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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

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

Brendan Maiorana - Wells Fargo Securities, LLC, Research Division

Andrew Schaffer

Ki Bin Kim - SunTrust Robinson Humphrey, Inc., Research Division

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

Craig Mailman - KeyBanc Capital Markets Inc., Research Division

James W. Sullivan - Cowen and Company, LLC, Research Division

Eric Frankel - Green Street Advisors, Inc., Research Division

Joshua Attie - Citigroup Inc, Research Division

Liberty Property Trust (LRY) Q3 2013 Earnings Call October 22, 2013 1:00 PM ET

Operator

Good afternoon. My name is Mike, and I will be your conference operator today. At this time, I would like to welcome everyone to the Liberty Property Trust Third Quarter 2013 Earnings Conference Call. [Operator Instructions] Ms. Leonard, you may begin your conference call.

Jeanne A. Leonard

Thank you, Mike. Thank you, everyone, for tuning in today. You will be hearing 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 third quarter results this morning, as well as a supplemental financial information package. You can access these in the Investors section of Liberty's website at www.libertyproperty.com. In both documents, you will 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 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 assurances that these expectations will be achieved.

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

Bill, would you like to begin?

William P. Hankowsky

Thank you, Jeannie, and good afternoon, everyone. We've got a lot to discuss this afternoon: first, our third quarter results; second, our progress in advancing our strategy via the Cabot transaction; third, the state of the economy and the real estate markets; and finally, our anticipated increase in sales activity over the next several months.

So let's begin with the quarter. Liberty had another very strong performance in the third quarter. We had a record volume of leasing activity: 8.7 million square feet in total, 5.9 million square feet in the portfolio and 2.8 million square feet in the development pipeline. Occupancy dipped to 90.6% due to a 1.2 million square foot development delivery with a signed lease that hasn't commenced and the acquisition of a vacant value-add industrial asset. Our renewal rate was strong at 82%. Our rents continue to perform better than our 2013 guidance, and same-store performance continued its positive trend. Development activity remained strong with a $300 million pipeline and $163 million in deliveries this quarter. So a solid quarter all around.

And while all that activity was occurring, we also acquired and financed the acquisition of the 23 million square foot Cabot Industrial Fund III at a purchase price of $1,475,000,000. The addition of this 177-asset portfolio significantly advances our strategy of being a national industrial operator. This off-market acquisition provided us with the following benefits: First, 64% of the assets are in 14 of our 15 existing Liberty markets, allowing us to deepen our presence and to leverage our operational footprint and our extensive tenant and broker relationships in these markets. Second, 21% of the square footage is in 3 markets we had targeted for expansion: Dallas, Atlanta and Southern California. The addition of these markets now has Liberty operating in 8 of the top 10 industrial markets nationally. Third, this 23 million square foot portfolio is very compatible with our 58 million square feet of existing industrial assets. An average building size of 130,000 square feet and an average tenant lease size of 49,000 square feet, this portfolio is the type of multi-tenant industrial product that is the core of our industrial footprint.

We financed this acquisition with a 24 million share equity offering and a $450 million senior unsecured note offering, consistent with maintaining our strong and conservative balance sheet. We closed on this transaction on October 8, and the integration and the operation have proceeded smoothly and as planned.

Let me move to our next significant strategy step in repositioning our portfolio. We are currently working on the disposition of approximately 6 million to 7 million square feet of suburban office and flex properties at a sales price of between of $650 million and $750 million. We anticipate closing in the next few quarters.

The combination of the Cabot acquisition and these sales will have a Liberty portfolio that's providing over 60% of its rent from a national industrial footprint and the remainder from a focused metro and suburban office presence.

These strategic moves are very reflective of, and consistent with where the economy and the real estate markets are today. The national economy continues its long, slow path forward. But it is a path forward and it's now in its third year of slow recovery. This economic context has been most beneficial to the industrial space. National corporates, retailers, consumer product firms continue to improve and upgrade their distribution networks, yielding steady build-to-suit prospects. The slow growth and emerging housing sector are increasing mid- and small-sized industrial prospect activity. The result is a declining industrial vacancy down another 30 basis points this quarter and 11.7% nationally. Though inventory development is increasing in some markets, it remains well below historic levels, yielding positive pressure on rents.

The office sector is also improving, but at a continued slower pace due to anemic office job growth and continued office space efficiency trends. Quality, high-performance office space is the preferred choice of most office prospects.

And with that, let me turn it over to George and Mike and Rob who will provide further details on this very active quarter.

