a couple of years and you don’t have anything drawn on it, but how are you thinking of the ultimate size of that line with does mature and it’s renegotiated and how much of it are you comfortable drawing down over the next several years; whether it be to repay some bonds or to fund the development ahead of that maturity?

George Alburger

There was nothing outstanding on it as at March 31. We had $240 million bonded matured in April 15 and we also had a dividend payment of probably around $50 million. So, we now have $162 million outstanding on the credit facility. So something is outstanding on it now.

With respect to size, several years ago our facility was $450 million facility and we increased it to $600 million facility because we had a $1 billion development pipeline which included a $500 million Comcast building in there. So we funded an extraordinary amount of activity with $600 million credit facility. We don’t foresee need a facility of that magnitude, when it matures with the extension in early 2011.

So, we can be comfortable pulling that facility back by $150 million to $450 million, plus or minus and I there’ll be less capacity out there for these facilities. So, I think we can get by with less capacity and I think there’ll be less capacity available.

Operator

Your next question comes from Jordan Sadler - KeyBanc Capital.

Jordan Sadler - KeyBanc Capital

My question relates just back to the capital. You guys put a new continuous equity offering program in place or an expanded CEO program, have you ruled out an overnight style offering?

Bill Hankowsky

I think Jordon; I don’t want to rule anything out in today’s world. It’s a very fluid capital situation and lots of things can happen or not happen. I continue to say this now for several months, the one thing that 2008 taught us is that whatever you think can’t happen, can happen. So we want to have every tool available to us. So it is something we could do. At the moment I think we’re going to use the continuous equity offering. It’s been very successful for us to-date, but it is a tool that’s available to us.

Jordan Sadler - KeyBanc Capital

Can you weigh sort of the certainty? I mean, how do you compare and contrast them from your perspective? I mean, it seems that you would have the ability I’m speculating here, to do an overnight transaction which would take some of the uncertainty out of your capital plan and could you maybe just contrast that with what you see the benefits being of the CEO program at this point? You’ve done a great job to-date with the first, I’m just curious.

Bill Hankowsky

Right. Well, let me first just talk contrast a little bit with the two programs and the way they operate. The continuous equity offering program, candidly is a less expensive program from a transactional perspective. I think it runs us about 2% in terms of transaction costs versus kind of four to five, which generally is what those over nights look like and depending on how the over nights go, sometimes you see your price go down afterwards.

I mean a number of guys have done it and their price has actually rebounded, but from our perspective it doesn’t feel quite as uncertain when you are talking about our continuous equity offering. I mean we have been able to utilize it as I mentioned, with an average share price of like between $20.74, which we think is a good number. We have the flexibility to not do it certain days or weeks and we can do it when we think it makes sense.

I think from our perspective when we started all this in the fall, we took a look at the entire capital situation and we felt we needed to address it very aggressively and very early and that’s why we went out and got the mortgage commitments in the fall. It’s why we put the continuous equity offering plan in place in the fall and it has served us well. So we think it’s a very efficient program. It’s worked very well. If in fact as I said, nothing is certain in this environment; if something changes we’ll evaluate our alternatives.

Jordan Sadler - KeyBanc Capital

That’s helpful. George, what have you baked into the guidance as it relates to the 165 that remains available under the expanded CEO program? I know, either at the midpoint or the low ends of guidance.

George Alburger

Well, we’ve kind of baked all of it in kind of a balanced utilization or balance access of it during the course of the year and we have utilized those proceeds for opportunistic investments on perhaps bond repurchases and things like that.

Jordan Sadler - KeyBanc Capital

So, you’re using the full $165 million over the course of the year at an average price in the $20 range or so.

George Alburger

That is correct.

Bill Hankowsky

Probably the biggest variable is timing. I just want to point out what George said; it prorated across the year assuming it sort of just happens a little bit every month.

George Alburger

Yes, I mean basically that’s what happened with the one that we executed. I mean the capital plan we put together was originally weigh back in October and in October, we didn’t even think of a continuous equity offering program.

