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Executives

Jeanne A. Leonard - Vice President of Corporate Communications & Investor Relations

William P. Hankowsky - Chairman, Chief Executive Officer and President

George J. Alburger - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Treasurer

Michael T. Hagan - Chief Investment Officer

Robert E. Fenza - Chief Operating Officer and Executive Vice President

Analysts

Craig Mailman - KeyBanc Capital Markets Inc., Research Division

Joshua Attie - Citigroup Inc, Research Division

Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division

Brendan Maiorana - Wells Fargo Securities, LLC, Research Division

John W. Guinee - Stifel, Nicolaus & Co., Inc., Research Division

John Stewart - Green Street Advisors, Inc., Research Division

Vincent Chao - Deutsche Bank AG, Research Division

Michael Bilerman - Citigroup Inc, Research Division

Gabriel Hilmoe - UBS Investment Bank, Research Division

Liberty Property Trust (LRY) Q1 2013 Earnings Call April 23, 2013 1:00 PM ET

Operator

Good afternoon, ladies and gentlemen, my name is Justin and I'll be your conference operator today. At this time, I would like to welcome everyone to the First Quarter 2013 Earnings Conference Call. [Operator Instructions] Thank you very much, and Ms. Jeanne Leonard, you may now begin your conference.

Jeanne A. Leonard

Thank you, Justin. Thank you, everyone, for tuning in today. 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 first quarter results this morning, as well as a supplemental financial information package. You can access these in the Investor section of Liberty's website at www.libertyproperty.com. In both documents, you will find a reconciliation of non-GAAP financial measures we referenced 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 laws. Although Liberty believes that the expectations reflected in such forward-looking statements are based on reasonable assumptions, we can give no assurance that these expectations will be achieved.

As forward-looking statements, these statements involve risks, uncertainties and other factors that could cause actual results to differ materially from the expected results, risks that were detailed in the issued press release and from time to time, in the company's filings with the Securities and Exchange Commission. The company assumes no obligation to update, or forward -- or supplement forward-looking statements that become untrue because of subsequent events. Bill, would you like to begin?

William P. Hankowsky

Thank you, Jeannie, and good afternoon, everyone. We had a very solid first quarter, totally consistent with our view of how 2013 would play out and consistent with our business plans for the year. We leased 5.4 million square feet of space, and saw occupancy increase 50 basis points to 92.6%. This increase was driven by our industrial and flex portfolio performance, and a very strong 77% renewal rate.

Rent performance was also consistent with our guidance. Our investment activity was fairly muted, with no acquisitions and the sole sale of the PNC building in Philadelphia. Again, this was, as we discussed in our 2013 guidance, where we predicted a slow start to the year. Activity is picking up, however, and Mike will discuss this in a moment.

The development pipeline remains strong at $302 million, with the delivery of the GSK building and the start of our Vanguard built-to-suit and 2 additional industrial buildings in Houston. We also continue to have numerous conversations with customers about potential new development activity. Our prospective development pipeline is very strong. This is encouraging, but it is also characterized by much longer processes and decision-making.

And finally, let me comment on the markets. Here again, the year is playing out as we thought in December. Industrial demand is picking up generally, allowing for positive net absorption, lower vacancy rates and either modestly rising or firming market rental rates. The item of note here is the increased demand among the mid to smaller industrial customer base.

On the office side, we would call it a continued game of musical chairs. Increased velocity from existing customers, offset by the increased office-based efficiency. The result? No significant real new demand, yielding flat rent growth in a generally tepid office market. And with that, let me turn it over to George.

George J. Alburger

Thanks, Bill. FFO for the first quarter was $0.65 per share. The operating results for the quarter include $540,000 in lease termination fees. Our guidance for the year is that lease termination fees would be in the $0.04 to $0.06 per share range.

Similar to previous years, G&A expense is high for us in the first quarter, due to the accelerated vesting of long-term incentive compensation. The accelerated vesting resulted in $3.9 million more G&A expense in the first quarter of 2013, compared to the expected quarterly expense for the remaining 3 quarters of the year.

During the quarter, we didn't acquire any properties. We sold 1 property, the PNC Operation Center in Philadelphia, which was sold for $75 million. With respect to development activities, we started construction of 3 properties, which have a projected investment of $70 million, and we brought into service, Glaxo's new headquarters building at the Philadelphia Navy Yard. As of March 31, our committed investment in development properties is $302 million, and the projected yield on this investment is 8.6%.

For the core portfolio, we executed 5 million square feet of renewal and replacement leases. For these leases, rents decreased by 4%. For the same-store group of properties, operating income increased by 1% on a straight-line basis and increased by 0.3% on a cash basis for the first quarter of 2013, compared to the first quarter of 2012.

I mentioned earlier that the first quarter earnings were burdened by about $3.9 million of additional expense due to the accelerated vesting of long-term incentive compensation. We won't have these costs in the second quarter. There were also some positive items affecting the first quarter that we won't have in the second quarter.

We sold the PNC Operations Center, so obviously, there will be no contribution to earnings from this property in the second quarter. And in the first quarter, Glaxo had overlapping occupancy with us. It took occupancy of its new facility at the Philadelphia Navy Yard, and it continued to occupy the Three Franklin Plaza facility. Glaxo vacated the Three Franklin Plaza property on April 1. The positive first-quarter earnings contribution for these 2 items, PNC and Glaxo, together with other modest onetime items, total approximately $4 million. I'm highlighting these items to help you bridge to the second quarter from the first quarter. These items are not unexpected, and we're comfortable with our 2013 earnings guidance range of $2.60 to $2.70 per share. With that, I'll turn it over to Mike.