George J. Alburger

Thank you, Bill. FFO for the third quarter was $0.57 per share. Although the Cabot acquisition occurred after the end of the quarter, the due diligence and capital raising activity for the transaction had a significant effect on our results for the quarter. Included in general and administrative expense is $2.7 million, $0.02 per share, of Cabot-related acquisition costs. And included in interest expense is $4.2 million, $0.03 per share, of Cabot-related finance fees.

The capital requirement to fund the Cabot acquisition was sourced in the third quarter. We executed 2 significant capital transactions. In early August, we raised $835 million from the sale of 24 million common shares. And in late September, we executed a $450 million 4.4% unsecured senior note offering. The common share offering affected FFO on a per-share basis by $0.07.

With that, let me move on to comments on our more routine activity for the quarter. We didn't sell any buildings this quarter and we acquired 1 building, a vacant 600,000 square foot industrial building in Phoenix for $28 million. During the quarter, we brought into service 4 development properties with an investment of $163 million; and we started a build-to-suit distribution facility, which has a projected investment of $50 million.

As of September 30, our committed investment in development properties is $300 million and the projected yield on this investment is 8%.

For the core portfolio, we executed 5.8 million square feet of renewal and replacement leases. For these leases, rents decreased by 2% on a straight-line basis and decreased by 2.3% on a cash basis.

For the same-store group of properties, operating income increased by 1% on a straight-line basis and increased by 1.8% on a cash basis for the third quarter of 2013 compared to the third quarter of 2012.

Moving on to the fourth quarter. The big item is, of course, the Cabot acquisition, which closed on August -- I'm sorry, October 8. Fourth quarter results will include the expensing of $5.4 million, $0.04 per share, of additional Cabot-related acquisition costs. And since the acquisition didn't occur until October 8, there is also an additional $0.01 per share in earnings dilution.

In addition to these Cabot-related items, our fourth quarter earnings guidance of $0.62 to $0.64 per share reflects lease termination fees and gains on land sales in the U.K. at reduced levels compared to the higher levels that benefited second and third quarter of 2013 and it also reflects the vacancy of the underleased warehouses in Central Pennsylvania for the full fourth quarter compared to a partial third quarter.

Our fourth quarter earnings guidance does not anticipate or reflect any of the 6 million to 7 million square feet of properties we're looking to close -- I'm sorry, we're looking to sell closing in the fourth quarter. And finally, we will provide 2014 earnings guidance on our scheduled December 17 call.

With that, I'll turn it over to Mike.

Michael T. Hagan

Thanks, George. I normally start out by reviewing our activity for the quarter. However, because our focus was on closing the Cabot acquisition, there was very little activity during the quarter. We still, though, continue to monitor the debt and equity markets and the investment sale area. We continue to see strong demand from investors for core real estate. Industrial properties continue to draw plenty of buyers, and demand has picked up on the office side as well. With this increased demand, we are evaluating additional dispositions that would be consistent with shifting our portfolio away from suburban office and high-finish flex. We are in active discussions with potential buyers for a portfolio of properties in multiple markets that could be as much as 6 million to 7 million square feet at a sales price of $650 million to $750 million. This would be similar to what we have completed in the past where we have sold our entire office portfolio in certain markets or submarkets. We expect these sales to occur over the next 1 to 3 quarters. The cap rate -- range on these potential dispositions will be consistent with the guidance we gave for the year, 8% to 10%.

With that, I'll turn it over to Rob.

Robert E. Fenza

Thank you, Mike. Good afternoon. Let me begin by thanking our employees for another quarter of strong performance. We leased 8.7 million square feet in the quarter. We've completed development of some outstanding new distribution in urban office facilities, and we laid the groundwork for integrating our transformational portfolio acquisition. In previous conference calls, we talked about our very robust prospect pipeline for industrial, both build-to-suit and spec prospects. In the second quarter call, we noted that prospects were showing increased willingness to commit, and we were converting more prospects to signed leases. As you can see from our leasing statistics, this movement continued and accelerated in the quarter.

The 205 leasing transactions executed in the quarter included all facets of our business: leasing in the speculative development pipeline, build-to-suit transactions, as well as large renewal and replacement leasing in the core portfolio. Half of the quarterly leasing production occurred in the Lehigh Valley Central Pennsylvania market.

The largest lease occurred in the development pipeline as we executed a lease for the entirety of the 1.2 million square foot distribution facility in Bethlehem for Walmart's newest online fulfillment center. We also signed significant renewals in our Lehigh Valley Central Pennsylvania portfolio, which is now nearly 98% leased on a signed basis. The Walmart building was one of 4 development properties totaling over 2.5 million square feet delivered into service during the third quarter.