We had different sources of capital and they were metered in during the course of the year and as you see, we executed the continuous equity offering program and burned in a meaningful amount of money early in the year. So that had somewhat of a dilutive effect, but of course addressed some balance sheet issues very early on.

Jordan Sadler - KeyBanc Capital

Just sort of connect the dots here on a point you made earlier, given sort of the post quarter end activity; it sounds like including revolver availability, you’ve got about $440 million or so of liquidity available right now? Do you have the full availability of revolver?

George Alburger

Yes. I mean we have 160 outstanding on it and it’s a $600 million revolver.

Jordan Sadler - KeyBanc Capital

You’ve utilized the cash to reduce that debt.

George Alburger

Yes.

Operator

Your next question comes from Sloan Bohlen - Goldman Sachs.

Sloan Bohlen - Goldman Sachs

George, just a question on the capital, just kind of asking the other half of your Jordan’s question; with regard to the $100 million of asset sales you guys are looking to do this year, have you guys thought about a range of cap rates or what kind of timing you are looking at there?

George Alburger

I can answer that. We’re staying with our original guidance on the range, which I believe was 8% to 11% and I guess I’m going to turn it over to Mike, but I think some of it is more towards the back of the year. Is that right, Mike?

Michael Hagan

Yes, the main 100, we probably had about $22 million of it under contract right now and are working with the half dozen. There’s plenty of stuff listed into the market and so I would say more pro rata, but probably back end loaded after that initial 20 that we deal with right now.

Sloan Bohlen - Goldman Sachs

Okay and maybe I missed it, but for the $35 million that you sold in the quarter, did you guys provide a cap rate on that?

George Alburger

No, we didn’t. It was about mid nines.

Sloan Bohlen - Goldman Sachs

Okay and then just turning to the development pipeline, on page 18 of your supplemental you break out kind of what the weighted-average projected yield would be and you come out to 8.5% for the deliveries through 2010. Could you maybe give us a little bit of a break out between what expected yield do you have for your build-to-suit’s that are 100% pre-leased and maybe some of the developments that you’ve got delivering in the third quarter of ‘09 that have a little bit lower leasing?

Michael Hagan

Well, the way we basically do it is, we update that yield every quarter, either as a function of construction cost movement, which really wasn’t a variable this quarter for where we see rents in the markets. So when you see those yields, which unfortunately they’ve been going down 10 basis points and now I think 20 quarter-over-quarter; that’s mainly reflecting us, refreshing our rental assumptions for those developments. George, do you have a sense of…

George Alburger

Yes, I can give you a little bit of a sense.

Michael Hagan

We don’t give deal-by-deal expense.

George Alburger

But on the built-to-suits, the yields aren’t necessarily and they aren’t that many of them by the way; there’s three of them, but there on a going in they are really pretty much in line with the inventory developments that are underway, on a going in. They have longer lease terms and they all have rent bumps, so on a straight line basis they’re tad higher.

Sloan Bohlen - Goldman Sachs

I guess maybe asked another way, what kind of rent assumptions did you make? To what degree you’re willing to comment versus what Rob was saying about rent declines by some of the competitors in the market?

George Alburger

These numbers in the supplemental package are continually updated every quarter.

Michael Hagan

That’s the point I was making. The rent assumption on the inventory product is market rent. Our view of market rent for that quality product in the markets they are in today. So it’s no longer pro forma numbers, its reality. That’s why their yields are going down.

George Alburger

Yes, the yields are updated to the extent of cost changes, and the yields change based upon signed leases or our judgment as to what we’ll lease the remaining vacancy at.

Michael Hagan

And the other thing we revised to is the timing of that leasing. So to a degree we think it’s going to take longer, that’s factored into these yield calculations.

Operator

Your next question comes from Alexander Goldfarb - Sandler O'Neill.

Alexander Goldfarb - Sandler O'Neill

I just wanted to go back to the capital markets for a second, just quickly touching on the debt. What’s your sense of the depth of the market for buying back debt? I imagine it’s a lot tighter than it was in the fall. Does it still make a lot of sense; is there still a pretty good arbitrage there in the current market or are things pretty tight right now?