Michael T. Hagan

Thanks, George. As we mentioned in our last call, we expected our acquisition and disposition activity to start out slow in 2013. Consistent with that, we had no acquisitions in the first quarter, and completed one sale transaction in the quarter. The sale we completed was a 441,000 square-foot office building, located adjacent to the Philadelphia airport, and 100% leased to PNC Bank. There was approximately 12 years left in the lease at the time of the sale. The sale price was $74,650,000. While we do not comment on individual cap rates, we had given a range of sale cap rates we expect to achieve during the year of 8% to 10%. This transaction, on a GAAP basis, as a result of the rent steps in the term of the lease is within that range. On a cash basis, we are below the low end of this range. In addition to this sale, it has been recently reported that we are under contract to sell Three Franklin Plaza in Philadelphia. Three Franklin Plaza was leased to Glaxo prior to their moving to their new Philadelphia headquarters at the Navy Yard.

While marketing the building for re-leasing, we are approached by a non-office user, who is interested in purchasing the building. We have entered into a contract to sell the building to this user for $29 million. The purchaser is currently in their due diligence period. Given this activity, we are comfortable with the disposition guidance we gave for the year, with sales in the $150 million to $250 million cap range, at cap rates between 8% and 10%. And while we have not completed any acquisitions to date, the activity in the market has picked up. We have been following several large industrial transactions in the market, and expect pricing for core industrial, in comp tier markets to trade in the 5.5% to 6.5% cap rate range.

In addition, value add and/or secondary markets will trade 50 to 75 basis points on top of that. We are comfortable with our acquisition guidance of $100 million to $200 million, inclusive of both metro-office and industrial property at 6% to 8% cap rates. However, as we have said many times in the past, these acquisition and disposition ranges are place holders. We continue to evaluate both acquisition and disposition opportunities, and will execute on these opportunities to the extent that they create value for Liberty. With that, I'll turn it over to Robert.

Robert E. Fenza

Thank you, Mike. Good afternoon. Liberty began the year with another quarter of solid leasing. Our leasing teams leased nearly 5.4 million square feet of space and 175 transactions. As Bill mentioned, this strong performance pushed overall portfolio occupancy higher, increasing from year-end 2012 occupancy of 92.1% to 92.6% as of quarter's end. Industrial and flex prospect activity remains solid, and produced occupancy gains. Office prospect activity remained flat. And there was a slight decline in overall office occupancy. As we have seen throughout 2012, industrial occupancy nationally improved again in the first quarter by 50 basis points, while office occupancy nationally improved by just 10 basis points.

Liberty's overall occupancy now stands at 92.6% leased, leading the national averages by 630 basis points. The outperformance is primarily due to our market-based operating model, which provides Liberty with the opportunity to make more deals than our competitors and retain more of our existing customers, as evidenced by this quarter's retention rate of 77%.

To summarize, our portfolio performed very well in the first quarter, and is right on target with our business plans for the year. Let me now briefly provide some market color. Activity on the industrial side remained very good in Houston, driven by loan and gas services, South Florida, and Lehigh Valley, Central Pennsylvania, which has seen a steady -- seeing steady activity from consumer goods and e-commerce prospects.

We are also seeing continued improvement in Chicago, Arizona, New Jersey and the Carolinas, which is seeing modest job growth related to the manufacturing sector.

On the office side, activity remained about the same and deal economics remain weak. This does not pertain to the Philadelphia Navy Yard, however, which continues to perform very well.

During the first quarter, GlaxoSmithKline moved into their new, state of the art double LEED [ph] platinum facility. Our newest Navy Yard office project has garnered national attention for its use of space to enhance employee productivity and interaction. If you would like to take a virtual tour of this workplace of the future, go to Liberty's website homepage. With the Glaxo building brought into service, and 3 new starts in the first quarter, the overall development pipeline stands at 12 projects for 366 million square feet -- 366,000 square feet -- 3,366,000 square feet at an investment of $302 million. A notable addition to the pipeline in the first quarter is the start of a 200,000 square-foot office build-to-suit at the Great Valley Corporate Center for Vanguard. This project is 100% leased for 12 years, and has a projected investment of $54.6 million. The overall composition of the pipeline is now 3 office projects, all 100% leased, and 9 industrial projects. The development is spread over 6 of our markets.

We are also about to begin construction on a new industrial inventory project in Hanover, Maryland along the I-95 Corridor, near the BWI Airport. The project will contain 244,000 square feet of Class A, wall-dependent industrial space, and 2 buildings at an investment of $25 million.

The I-95 industrial corridor between Baltimore and the BWI Airport is particularly active, with literally dozens of industrial prospects. With Class A industrial vacancy in the single digits, Liberty's newest industrial project will be well-positioned to harvest this demand. One other development note. As I mentioned last quarter, we are in active, but protracted discussions with several full building users for our Lehigh Valley Central Pennsylvania projects. With no executed leases yet, stabilization dates for these buildings could move beyond our Q3 projections. Moving now to the build-to-suit pipeline, where prospect activity continues to be robust. And hereto, decision-making by high credit corporates remains protracted. There are 5 build-to-suits under construction for 786,000 square feet at an investment of $151 million.

There are 16 proposals out for over 11 million square feet, spread over 8 of our markets. We continue to be optimistic about the amount of build-to-suit activity we are seeing, and that, at least, some of this activity will land with Liberty. And with that, I'll turn the call back to Bill. Thank you.

William P. Hankowsky

Thanks, Rob, and Mike and George. And with that, we will open it up for questions, Justin.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question comes from the line of Jordan Sadler from KeyBanc Capital.

Craig Mailman - KeyBanc Capital Markets Inc., Research Division

It's actually Craig Mailman here with Jordan. It sounds like, obviously acquisition activity could pick up. Just curious, would you guys be interested in some of these larger portfolios, on the industrial side, to kick around?

William P. Hankowsky

The answer is that, a couple of points. Number 1 is, I think it's, we've been very clear over the last couple of years that we have an interest in expanding Liberty's industrial footprint, the size of our industrial investment and conceivably, even the markets we're in, over time. So that's a strategic direction we are interested in. Consistent with that strategic direction, we look pretty much at every industrial opportunity that's out there, which would include portfolios as well as single assets. What often happens, Mike commented about sort of where pricing is, when some of these portfolios that the fully leased top-tier markets, you're getting some fairly tremendous amount of interest. And that's driving some fairly strong pricing. So we will look, and we will be disciplined.