On a signed basis, this group of 3 industrial and 1 office project is 83.2% leased and 35.3% leased on a rent-commenced basis as reported in your package.

During the third quarter, we started construction on 1 additional build-to-suit, a 946,000 square foot big box distribution center on the I-95 Corridor in Aberdeen, Maryland. This building is 100% pre-leased to The Clorox Company and is projected to come into service in Q3 of 2014. The current development pipeline is 77.4% leased, and activity remains positive.

Turning now to our prospective build-to-suit pipeline. We have 21 active prospects for new facilities, totaling 7.4 million square feet. This activity is spread over 11 of our markets and is primarily industrial. But a lack of new product has tightened the supply of large blocks of high-quality office space and continues to fuel a need for build-to-suits for sophisticated office users who need larger spaces. Industrial build-to-suit prospects consist primarily of companies looking for traditional distribution space, a few prospects are e-commerce related and some are manufacturing and distributing high-value goods such as automotive and electronic goods.

Our ability to deliver on the need for build-to-suits for larger users, both office and industrial, is a significant driver of our long-term growth, and we are very encouraged by the new opportunities we will be able to pursue given the more national platform due to the acquisition of the Cabot portfolio. We are already talking with current tenants about these requirements in our new markets and we intend to fully leverage this broadened geographic scope.

But as Bill mentioned, 64% of the Cabot properties are located in our existing markets. We are already well underway in integrating these properties utilizing our existing local platforms, and the efficiencies we can achieve is underscored by the fact that the integration of 23 million square feet of space will only have a modest incremental G&A impact. Adding to our ability to manage the integration and capitalize on opportunities afforded by this new product is the nature of the product itself. The Cabot portfolio consists primarily of multi-tenant industrial properties in excellent inter-loop and interlocations. Liberty has been developing and operating this type of product for over 40 years. We understand how these properties can be managed effectively for maximum returns and also how they can be repositioned when the opportunity presents itself.

At Liberty, we often refer to multi-tenant industrial as our bread-and-butter. It is a sweet spot for us and positions us at precisely the right time to take advantage of the resurgence of the housing sector and the general uptick in industrial demand in many of our markets for this multi-tenant industrial product. The small and midsized industrial customer is back in the market and we are well positioned to capture more than our market share of this customer's business.

And with that, I will turn the call back to Bill. Thank you.

William P. Hankowsky

Thanks, Rob. So with that, Mike, we're prepared to take questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of John Guinee from Stifel, Nicolaus.

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

The obvious question, and I know you guys have probably offices full of computer runs, why now versus not 2 years ago? And then the second question is you've got about 27 million square feet of office plus flex in the portfolio. Why only sell 25% of it in the next couple of quarters?

William P. Hankowsky

Okay. So let's take them in -- let's take the 2 in the way you laid them out, John. So over the last year or so, we've been thinking very much about sort of what's Liberty's strategy for the next 5 years. And we have looked at that from the standpoint of sort of our skill set, what are we good at, what should we emphasize. We've looked at it from the standpoint of what we think market strength is, where the markets are going. And the conclusion of all of that for us, I mean, I think you know this, is that it further reinforced to us that we wanted to be more industrial and less suburban office. Part of that also then was from the standpoint of looking at product and looking at markets. So this has been very focused and sort of very analytical, as you said lots of runs, about where does it make sense to be and where it doesn't make sense to be. And so we came to a determination that there were some places and some markets and some products that might make sense not to have in the portfolio. We then proceeded to test the market and that testing of the markets indicated to us that there was receptivity. So as Mike said, we are in active discussions to pursue that receptivity. And it's really a process that we go through and consistently go through about where do we want to be. In terms of sort of the scale of it, I think we've been relatively clear that we're trying to get to a place where we're about 2/3 industrial rent and about 1/3 from the office side. And if we do the combination of the Cabot transaction, which we have done and then if we proceed and are able to close on these potential sales that we've described, would get us to where we're over 60% of the rents coming from the industrial side. And John, if we simply perceived -- the way we do organically, I think you know Liberty pretty well, so if we do a couple of hundred million in sales and we do a couple hundred million in acquisitions, then we do a couple several hundred million in development, you had a year or 2 of that organic activity, for want of a better phrase, and we'd be where we want to be. I think when we're able to and there's some -- a little bit more clarity with this and we can talk a little bit about markets, you'll get a sense that we're trying to narrow the number of markets we're in on the office side and obviously we're expanding the number of markets we're in on the industrial side. So it's a combination of strategic thinking, business thinking, where the real estate markets are, where that receptivity is to the actions we want to take and then just executing across that.