George Alburger

For us, by short term, the 2010-2011 we can’t really get at meaningful discounts. Some discounts, but if you looked at this, back in the fall we were getting them at discounts, we were buying the short term debt at $0.90 on the dollar. That’s not happening now. So the discounts have kind of gone away for some of the more short term debt. If you went out to the 2016, 2017 debt, you could have gotten that maybe at $0.70 on the dollar. So, the discounts are still out there for that.

Bill Hankowsky

That George, it would be around 13 to 14...?

George Alburger

No, they are a little less than that, because the life of the instrument is so long. To some extent you get a better, at times even with the more modest discounts you get a better yield to maturity if you will, because of the shorter term of the obligation. You get a better yield to maturity than do you for some of the longer dated stuff.

Alexander Goldfarb - Sandler O'Neill

Okay. So the longer dated, the 16, 17 is still good discounts, $0.70 on the dollar, the near term stuff has tightened up?

George Alburger

The near term stuff has tightened up. I keep on top of it, but not every day and there is not a lot of volume out there. So it’s a little bit similar to cap rates, not a lot of activity out there. So, it’s kind of hard to judge cap rates.

Alexander Goldfarb - Sandler O'Neill

I looked through your press release, I didn’t see it. Have you guys done or considered tendering for your debt? A number of the other REITs have done it. I just want to do get your thought; the trade off between out right tender versus trying to do the open market purchases?

George Alburger

Like Bill said earlier, we consider everything and so we kind of looked at tendering. We picked them off a little bit here and there in the market at the discounts that we’ve gotten. You’re not going to get those types of discounts if you tender. We haven’t tendered so far. Right now, I think we’ve put the liquidity we’ve raised to good uses and have opportunistically picked off a few here and thereof debt that’s trading, but we haven’t tendered so far, but we’ve kept an eye on it.

Bill Hankowsky

One other point I think that’s important to remember, when thinking about Liberty, is in fact our debt structure. So number one is, we are not highly levered from an overall corporate perspective; number two is, we have a very low latter debt maturity schedule.

So, we’re not facing a peak year that would motivate us or try to “take that year out.” We’re looking at $2 million to $300 million a year, because we’ve got about $2.1 billion of outstanding unsecured. So kind of pretty evenly paced and given the various resources we have to address it, we are not compelled to tender. It’s clearly something that’s a tool, but it's not something where we have to do.

Alexander Goldfarb - Sandler O'Neill

Just the final question, just going back to the guidance, the G&A, what’s the outlook for their balance of the year and then are there any lumps to that?

George Alburger

In our original guidance, we suggested that the G&A would be up $0.03 to $0.04 in 2009 compared to 2008. I think we would revise that and say it’ll be a little closer now to maybe $0.02 up and that $0.02 up is with the burden if you will of the lumpiness of this amortization of the long term incentive compensation, which was the kind of onetime hit in the first quarter.

Alexander Goldfarb - Sandler O'Neill

So George, on a run rate next three quarter is like $13 million to $14 million a quarter though and I don’t think we think there’s any lumpiness and that movement that George has described where we headed up and now even with this LTI acceleration, it’s actually down. It really reflects again, a series of moves we made in the fall from a cost cutting perspective. So, we’ve been aggressively managing G&A since October.

Operator

Your next question comes from John Guinee - Stifel.

John Guinee - Stifel

A couple of questions; Bill or George you guys probably remember the old days when these businesses are run at more like 40% to 50% levered versus where we are right now. If you fast forward 18, 24 months on a debt to gross book value or debt to total enterprise value, what’s your goal?

George Alburger

Well, I think our goal John, has been very consistent. Ever since, I’ve been here and I think going forward our goal has been to keep part of leverage. 45% is kind of our suite spot and we sometimes vary between 40% and 50% depending on timing sometimes and that’s the gross book and I think that’s relatively our philosophy at the moment.