Craig Mailman - KeyBanc Capital Markets Inc., Research Division

Okay, that's fair. And then just -- I know you guys touched on that activity. You're still talking full building users on the -- that 2.2 million square feet of spec in the Lehigh Valley, but given where you are today, versus your kind of 3Q expectation, I mean, what do you think the probability of landing those within your original expectations is? And maybe just update on exactly what the original expectation is, and maybe as it moves into 4Q, how big of an impact that could be on earnings?

George J. Alburger

Okay, well, let's do it this way. The way we do our development pipeline is a very consistent methodology. As we basically put into the pipeline the actual construction period for an asset, and then we add 12 months as the lease-up period. So what you have for these 2 assets is they are in the lease-up period, i.e., they are physically completed, and we're in that 12-month zone. That zone ends in the third quarter. So what we -- and in that zone, we expect there to be not just lease-up, but we expect there to be commencement of rent. So that's the way we think about it, i.e., that at the 12 months, somebody's in the space, the TI's are done, and they're starting to pay, well then the lease has commenced. Here you are in April, and that period of course will end at the end of third quarter. So is it conceivable that we execute an agreement with somebody in the next month, 2 months, 3 months? Conceivable. There's real, as Rob said, very real prospects. Very real people who can take the whole building down, both -- either building down, excuse me. But if it takes a couple of months, and then if there's TI's involved and all that work has to get done, you may not have lease commencement at the end of the -- rent commencement, excuse me, at the end of third period, third quarter. You might be the end the fourth quarter. So it is conceivable, as Rob said, that these could slide a bit. Is it a month? 2 months? A quarter, It's going to depend, candidly on the -- on which client it is, when it gets done, and the significance that TI work involved. We're fairly encouraged about the number of people were talking to, and who's out there, and they're real people and they have real needs, and it looks like they really have to make a decision. But I have to be very candid. One of the things that has clearly been the case, ever since 2008, 2009, is the tremendous amount of uncertainty and increased process time and people getting to the very end and say, "You know what? Maybe not right now." Or maybe, "I have to wait." So they are not done until they're done. We feel pretty good. I feel very good today versus where I was 90 days ago on those assets. But until it's done, it's not done. So that's where we're at.

Craig Mailman - KeyBanc Capital Markets Inc., Research Division

Is part of it, they just have more options now, with construction picking up a little bit, in central PA?

William P. Hankowsky

This is not -- no, that is not exact -- that is not so much the issue, in the sense of, in the sense they have options. It has more to do with, is this the right logistic solution for what they're -- want to implement? Is it the right sum market where they want to be? So, would they rather be 200 changes away? Does this work, is it exactly the right configuration? It's issues dealing a lot with, very much -- with their business. It's not so much that we're facing, they have 3 buildings all next door to each other, they could pick anyone and it's like a competitive -- that happens obviously, too, in some situations, where there's -- there's 10 spaces of 100,000 square feet for industrial in Chicago, and we wanted them here. That's a battle, right? This is not that scenario. This is very much a scenario that's particular to these companies making decisions about how they want to implement their logistics solution.

Operator

Our next question comes from the line of Josh Attie from Citi.

Joshua Attie - Citigroup Inc, Research Division

Just to follow-up on Craig's question. Could you remind us what is in the guidance for the timing of the lease up of the 2 Bethlehem and Carlisle assets? So if you didn't lease them up on October, just to give us some sense of what the sensitivity is, the FFO per share?

William P. Hankowsky

Yes, George, I don't --

George J. Alburger

Yes, Josh.

William P. Hankowsky

Craig answered that, you're right.

George J. Alburger

Craig answered that, but Josh, guidance has been coming into service consistent with how they're laid out in the development pipeline schedule on Page 19, or whatever it is. -- 18, sorry, Page 18. If the -- if they're empty, the impact is, we're at 4 quarters, about $2.2 million for both together, if they're empty for a full quarter.

Joshua Attie - Citigroup Inc, Research Division

And that's the lost NOI, and also the operating expense that you'd have to fund on it, combined?

George J. Alburger

Yes.

Joshua Attie - Citigroup Inc, Research Division

Okay. And then separately, on the acquisition pipeline, you mentioned it's a very low cap rate market for a lot of what's in the market right now, and that some of the larger portfolios seem like they're fully priced. But you also said that the deal pipeline looks healthy. So could you give us some sense of maybe the characteristics of what's in the deal pipeline? Is it mainly stabilized, mainly value add? Are they portfolios? Or are they single assets?

William P. Hankowsky

Well, let's -- I'm going parch this a little bit, Josh, and then I'm going to skip -- Mike wants to elaborate on it.

Michael T. Hagan

So there are some assets that we're looking at, that are single assets. I would -- maybe I'll do it, sort of a more, kind of reflect on things we've bought in the past, which I think aren't a bad example. So we bought a couple of buildings in Chicago last year. I think in both instances, they had leases that were expiring within a year, 18 months, something like that. So on the one hand you can look and say, well they've stabilized. On the other hand, you can say, well wait a minute, it's 700,000 square-foot building, and a major customer's going to leave, because they are going to some other option or they decided to shut this down. So you're not going to get a life mortgage to give you a loan on an asset that's going to be empty 12 months from now. So we look at that as how we determine value add, in the sense that there's going to be a leasing opportunity that not everybody would find interesting, because it's a challenge. It's not a -- you're not acquiring it with a 7 year, 10 year lease in place. So there could be opportunities that look like that. There can be vacant buildings, or it can half-leased buildings. So I would put all of those in a bucket of value add. Things of that characteristic something with a piece of ground next to it. These are all things we've done in the past. They tend to be somewhat less competitive, just because some buyers don't find that core, right? So it doesn't fit their profile. It's not as financeable, so that puts some other people to the side. So it's a little more, it's just -- less competitive. Not to say zero competitive, but it might be less competitive. So those could be there. We are clearly could be assets that are stabilized, and I don't want you to think we won't buy a stabilized asset. In a market where we're -- we own a bunch of assets, and it's an addition it says no property management added cost, it's fits in, you know how we like concentration of assets, customers roll, they can move into other buildings, they can be people we have relationships with. So there could be stabilized assets. So I would say it's a continuum of characteristics that represent what's out there, and I think the big point was, kind as of what we called it, the beginning of the year there wasn't a whole lot to look at, and here we are, 4 months into the year, and there's much more to look at. So, Mike, is there anything you want to add, or...?