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

And then why only 25% of the assets -- the office industrial -- I'm sorry, office, flex assets? You have about 27 million square feet of office and flex and you're selling 6 million to 7 million square feet.

William P. Hankowsky

Yes, I think part of it, John, is the flex that is -- much of the flex that's in the portfolio is what I would call low-finish industrial flex. So it really belongs in the industrial side of the house, stuff that we've done in Houston and stuff that's in Chicago and other places. So we see that as consistent with and compatible with our industrial footprint, okay? We then look at the office side, which is about 23 million square feet. It goes down. It'll get to the mid-low teens -- or the mid-teens kind of thing if this all happens. And then where that puts us is we still do believe that we have something to offer in the office space and that the office space makes some sense. I mean, I think, Rob, in his comments, talked about the fact that people are still looking for quality office space and so we're interested in the markets where there's a depth of prospects, there's a wide variety of prospects, there's a lot of activity. And so we've seen decent build-to-suit activity come to us. We're building a building for Vanguard right now. We just finished one for Glaxo. We announced a build-to-suit yesterday at the Navy Yard. We can make money, good money, and see rent growth, et cetera, in the office space. But we think we have to do it in less places and with a smaller footprint than we've had historically. So we are not exiting. We're basically reconfiguring the portfolio, as I said, getting ourselves to a roughly 2/3 industrial and about 1/3 office.

Operator

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

Brendan Maiorana - Wells Fargo Securities, LLC, Research Division

So Bill, kind of less office markets, more industrial. I know you gave some guidance initially with the Cabot transaction about what the G&A impact would be. I think it was maybe an increase of $1 million or so. As we think a little bit longer terms about having less office and then being in more markets on industrial and probably setting up a few offices in some of those markets, how should we think about the longer-term G&A impact for Liberty?

William P. Hankowsky

Yes, so just -- let me just do this in pieces. So on the Cabot one, we're talking about somewhere between $750,000 to $1 million of kind of the G&A impact of Cabot as an incremental -- I mean, it's a fairly big transaction. But that's one step, a big step. And I think you should think about that against where Liberty is today. In terms of these potential sales, to be quite candid, we'll fill you in on all that detail kind of when we get there. I think it was George mentioned we have a guidance call on the 17th of December. I think we'll have a sense, we'll be able to provide a lot of information, a lot of things at that point. But obviously, it'll be -- the office side is probably a little bit more labor-intensive than the industrial side. You have bigger leases per tenant on the industrial side. In fact, we track here internally just average size of lease per quarter and that has been rising for 5 quarters in a row as we've become more industrial and less office. You'll probably see less leases producing more square feet leased. You also have a different expectation on the property management side. I think you also have a capacity to do more leveraging of your relationships. The logistics companies, consumer products guys are much more multi-market players. And so one of the reasons we want to be in more markets is because we can actually provide a better response to our industrial tenants across multiple markets. You need to be much more focused on the office side because much of that comes out of the market you're in. So there'll be some -- there'll be another G&A incremental step as a function of all this. But at the moment, the only one we've got out there is the impact of Cabot.

Brendan Maiorana - Wells Fargo Securities, LLC, Research Division

Yes. So I guess -- that's helpful color. If I kind of hear that correctly, it sounds like as you explore more opportunities in these new industrial markets for Liberty, there's probably not likely to be a longer-term G&A creep from maybe having a market officer there and thinking about buying land and mining opportunities in those markets? Do you think that $750,000 to $1 million is -- probably holds over the next couple of years?

William P. Hankowsky

Yes, I think that's roughly right, yes. I mean, I don't want to say we -- I mean, we are big believers in having a market officer in a market to understand the market and that, that local knowledge and local presence yields a whole variety of things. It yields -- you mentioned one. We're in the development business and you need to understand where land is, where growth is going. You need to understand that there's value acquisitions you can find, et cetera. Having said that, if you -- and I think you do sort of pay attention to how we've evolved over the last couple of years, so we've taken our Lehigh Valley team and they now cover Central Pennsylvania. We don't have another market officer. Our market officer in South Jersey is now covering Central Jersey because these are industrial markets and you can do that. We've taken our market officer who now covers both Virginia Beach and Richmond. We have a market officer who now covers Raleigh, Charlotte, Greensboro and Greenville. So we're able to leverage the teams we have off an industrial footprint a little bit more easily that you can off an office footprint. So hence, that's why the G&A is somewhat more incremental.