John Guinee - Stifel

Let me ask it a different way. When you look at your lenders, whether it’s the corporate unsecured market, the mortgage market, the term loan market or the revolver market, these lenders are really maxing out on what they are going to lend. If you look at a kind of throw away gross book, because you know how that works in this day and age and you look at a reasonable asset value, do you perceive the lending world maxing out at 50%, 60%, 70% our loan to value? Where do you see that coming?

Rob Fenza

Well John, I think that’s a complicated question, which I probably would share. Let me give you a couple of reference points. If I look at what just transpired with us on the $317 million in mortgages we did and that’s very asset driven. So in other words, that was underwriting of assets by life company’s portfolios, but at an asset level. You’re right, I mean fundamentally they may say they did it at 55% or 60% loan to value and the way we think about it, it’s more like 50% loan to value.

So in that respect, if you look at the balance sheet you might say, “Well wait a minute; maybe I am a little too over levered” from the standpoint of what are all those assets worth. I do think that John, part what have we have to factor in here is, where are cap rates going to settle out? And I am not comfortable that the scarcity of transactions gives us any clarity as to where real cap rates are. I mean, Mike can tell you what’s happening in the market, we can tell you what the assets we’ve sold have sold for; we know the data, but I’m not sure how it all settles out.

So my prior answer to your question; I think clearly in the context of looking at total enterprise value, you also want to look at that when you have some comfort as to where is that all settling at. You want to look at cap rates and have a sense of where you want your leverage and my gut would be that you try to have those things relatively aligned.

So, if I’m trying to do 45 to gross book, I probably would like to be doing 45 no matter what my metric was and to the degree there’s a disconnect between the metrics, then we take a hard look at that and if that meant you try to do some deleveraging, maybe that’s what you’d do.

I do think though and I feel this very strongly, given what we’ve done over the last five or six months here; is if you think about Liberty, number one is as I pointed out a moment ago, we had a very laddered maturity. So, we’re not looking at any big spike problem coming up the road.

We have and we should be selling about two to $200 million to $300 million in assets every year just as a good Asset Management protocol. This is clearly a tough market to sell in, but at least to-date we’ve done $65 million this year and that feels pretty good.

We have access to mortgage debt; George talked about through to a prior question. We have had access to the equity markets and we’re going to continue to look at that. So I think we have a lot of tools available to deal with liquidity and capital from our perspective and the good news is we’re not against the law on anyone. We’re not a desperate seller; we’re not a desperate borrower; we’re not a desperate issue of equity. We can decide when and where we want to do it to make sense for our shareholders.

Analyst

Okay great. One last question, we noticed on one hand that you’re CapEx numbers are going down, but then when you dive into the details which is page 10 and 12. It looks like there is a surprisingly high average CapEx per square foot per lease term and one of the things we were expecting Bob you and a few others was to see that CapEx comedown significantly as you mentioned earlier; none of the private market competitors of your, private owner-operators have any money to spend on TIs and we are sort of surprised to see that it hasn’t come down. Do you think we should look at for example on renewals, for it to continue to be over $1 a square foot per lease term?

Rob Fenza

Well, a couple of things John. Number one is, in this environment, you’re absolutely right, your analysis of the environment is correct, which is there are people who candidly can provide TIs and we even heard about deals where people have tried to provide them and then couldn’t post. I heard just within the last week about a transaction that’s literally under construction and the landlord had to stop it, because he couldn’t finish the TI work.

There’s real stuff happening real time out there, but from our perspective I think and Rob put this out in his comments, we want to be a landlord of choice for people and we think the package that people get is rent and the package of TIs and great service, so we are not shutting down the availability of TIs to our leasing people.

On the other hand we are not trying to buy deals with TIs. So, what we think is the prudent number for renewal on industrial or the prudent number for building out shell space in a pipeline building, we are going to put those dollars out.

We are not going to buy deals, so I don’t think you are going to see our numbers get bigger and sometimes there’s a idiosyncratic deal that bounces a number, a building, I mean I’m going to be candid right, because it’s the truth.