Michael T. Hagan

I appreciate the color and so I think it's just consistent with our overall strategy, too. It's more leaning towards industrial. But we are looking at metro-office opportunities as well. That's fine.

Joshua Attie - Citigroup Inc, Research Division

That makes sense. And just lastly, can you give us an update on the Miami Industrial Development? I noticed it wasn't started yet. Have your plans changed? Or do you still expect to start that in the first half of this year?

George J. Alburger

Sure, it actually has started, but it started after quarter end. I think it was like about a week, 10 days ago. We actually started site work much earlier. But In terms of that actual asset, in terms of the permit, point of foundation, that work has begun in this month, the beginning of the month.

Operator

Our next question comes from the line of Alex Goldfarb from Sandler O'Neill.

Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division

Just some quick questions here. First, just looking at your expirations, 2014, looks a bit outsized from the regular years, and it looks to be a lot in the distribution space. Can you just talk a little bit about what: A, how far in advance you start those discussions; and B, in the current environment, before you were talking about tenants being patient, making leasing decisions on new buildings, on new development, sort of what tenants are thinking about. Are they fine waiting until closer to expiration? Or are tenants comfortable enough to say "Hey, this far out in advance, let's re-sign now."

William P. Hankowsky

Let me do 2 things. Let me, one, comment on your observation, which is the slight uptick in distribution expirations, cause there's something a little idiosyncratic to that. But I will answer your question also about how people think about expirations. So regarding 2014, there's a couple of million square feet, 2-plus million of that number in the distribution side, that represented like 1 year, 1.5 year deals we did with existing customers, that represented them needing some more time to sort through longer-term decisions about how they want to operate and where they want to operate. And the good news is, they're talking to us about that. They're not in the market talking to people about that. But it did represent us kind of pushing a little bit of more even expirations into kind of the year. Right? So that's a little bit why that number is higher. And at the moment, I feel pretty good, we're going to help these people solve their problems, and we'll be able to enter into longer term leases with those parties once we ascertain what the rate solutions are, and they -- once they and we ascertain that. With regard to expirations generally, I think the answer is, it's a little bit all over the place. So you've got some people who are -- look at the world today, and let's say, well, wait a minute, it feels like the markets are firming up, so maybe I should get in now, and see if I can get something done for '14, because by the -- if I waited, if I waited until 6 months out, maybe the market's gotten a little more expensive and maybe I can do a little better today, and so I'm prepared to do that. Yet some people consistent with the comments all of us have made at some point this afternoon, this uncertainty, where is the world going? Where am I going? Where's my company going? Where is sequestration going? So it -- if I'm a defense contractor, I might be saying, I have no idea how to have a conversation about a renewal in '14, because I don't know what my business is going to look like. So I'm happy to sit where I am at. You may get to a certain point, and they say, give me 6 months, give me a year, because I just, need to extend a little bit because I just don't know. So there's a long continuum, I would say most customers are behaving the way most customers have historically, which is, with the year out, we start a conversation with them. They might be ready to do something, they might want a few months to go, they've got internal processes, and it kind of gets done. But we are doing '14 expirations now. I mean, if you compare these schedules quarter-over-quarter, you'll see those numbers start to shift out as some of that work gets done. So there's a little bit of peculiar behavior, because you're, a impacted by something going on in the economy, or you're -- just have a general corporate uncertainty. But the average customer is behaving, I would say, normally.

Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division

So if I understand correctly, about 2 million square feet of the roll is just where you guys accommodated some tenants on a short-term basis a few years ago, and now you feel comfortable that those tenants will enter into regular, long-term leases? And of the balance of the leases, it sounds like the majority of the tenants you feel will be normal leasing, maybe there are few people stuck by indecision, 2013. But otherwise, is that the way to take away from it?

William P. Hankowsky

Let me just be a little bit precise. Two other customers we did -- within the last 12 months, did short-term lease extensions to deal with issues. And I don't -- as with all of this in today's world, I'm very optimistic it will stay in the portfolio. I'm very optimistic that, that will be fine. But until it's done, it's not done. But the idea would be, yes, they would stay at roughly at the same square footage, and they might even stay in the same space, or we may do some improvements in that space or they may enter another space, but they would stay in the family. And then I would say for the rest of it, I mean, again, I don't want to -- I'm very excited about a 77% renewal rate this quarter. I'm very excited that out of all the customers who could renew with Liberty this quarter, so in other words they didn't shut it down, they didn't move it back to headquarters, 96% of them stayed with us. But that our average rate as you know, is more like 65% or so, right? So some people will lose things. There's competitors out there. But I think we will continue to outperform and do fine. Yes.

Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division

Okay, and then the second question is, George, and maybe, I'm sure that this probably asked a few calls ago, but given where preferreds are trading, just wanted to ask. The series E, F and G, in the supplemental it says that they are redeemable, yet they're still outstanding. Obviously, you guys have pretty good cost of capital on the preferred side. So is there a chance to reissue these units to the unitholders, or what holds you guys back?

George J. Alburger

They haven't -- excuse me, they haven't escaped our attention. As you may recall, we redeemed around $207 million of preferreds last year. And as you also recall, some of those preferreds we redeemed at $0.80 on the dollar, which was a terrific score. Worked well for us, let's put it that way. So these are -- we could issue preferreds under 6%, so these are capital sources that could have a better coupon for us. We do have the ability to redeem them. We can enter into direct conversations with the holder of them to recoupon them, and it's a work in progress.

Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division

Okay, these are units, not shares, right?