We had some shell buildings that weren’t fully leased in the pipeline that have come into the core. To a degree we lease one of those, you’re going to see a pop in the number because you’re going to be doing Shell TI work on a vacant building versus retrofitting an existing building. So sometimes you’ll get a pop so to speak, but these are not in our minds extraordinarily out of line numbers

Operator

Your next question comes from Paul Adornato - BMO Capital Markets

Paul Adornato - BMO Capital Markets

I was wondering if you could tell us a little bit more about the tenants that did not renew, that contributed to the low renewal rate in the quarter.

Bill Hankowsky

I’m not going to name names. We respect the confidentiality of all our tenants, but Paul, to give you some flavor, you’re talking in some cases big national firms that had industrial distribution operations and then simply decided, we’re not going to have that operation in that market any more.

One of those was like over 300,000 square feet, one was 250,000 square feet. You don’t know the names if I gave them to you. They just shut the operation down at the end of the lease, so they went and paid full term. In some cases you are getting consolidation activity, so that they will take two or three operations and move it into one. So, they are shutting down the other two and the third one remains.

I mean I’ll just give you a flavor; I mean there was a company in Florida that are related to the hospitality business. They are in our Orlando market, the hospitality business that they supply them; they are not doing so well, some of the lease came up; they basically shut the operation down. I had another guy go out of business that was in the window business. Again, kind of related to home building and not a business in the sense of, it didn’t go bankrupt; just it leases up and shut it down.

Paul Adornato - BMO Capital Markets

Okay. George, with respect to the accelerated vesting, is that really just a sharpening of the pencil or was there a change in personnel such that it prompted that recalculation?

George Alburger

It wasn’t necessarily a recalculation and some of the personnel is just getting older or being here longer. Basically Paul, we gave the original guidance; it’s an element of the G&A. It was considered in the original G&A. We don’t layout the guidance by quarter. So we always expected a certain amount of lumpiness in the first quarter, because we knew the tenure of some people for their years in service and their ages.

It’s really impossible to be exactly precise on this, because we also don’t no exactly what grants will be in the first quarter of 2009, not that they were excessive, but just in terms of which ones get accelerated and which ones don’t and things like that. So it was in the number, just the lumpiness really wasn’t communicated.

Paul Adornato - BMO Capital Markets

Finally Bill, for an investor who is considering buying equity today, what’s kind of the light at the end of the tunnel that you see in terms of kind of the big picture benefit of being in your position today, that is having a well capitalized opportunistic company that’s ready to take advantage of some of these market opportunities that everyone is anticipating.

Bill Hankowsky

I think there are two aspects to it Paul, and I think I would make them relatively near term and somewhat mid-term. I think relatively near term, Rob comment about it, which is the stability, the landlord situation. I’m now continuing to hear stories. I mentioned one earlier about a project underway with a landlord you would know, who candidly couldn’t complete the TI work.

I’ve heard another story this week about a broker who was so nervous that they actually asked for both TI and their commission check to get escrowed. So, I think that the pressure of fundamentals and the pressure of the capital markets is going to put some of our competitors in a tougher situation.

So, I think one benefit of the stability of our platform and the knowledge of it in the market, the fact that we have capital and as I said to an earlier question can provide TI in jobs. We can cut the commission check on the lease to that broker the day the deal is done, the lease is signed. All of those things I think will benefit us from a fundamental perspective in the near term.

Longer term or mid-term actually, I do believe that there may well be interesting investment opportunities. We are not changing our guidance for the year. We don’t plan on buying anything this year or anything like that. I won’t telegraph anything here, but on the other hand, we’re all hearing and seeing the pressure of these capital markets and fundamentals for various people who are defaulting on properties, are unable to refinance properties.

There may well be opportunities for us, to get deeper in markets we are in, use the platforms we have, the talent we have and see growth not just by filling up the vacancy in our portfolio, but see some growth by actually some very attractive acquisitions. So, earlier somebody asked us about paying back debt. When we think about using our capital in this environment, we’re very disciplined and we’re thinking about whatever the opportunities might be to use that capital.

Operator

Your next question comes from [Brendan Meyer] - Wachovia.

Brendan Meyer - Wachovia

I just wanted to follow up on the capital question a little bit if I could and your comments on John Guinee’s question, just wanted to follow up that. I understand the debt-to-gross asset value augment or the loan-to-value argument, but obviously everyone is having trouble figuring out where the value is.

When I look at what your NOI levels or EBITDA levels were in the first quarter, you’re coming out at an annualized EBITDA level of around 18% of overall debt which to me seems like a better ratio than most of your peers.

Then if I look at kind of your sources and uses, you’ve got the planned asset sales and then you’ve got all of the properties that are currently unencumbered which you could put secured debt onto. It doesn’t seem like from a sources and uses standpoint there’s a need to issue a lot of additional equity. So, can we view that these issuances are more from an offensive standpoint more so than a defensive standpoint?

George Alburger

I think they are from a couple of standpoints. I think that number one, I said this a moment ago, we do not want to be in a position where any one of our capital sources, will be dependent on a single capital source and become like I said, a desperate seller or a desperate borrower. So, what we really like right now is the tremendous flexibility of having multiple sources we can tap as appropriate.

So, I’m expected Mike to sell that other $100 million this year, but if for some reason that’s not possible, then we can use equity and as you said secure debt. If secured debt gets tight and light companies run out of money, which in fact I think they are pretty taxed at this point in the year; I’m glad we got there early. Then I can do asset sales and I can do equity. So, we like the flexibility aspect of having all of those tools out there.

I also think that and John’s question was sort of on this point, we want to pay attention to where we are from an overall leverage perspective. I think John talked about, we can remember when. Well, I don’t think; I think leverage and debt for a long time are going to be things that people are going to look at very closely.

So, I like where we are today and if we got a little less levered, that would be good too, but you’re also right and it was the question that Paul just asked Brendan, which is, if there are offensive opportunities in this environment, there’s a lot of people who are distracted. We are not distracted and it we would be great to take advantage of them.

So, I think it provides us flexibility. It provides us opportunity to watch our leverage and it provides us with an offensive tool. We think it serves three purposes.

Brendan Meyer - Wachovia

Thanks Bill. Are you guys pursuing additional secured debt financing now, where you’ll maybe able to tap that source and then not necessarily have to issue equity if you’re successful in getting additional...

Bill Hankowsky

Let me be clear. On the whole we’re not pursuing secured debt the way we did for that $317 million right now. George walked you through the availability of it, we have the capacity to do it, but we are not pursuing it right now. So as we laid out, that $310 million of need in ‘09 and ‘10, we’re going to use some combination of asset sales and equity. One caveat to that, so I don’t misinform you is that there are some specific secured mortgages or in JV situations that we may need to secure.

Brendan Meyer - Wachovia

Okay, that’s helpful. Just as it relates to the guidance, I just want to think about the Q1 run rate if we strip out the acceleration of the incentive comp. It kind of brings a number to around $0.76 a share. I guess the average FFO at the mid-point of the guidance for the remaining three quarters will be somewhere around $0.70.

If I look at the dilutive impact from the capital plan changes as it relates to kind of the Q1 run rate, it seems like the average share count for the offering that was done in Q1 is mostly in the Q1 numbers, you’ve got $100 million of additional asset sales that you talked about and the potential for additional equity offerings; all of those would be dilutive.

That would be on my numbers, mostly offset against the rate spread improvement that you would get from paying off the unsecured debt that you did earlier this month. So my back of the envelope number is roughly $0.01 dilutive kind of per quarter from capital structure changes, which would imply $0.04 to $0.05 of dilution from core operating fundamentals. It doesn’t seem like occupancy going down flat to 200 basis points and rents down flat to 5% would get me there. I’m not sure if I’m missing something.