George J. Alburger

That's correct. So it is a conversation, a one-on-one conversation. It's a lot less problematic than it would be to re-coupon preferreds that are out there with retail constituency.

Alexander David Goldfarb - Sandler O'Neill + Partners, L.P., Research Division

Okay, so there's no, as long as you re-coupon, there's no tax issues. And you can -- the person's fall on the other side?

George J. Alburger

That's correct.

Operator

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

Brendan Maiorana - Wells Fargo Securities, LLC, Research Division

Rob, I was listening to your comments about the BWI submarket, and -- are rents really that high to make kind of development yields? So I know you guys sort of target for development cost that are $100 a foot. I thought they would have been a little bit lower than that for the new stuff that you're starting.

Robert E. Fenza

Yes. First, let me comment on the quarter. The quarter is very active. The Class A industrial is very, very tight. So we think it's a good time to start. The challenge in this quarter is the land cost. The land costs are very expensive, because there are no sites. We also have a quarter that is very sophisticated in their planning approval process, so you have a fair amount of entitlement costs, where you contribute toward some of the improvements, et cetera, that the municipalities need to provide. So overall, it drives your construction cost up, and you might want to -- added $10 for land, and add $10 for your off sites. The rents will justify it with new product, if it is done in a prime location, which our site is. So we feel very good about where we stand. We'll have a Class A product, very high quality, with a very high quality location. And we believe this is where we're going to be.

William P. Hankowsky

Can I add one characteristic. Just to take something Mike said earlier, with what Rob just said, which is, if we develop these at the cost that are out there, say $100 per square foot, but you look at where cap rates are for fully stabilized industrial assets in this quarter, you could be looking at a spread that we think is a real value creation opportunity. So we're cognizant of what it costs. We're also cognizant of what it might be worth.

Brendan Maiorana - Wells Fargo Securities, LLC, Research Division

Yes, there, that's helpful. So, Bill, does that mean that, or because cap rates have come down pretty significantly, have you sort of lowered the threshold of development yields that you're targeting, so the spread's the same, but maybe the overall yield is a little bit lower than it might have been, 12 months ago?

William P. Hankowsky

Yes, I -- that's a good question. I think what we're doing is, we are -- or as we try to be, and hopefully, some success, very particular to the asset, to that sub market, to the dynamics of the market, and you're asking some of the obvious pertinent questions. So what's going to cost me to do it? What can I get for rent? What are our cap rates? Because you want to be in more per pound than you can sell it, even if the rents justify the yield, right? So there's a lot of things to look at. But I'll be candid, yes, I mean the cost where people are pricing, I think we are -- if we can get a spread that's 100 to 150 basis points between kind of the return we can get, and then what you could sell it for, that feels pretty good to us. And unfortunately, in the sense of, I wish I were wrong, I mean, we're generally believers that there's a long, slow slug back, we said that a number of times. So we think the rate environment's going to remain relatively low. And therefore, we think these cap rates are going to hang around for a while. So we think this is good deployment of our capital and good value creation.

Brendan Maiorana - Wells Fargo Securities, LLC, Research Division

Yes, that's helpful. That makes sense. And then I had a question for Mike, too. You mentioned, I think at least once in the prepared remarks that metro-office was also a possibility, on the acquisition side, in addition to industrial. Just given that cap rates are pretty low in metro-office, especially in Philly and in DC, which is where you guys are primarily focused. Is that -- are those opportunities sort of available to Liberty at returns that you guys are looking for?

Michael T. Hagan

Brendan, I think, it's like we say, we look at every opportunity that is out there. And to the extent that where you think the same kind of scenario that we can create value through the acquisition process, we'll take a run at something. And I think those are the 2 markets, as you -- we've mentioned, the 2 markets that we consistently look at.

William P. Hankowsky

Brendan, maybe just to take note, was it Mike, was it December of '11 or January of '12, we bought the building in DC. It was 83% occupied. Today it's 93% occupied. So we've added 100 basis points in return or something. I forget the kind of in that 12 month period. So that yes, we look at that as a value creation opportunity. It had sort of -- not quite absentee landlords, but they had a lot of problems, they were not on the case. And us getting on the case, done a little bid on the management side, some of the physical side. That's an example of an asset that we thought had some opportunity.

Brendan Maiorana - Wells Fargo Securities, LLC, Research Division

Sure, that's helpful. And then just last one, for me. George, it's -- I know there's a lot of ins and outs with guidance, but as we would think about the -- relative to Three Franklin, and where you're going to be in the second quarter, if you do sell that building, it should be a little bit additive to the guidance outlook, because you won't be carrying the OpEx, and you could use the capital for something else, is that right?

George J. Alburger

We had it -- yes, we'll be able to access the capital. We had Three Franklin in it for purposes of guidance, vacant for the entire 2013. So the extent that we can sell it sooner and get some capital, we will not be burdened with the carry of that building for whatever period of time, we won't own it for, and we'll have the availability of that capital.

Brendan Maiorana - Wells Fargo Securities, LLC, Research Division

Yes, so half a year would be about a penny, is that right?

George J. Alburger

I'm not exactly sure of the -- that sounds reasonable.

Operator

Our next question comes from the line of John Guinee from Stiefel.

John W. Guinee - Stifel, Nicolaus & Co., Inc., Research Division

One quick question, then a follow-up. George, what's going on at Blythe Valley?

George J. Alburger

Blythe Valley has a -- well, just to rewind the clock. As you know, we took an impairment for the entire investment in that asset in the third quarter. We -- the debt was more than the value of the asset. We tried to work with the lender on a work out of that loan. We gave to the lender what we thought was a pretty reasonable proposal. The lender wanted to push us for more than we thought made sense for us to invest in that asset. So those assets were turned back to -- the lender took control of those assets and took them into receivership in February of this year. So we had some income statement impact activity for those assets through February, all of which balanced out to 0. And those assets are no longer on our books.

John W. Guinee - Stifel, Nicolaus & Co., Inc., Research Division

Should we expect any more of that to occur in your JV portfolio?

George J. Alburger

I'm not anticipating any, no.