George Alburger

Brendan, this is George. It’s a little bit complicated and I’m not sure if we want to tie up this whole line going through that. So, why don’t you and I do it off-line. I think I know an element that you might be missing.

Bill Hankowsky

Because, for everybody else on the line I just want to be clear. Our calculation is what I said in my remarks, which is roughly half of this guidance changes of effective dilutive aspects of everything we’ve done, timing early and then the second is roughly half is fundamentals and George can walk you through the detail.

George Alburger

But the fundamentals pop up in a couple of spots.

Brendan Meyer - Wachovia

Okay and then just lastly, the original guidance for the development portfolio I think for both the ‘08 deliveries and ‘09 deliveries was $0.06 to $0.08 per share accretive. Can you give us an update on where that stands currently?

George Alburger

That is an element where the fundamentals will hit us. In other words, the development deliveries that were delivered in ‘08, had some level of vacancy that we had in October, made some estimations of how long it would take us to lease it up and the deliveries in ‘09 obviously had some level of vacancies and in October 2008, we made estimates of how long it would take to us lease that up.

The combination of the projected lease up of that space when we did it in October, we thought that would contribute approximately that at $0.08 you referred to in earnings. Now, it’s probably going to be a little bit more break-even if you will. It will be a drag on earnings for some period of time until it’s leased up and then it’ll start to offset that drag.

So, I think that might be the other element of fundamentals that you’re probably missing in your calculation, which is the fundamentals obviously are hitting with the same-store portfolio, but it’s also hitting some of that 2008, 2009 development deliveries.

Operator

Your next question comes from Nick Pirsos - Macquarie.

Nick Pirsos - Macquarie

Just two quick questions; one in your opening remarks you indicated the loss of some large customers in the quarter and then given your employment expectations in the year you could see that trends continuing. Would that trend be spread across both portfolios or predominantly just the industrial portfolio?

Bill Hankowsky

I think Nick, it can happen with both portfolios, but to be candid, we’ve only got about $5.8 million of expirations for the rest of the year and with industrial what you get is these big spaces, right. So I mentioned one was 250,000 square feet; one was 317,000 square feet. Where somebody makes that decision, it just has a bigger impact. So, I think it will happen in both spaces, but I think you tend to get somewhat more of a hit on the industrial side.

Nick Pirsos - Macquarie

Just secondly, just revisiting asset sales from the standpoint, has the buyer appetite changed in any meaningful ways since year end?

Bill Hankowsky

Buyer appetite changed; Mike, do you want to comment on that?

Michael Hagan

I would tell you that trying to get transactions aren’t any easier, but I think the people that are out there looking and spending the time to look are probably real buyers. It’s a much smaller universe, but you have a better chance of getting a deal done. I think clearly it’s always been a flight to quality and in the last six to nine months I don’t think that’s changed and pricing is always the key. There is still a lot of predatory pricing out there.

Operator

Your next question comes from Jordan Sadler - KeyBanc Capital.

Craig Mailman - KeyBanc Capital

It’s Craig Mailman, here with Jordan. Bill, could you just talk about the blend and extends that tenants are coming to ask you about? Are there any situations where you’re more inclined to do those depending on markets and kind of what the competitive space looks like out there or at this point, are you just looking to kind of keep retention out?

Bill Hankowsky

I think it is in fact, Rob laid out a set of characteristics we would look at. So, let me give you a couple of examples that I think will help answer the question. If somebody comes to us in Houston for industrial, where the market is still single-digit vacancy, has had generally it’s down, everybody’s down, but it’s nowhere near as difficult as for example, our industrial situation is in the Carolinas.

Somebody is going to expire in early ‘11. So, they’ve maybe two years left and they’ll give us another three. Let’s assume they’re good credit, let’s assume none of that’s the issue. I’m basically trying to make a judgment about where do I think the market is and is it worth me giving up some income today to get three years of term from ‘11 to ‘14. If I don’t think the market’s going to be perceptively down in rate. So, I’d probable say no to that.

Somebody comes to us in Richmond, Jacksonville, I’m going to use Richmond, and it’s an office deal and it’s a decent amount of space and it’s expiring in the middle of next year and they are willing to add five years and I know that the Circuit City buildings are coming back into the market, Bob and I were just there last week I think and it’s pretty sobering to go see several hundred thousand square feet with vacant parking lots.

I know that there’s some Wachovia building’s coming back to the market that were part of Wachovia Securities and that operations actually moved to St. Louis and I look at that and say, “Wait a minute. What’s the market going to look like in the summer of 2010. I think the market is going to look worse than it did today and I have got a good credit tenants in my portfolio who’s willing to stay there, that’s a deal we’re going to have a conversation about.” So, I hope that’s helpful in terms of how you sort of think them through.

Craig Mailman - KeyBanc capital

On the once that you guys have done already, has there’s been sort of an average range of net effective rent reductions or is it really situation dependent?

Bill Hankowsky

It’s very situation dependent and in some cases candidly some tenants are all about just, can you help me a little bit in ‘09 for whatever reason and I’m happy to almost pay it back to you in ‘10 and ’11, right. In some of these the NPV is positive, it’s more a rearrangement of revenue flows versus really necessarily taking a hit.

Operator

Your next question comes from Justin Webb - Robert W. Baird.

Justin Webb - Robert W. Baird

Just a couple of quick questions, one, on the industrial portfolio which was pretty weak and just sort of across the country it’s pretty weak. When that does turnaround, you guys anticipate a sort of quick turn around for the rebuild in inventories or more of a slow arcing turnaround?

Bill Hankowsky

Well, there’s a couple of things about it; one is, industrial tend to have shorter term leases and people can move in very quickly. There’s not as much, you are not redoing office space and everything. So, the market moves it faster both down and up and people are moving more actively.

Rob mentioned for example, on our development pipeline and I think we have 1.8 million square feet of sort of prospects on it. I mean, there are industrial people in the market looking for space. One phenomenon that’s happening, I think is you do not see people looking for a million square feet or 800,000 square feet.

The huge consumer product or retailer who used to do the big DC, they’re just not in the market right now. I’m not saying they’re not going to come back, but I don’t think they come back until they’ve figure out how many stores they’re going to have left, in what locations. So, at the moment those guys are tempting to go and say to a 3-PL, get me 250,000 or 300,000 square feet, handle my inventory in this market.

So, there is more activity in kind of the as I said 200,000 to 300,000 square foot. I do think where you will see a pop is the multi-tenant occupancy, because that’s local people supplying in local economy. So when it turns and our theory at the moment is that the low beta cities will do better faster, because they’re not as much in the tank.

So, we think Philly and Minneapolis are nice places to be right now and when they turn, I think that multi-tenant industrial will turn fairly quickly. I think it will take longer in a Phoenix and in Orlando where it’s just been tougher right; the downturn has been more acute.

Justin Webb - Robert W. Baird

Then secondly, in terms of just sort of on the capital side, do you guys have any thoughts on the dividend and sort of the FAD payout ratio moving up there and maybe cutting it down to closer to taxable net income?

George Alburger

It already is a taxable net income.

Michael Hagan

Yes, we made a cut in October, 24% and we’re comfortable at the moment, that’s where we are at.

Operator

Your last question comes from Stephanie Krewson - Janney.

Stephanie Krewson - Janney

Hi, guys most of my questions have been answered, just two quickies for George. What was your capitalized interest in the first quarter?

George Alburger

Capitalized interest in the first quarter, hold on a second Stephanie. What’s your second question, while I was looking at the first one?

Stephanie Krewson - Janney

The second question is what was the amortization of your deferred financing cost in the quarter? These are just cash flow statement items.

George Alburger

Capitalized interest was around $3 million and deferred financing 1.2.

Operator

There are no more questions at this time.

Bill Hankowsky

I’m sure everybody has jumped off to go into other calls, but whoever is left on the line thanks for being with us today and we appreciate it and we will talk to you in 90 days.

Operator

This does conclude today’s conference. You may now disconnect.

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