John W. Guinee - Stifel, Nicolaus & Co., Inc., Research Division

Okay, and then just a curiosity question, probably Bill. If you look at the Glaxo, $386 a square foot, you having to build-to-suit in Phoenix, $204 a foot. Philadelphia Hospital, $316 a foot. Vanguard, $272 a foot. Can you talk little bit about what people are getting for say, Vanguard, at $272 per foot, and what Glaxo is getting at $386 a foot?

William P. Hankowsky

Getting in the sense of...

John W. Guinee - Stifel, Nicolaus & Co., Inc., Research Division

Fixed buildings, TIs, I mean, those are big numbers for that part of the world.

William P. Hankowsky

Well, maybe yes, maybe no. I mean, John, the reality -- people would assume that given the very slow, long protracted period in which not much has been built, that cost would be very cheap. That isn't necessarily the case. Part of what has happened in the industry is that the number of contractors has shrunk because they couldn't survive. And it's particularly telling more with subs than it is with GCs. You've also got potentially material costs, et cetera. So there's just no question that a ground up new asset today is a -- is going to cost a fair amount of money, the numbers you cite are, that kind of a range of that opportunity. The other side of that, though, as you are building a ground up new facility. So what you have are higher ceiling heights, you have state-of-the-art systems. You have full lead, more efficient, more cost-effective buildings, i.e., less cost to operate them. As Rob mentioned in his opening comments, the Glaxo building is a double platinum, i.e., both the core and shell were platinum as were the interiors that Glaxo provided. You're right, people get TI packages, TI packages in new construction, and we're delivering as they say, a core and shell, wet core and shell, so they, it requires more than just new rugs and carpet that you might do in an existing building. So you're running $40, $50, instead of $10 and $15. You're signing longer-term leases. I mean, you cited a good example, so you got Aetna, Vanguard, Glaxo, I mean, it's those kinds of people on longer term leases. I think what you're going to find, because I think, and this, now I'm musing a little bit, John, is over the term of those leases, whereas I said it, 5 minutes ago, that I -- our belief at the moment is, was long slow slog, low interest rates. But that's our belief kind of in the next several years. You go out 5 to 10 years, I think you're going to see inflation at serious levels. And I think you're going to find out that these buildings were built inexpensively, compared to what you would have to do then to create new product. And these will be the only buildings built, sort of in the decade. If you get, in other words, there's very little new product coming into market. And these will be the new buildings, when these leases end, and the buildings that were built, 10 and 15 years ago, will be another 10 years older. So we're -- feel pretty good about owning the best stuff in the right submarkets, going forward. But it does cost a fair amount of money. And by the way, last comment John.

John W. Guinee - Stifel, Nicolaus & Co., Inc., Research Division

In Malvern, for Vanguard, are you building a two-story, tilt-wall building, and giving them $120 NTIs? Or are you building a 6 or 7 story grand clad building, very multi-tenable, and these are your 40 NTIs? And the same sort of question in Glaxo, what's the relationship between the shell, core and shell and the TI package?

William P. Hankowsky

Yes, no. We're not giving $120 of TI. The Vanguard building is, in fact, 6 stories. It's a -- by the way, it's also a multi-level parking garage. So you've got that as a part of the cost in the Vanguard building. And I can't do this Rob, off the top of my head, or Mike, but I think that the TIs are 40, 50 kind of -- George?

George J. Alburger

I think they are pretty garden-variety TI for both of them.

William P. Hankowsky

I think you're exactly right.

George J. Alburger

So the investment, John, if that's your question, I apologize if I didn't catch it, is in the building, it's not in the TIs.

Operator

Our next question comes from the line of John Stuart from Green Street Advisors.

John Stewart - Green Street Advisors, Inc., Research Division

Bill, it sounds like the timing on the 2 central PA, warehouses may have slipped a bit. But can you share with us how rents are expected to come in, relative to pro forma?

William P. Hankowsky

Yes, I would say they are basically consistent with pro forma, in terms of the yields. So we're not talking so much about deterioration of the economics, we're talking about the delay of the economics.

John Stewart - Green Street Advisors, Inc., Research Division

Got it. And either perhaps, George or Rob, would you be able to share with us what the gross and net rents where, that GlaxoSmithKline had been paying at Three Franklin?

George J. Alburger

What was that question again, John? This is George.

John Stewart - Green Street Advisors, Inc., Research Division

Gross and net rents per square foot at Three Franklin?

Robert E. Fenza

They had, had bumps. It was a 15 year lease. So it had move up, John. And my gut, George, is, nets were in the low 20s, and then throw another 8 to 10 on it. The tax abatement had expired, I think, Mike, right? So it was paying taxes, it wasn't abated. So that's at least a couple of bucks. I'm looking at everybody, John. Off the top of our heads, that feels right. We'll check and let you know if we're wrong.

John Stewart - Green Street Advisors, Inc., Research Division

And then, just with the benefit of hindsight, in terms of the round-trip economics on that deal, how do you think about potentially harvesting value, day 1 on the next GlaxoSmithKline [indiscernible] or Vanguard?

William P. Hankowsky

Yes, so let me comment a little bit. When we look at that building, the Three Franklin Plaza building, as you know, we signed a long-term lease with them and we built a building that had the capacity to expand, which they were willing to observe -- pay for in the sense that it was part of the cost of the original constructions or the basis, if you get what I mean, over a period of time. And we were in conversations with them about beating the potential of expanding that building, using that capacity that's been put in place 15 years earlier. As late as 60 days before their decision, before we signed the lease going to the Navy Yard, which is a very quick decision, because they basically made a very big decision about the nature of the environment they wanted their employees to work in. Very critical to them, and that led to that. So we were then in the mode of, "Okay, now we have the assets, it's not going to be them." And we looked at a variety of scenarios. We considered multi-teneting that building. We have proposals to single users for that building. We looked at selling the building. And to some extent, as Mike said, someone atypical came along, i.e. not an office user, and said, "Hey, we would actually take it from you," and with no further investment by us, no upgrading of anything, which we would have done in a kind of multi-teneting, et cetera. It seemed to makes sense to us. We did a bunch of analysis on it.

William P. Hankowsky

The -- I think, if you juxtapose that, for example, take the PNC building, which we built in '97, Mike, right? And then expanded in 2000 -- it was actually done in 2 phases. And now have just signed a new lease with that, right? I mean, relatively, slightly, like within the last year, Mike? And then said hey, maybe we have a value creation point here that it makes sense to harvest. We might well have done that had we expanded Glaxo, the Three Franklin, put Glaxo had signed a new lease, we might have harvested. That's not -- that's not our play. We made a judgment. We've now built new buildings, we raised a couple. And part of it is, you're looking at where these assets are, so when we do the Navy Yard, and we are creating a portfolio of assets, which we believe, I think, over time, the whole might be worth more than the parts, if you understand what I mean. In other words, we're not in the mode at the moment of doing asset by asset dispositions there. I think we look at that as a totality value creation. That at some point, if we decide to harvest, would we harvest via JV, would we harvest by sale, would we -- there's a lot of ways to think about things. So we try to be pretty conscious of it. But you make decisions asset by asset, thinking of where they're going to go, what their histories going to look like, how they're going to play out over time. And so we're happy to harvest, ANC, we're happy to hold. And we try to think about that in a pretty consistent way. I hope that's helpful.

Operator

Our next question comes from the line of Vincent Chao from Deutsche Bank.

Vincent Chao - Deutsche Bank AG, Research Division

Just a question about -- going back to acquisitions. It sounds like the pricing on the portfolios that you mentioned earlier is coming in, giving competition. And but just thinking about your expectations, around 6% to 8% cap rates on your own acquisitions for the year, do you think there's more risk to that going lower, just given pricing trends in the market? Or would you prefer just not to buy below that range? And then I know that's very specific to the property that you're talking about, but just maybe at a general level, how you're thinking about that?

William P. Hankowsky

I'll comment. Maybe ask -- if Mike has anything to -- you asked if -- actually, pretty straightforward question, it's actually pretty complicated. So that's a range we put out in December, on what we thought would make sense, sort of consistent with some of what we've already talked about over the course of the afternoon here, value-added opportunities, et cetera. We've also said, hey rates have moved down. So would there be an opportunity, would you buy some thing south of that number because you thought you could see 100 basis points of value creation, or 75 basis points or it typically takes a lot to stabilize, repositioning or something? Yes, maybe. Are you going to go and say it's a stabilized asset, it's a 5, 2, and I'm just going to stick it in the portfolio, probably not. So I think "going through" that number would be on the basis of some opportunity that the assets would provide that you'd enjoy over time. But I don't think you're doing it just to add stabilized assets that start with the 5%. Is that fair, Mike and George? Because I think that's where we're at.

George J. Alburger

Look, we -- 2012, we probably, the hit ratio and what we acquired versus what we underwrote was probably about 10% to 12%. I mean, we all, we do think we're fairly disciplined on that. And I think you're right. The market has moved in terms of where cap rates where from when we first started giving the guidance. And if we can make the lines cross, we'll try to make those lines cross.

Vincent Chao - Deutsche Bank AG, Research Division

Okay, that's fair. And just maybe, I thought I heard you guys in your opening comments, talking about the different markets that are doing pretty well. I thought Arizona was in the decent performance bucket? Just wondering if you could give a little bit more color there. It looks like the occupancy didn't really move. Too much quarter on quarter, but just maybe a little bit more on what you're seeing at the ground level?

William P. Hankowsky

Sure. We had a slight uptick on our prospect activity. We tracked prospects, we tracked showings, proposals and leases up for negotiations. So we had a real good quarter in Arizona, in our own portfolio for activity. And we're seeing that activity ramping up gradually over the last several quarters. So we're feeling good that, that's improving in Arizona.

Robert E. Fenza

We just need to convert some of it. And then we'll move the occupancy. There's more opportunity to convert.

Vincent Chao - Deutsche Bank AG, Research Division

And is there any sort of bucket of tenants that are really driving that market or prospect activity?.

Robert E. Fenza

Well I think, I mean, our investment activity, over the last several quarters has been primarily focused on the industrial side, We bought a couple of buildings in Tulles and then we bought a building where we're positioning actually kind of redevelopment opportunity, it's industrial. So that's an area where we're -- we have some space to fill and we're seeing a nice pickup in activity that might be available to fill it.

William P. Hankowsky

Yes, it's been both, actually.

Vincent Chao - Deutsche Bank AG, Research Division

I guess, I just meant more on the industrial side, just the tenant types and that kind of thing, in industry's segment.

William P. Hankowsky

I think the smaller guys -- well, both are happy. But I mean, there's large users that are in the market, but there's also smaller users, back, it's -- one of the things we're noting across a number of markets is with a somewhat, somewhat better housing market, we're getting somewhat of that benefit in the 20,000, 40,000, 50,000 square foot players, who are a little bit more back in the market. That was actually a soft spot over the last, say year and a half, and it seems to be getting a little firmer.

Operator

[Operator Instructions] And our next question comes from Josh Attie from Citi.

Michael Bilerman - Citigroup Inc, Research Division

It's Michael Bilerman. Bill, I just want to come back to sort of your industrial comments, in terms of the cap rates firming into the mid-5 to mid-6 range, and granted, I recognize you want to be increasing your industrial exposure, and it sounds like you'd rather do that through development and value add, because you don't want to be buying portfolios at that sort of -- those cap rates. But would you entertain, potentially putting a portfolio together of assets to meet the demand that seems to be there, that's driving cap rates down, significantly?

William P. Hankowsky

Would we be a seller at those numbers, Michael?

Michael Bilerman - Citigroup Inc, Research Division

Yes. Either outright or into a joint venture, right? And being able to, what it seems to be is, there's a lot of capital chasing and the cap rates are certainly compressed further than where perhaps you would've thought.

William P. Hankowsky

Yes. Again, pretty straightforward question. It's somewhat complicated to answer. On the one hand, that is something to think about, right? So we're not -- we would not sort of be adverse to -- about harvesting value. Another aspect of it, though is, and this maybe a little bit -- well, I'll just say, our perspective is, it's not just about the assets, right? It really is about the entire real estate activity of the business. So we need, we want presence in markets, we want to have deal flow. We think this a very much customer-driven business. So our model isn't a fund model, right? We're not just accumulating, stabilizing, then selling, doing a promote and calling it a day. We're trying to create a very successful real estate operating company with a, with an industrial, significant industrial presence. In order to do that, and partially you touched on it when you said we like development, we like, we've talked with you and others about this over the years, we look at how much that product we have available on the shelf for our teams. If they're short on product, we will entertain development, even if its speculative. Touched on that today. Maryland, South Florida, Houston, we are building speculative industrial to do that in those robust markets. So we're trying to grow our customer base, grow our presence, grow our presence. At the same time, you have to say hey, if somebody wants to own this, does it make some sense? And we might look at that. I would tend to say that at the moment, we're in the building out of the platform mode. But I think we'll think about things as they come along. Obviously, what we thought PNC was an office example, it's not an investor example. But we thought we'd maximized value at the time to move on, so.

Michael Bilerman - Citigroup Inc, Research Division

Well I guess, keeping within the platform, you could do an institutional joint venture.

William P. Hankowsky

We could do that.

Michael Bilerman - Citigroup Inc, Research Division

Right, so would that be something that, I mean, I guess it's holding -- nothing is imminent. But I guess our -- when you look at the sort of deals that are being done, and the cap rates that are being paid, does that spark more interest? I mean, I completely understand your comment about not wanting to sell outright, but does it...?

William P. Hankowsky

Right. Let me absolutely comment, because you said it so well. [indiscernible] There's nothing given, so we -- this is a conversation about a concept not about we're about to do. But I can say this: I mean, I think we do get inquiries, reverse inquiries from people who -- there is capital, who's interested in investing, and sometimes we have to think about those opportunities. And by the way, go the other way, Michael, so we may want to enter markets, grow this platform, grow with us, or maybe a way to do it is with a joint venture partners, that's another way to think about doing this, right. So it's not just selling our position. And it might be using, working with another customer to expand ourselves. So all of -- I mean, as Mike said, I mean, activity is picking up and lots of people are talking about a lot of different things. So I'll maybe just leave it at that.

Michael Bilerman - Citigroup Inc, Research Division

Let me just clarify on the disposition guidance, that $1.50 to $2.50. You talked about 8% to 10% GAAP cap rates, now Three Franklin Parkway is 0. So is that right? A net number or out of that number?

George J. Alburger

This is George. Those numbers are really put in there as a stabilized number of what you would customarily see. So even the PNC building was outside of those numbers, if you're looking at it in terms of a cash-type of transaction. So if that gets old, it is clearly outside the range. Right? It's a zero.

Michael Bilerman - Citigroup Inc, Research Division

Right, so that's -- it might -- so you're saying that's --

George J. Alburger

And we didn't add up a zero and come up with a weighted average of 8% to 10% with that in there as a zero.

William P. Hankowsky

In fact, George, is it fair to say, when we thought about the year, PAC, when we talked about in December, we simply had Three Franklin empty for the year, as somebody -- let's talk about it. And we didn't, well actually it wasn't in that number. It wasn't in that 150 to 250 number. We didn't think we were selling it.

George J. Alburger

Right. And I got a call earlier about what would be the impact on earnings if we sold it, and didn't have it vacant for the full year. And we said perhaps a penny, but the building isn't sold yet. So let's get it to the finish line.

Michael Bilerman - Citigroup Inc, Research Division

And then I guess, with all -- what's happening with the private market, interest improving capital sort of becoming more available, does that 150 to 250, if you add on Three Franklin, that's 180 to 280. Could it be even higher into total disposition proceeds? Or should we think about 3 Franklin as subbing for some other sale?

George J. Alburger

Well, I think the way to think about it is, we give you our best shot and what we think is the most probable thing that will happen. So some things happen, some things don't. So it's kind of a fairly large number, as it's on average of what we think's going to happen. But I do want to repeat what Mike Hagan said at the beginning of the call, which is we reserve the right. So if we see an opportunity to sell more, or buy more than these ranges, because it makes sense in a value harvesting or in a strategic positioning or growth mode, we'll do it. So we try to help all of you think about the year, the best way we think it'll play. Because as Mike said, we should bat it 1 out of 10 last year to buy stuff, it takes a lot. But it is possible that we could exceed either of the disposition or the acquisition number if something happened.

Operator

Our last question comes from the line of Ross Nussbaum from UBS.

Gabriel Hilmoe - UBS Investment Bank, Research Division

It's actually Gabe Hilmoe for Ross. Just following up on that question. I know you laid out you're comfortable with the capital plan you put out in December, and there's obviously a lot of moving parts in that, but can you talk about expectations for potential additional equity, for the remainder of the year after tapping the ATM in the first quarter, now with Three Franklin in the box?

George J. Alburger

This is George. I mean, we did put out the ATM and we, I think it was something, $23 million range that we realized from proceeds of some -- ATM proceeds in the first quarter. The ATM is $200 million. As you mentioned, there's a lot of pluses and minuses going on. There is the plus and minuses going on of acquisitions and dispositions. Also, we suggested that we would be investing somewhere in the $300 million range in development activity for the year. And I think Rob discussed earlier, a pretty robust prospect list for development activity. So we will kind of match fund all those capital needs with equity issuance, and hopefully we'll have some of those development come in, and be initiated and use our ATM.

Operator

There are no additional questions at this time. Presenters, I turn the call back to you.

William P. Hankowsky

Thanks, Justin. Well I appreciate everybody being on the call. Again, solid quarter, I feel good about it, and look forward to talking to you for the -- throughout the rest of the year. Thanks, everybody.

Operator

This concludes today's conference call. You may now disconnect.

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