Brendan Maiorana - Wells Fargo Securities, LLC, Research Division

Okay -- no, that's great. That's helpful. Just last question for George. If I look at your same-store and you guys posted a nice increase in the quarter, it was a little less than 2%. It was about $2 million kind of quarter-over-quarter. Out of that $2 million, there is about $1.7 million that was from lower straight-line rent and a lower level of unreimbursed operating expenses. And it seems like you're running at very efficient ratios if we look at both of those metrics. So I guess, question is, do you think that you can get more efficient on those metrics as we go out over the next 12 months or so? Or are you kind of running as efficiently as possible when you look at operating margin and low straight-line rent?

George J. Alburger

We're kind of getting there, Brendan. I mean, you kind of focused on the quarterly number. And if you focus on the year-to-date number in terms of our operating expenses, we recovered close to 98% year-to-date of our operating expenses. So I'd like to suggest we can squeeze more juice out of the orange, but it's pretty efficient already. So I don't know how else to answer the question other than to say we like to maintain that efficiency. There is some occupancy -- more occupancy we can squeeze out of the office slice of the portfolio, so maybe you can get a little bit more there.

Operator

Your next question comes from the line of Andrew Schaffer.

Andrew Schaffer

First, just kind of looking at your recently delivered properties that are currently 35% occupied, 85% leased. I was wondering if you'd comment on this leasing velocity and if this is ahead, behind or in line with you guys' underwriting?

William P. Hankowsky

So the simple answer is it's going to vary a little bit project-by-project. So some of these get done ahead of schedule, some get done behind schedule. The one that has been -- gotten some attention over the last several quarters is the -- or actually the 2 -- are the 2 larger industrial buildings, one in Bethlehem and the other in Carlisle. And those we do a construction schedule and then we always add a 12-month lease-up period where we think they'll get done. And the underwriting is generally based on that kind of a pro forma. And both of them got -- one got fully leased, but it hasn't commenced in the third quarter. And the other got about 60% leased in the third quarter, so still some leasing to go. So they are somewhat below the underwriting because they should have "gotten leased and rent-commenced" earlier. But not -- it's not market or whatever. So when we do these -- there's kind of a balancing out because the portfolio -- these -- the pipeline tends to have a lot of elements in it, so some are ahead, some are behind. But those 2 happen to be a little bit behind.

Andrew Schaffer

Okay. And secondly, from what I understand, you guys are still evaluating more sales as you've kind of reconfigured your portfolio. So was wondering if you could kind of talk about the cost benefit analysis of getting all the sales out of the way right now rather than kind of continuing to kind of create some sort of pressure on your earnings growth over the last 2 to 3 years.

William P. Hankowsky

Sure. So I think this is somewhat analogous to an earlier question about sort of the timing aspect to this. Again, just to step back, what mainly drives our thinking right now is trying to think strategically about where we want to be and where the world is. So we see a world where there is enhanced demand for industrial product. I mean, that's driven partially by population growth, it's driven by the increase in e-commerce, it's driven by the reconfiguration of distribution patterns. I mean, our development pipeline is very indicative of that when you see major companies doing build-to-suits and distribution because they need a product where they need it to do what they want to do. So do we think this is an area that for the foreseeable future is an area of growth both in terms of demand, in terms of product mix, in terms of rents. So our interest in growing the industrial side grows out of those big factors and then our skill set being applied to those factors and figuring out how to do that effectively. On the office side, we look and say, what's happening seems to be people are getting more efficient with their space. We think there'll be generally less demand for office space than there has been historically because of this efficiency. And therefore, what people really are looking for is the right kind of space in the right place. They want high-performance space where they can get people to be very productive and successful and we've produced that space. I mentioned earlier, for example, a building we just did for Glaxo, a building we have underway for Vanguard is that kind of space. We also can take existing product and reconfigure it to be that space. So we want to be in markets where there is a number of companies who are looking for office space in various industries so there's kind of consistent demand where we can, again, use our skill sets effectively. We don't want to be in thin markets and smaller markets. We want to be focused on that and again apply our skill sets. So when we look at that, we said to ourselves, you know what, we could achieve that. Let's go see if the marketplace is receptive to us making a series of moves.

And as I said earlier, we kind of tested the market. We're comfortable that it's very conceivable we could sell 6 million to 7 million square feet. So we're in active discussions to see if we can bring that all together. That makes sense to us. It allows us to kind of advance both -- all components of what we're trying to do. We got deeper on the industrial side with Cabot. We'll get more focused on the office side if these sales actually get executed. And we'll have a footprint that we think makes a lot of sense to us and is kind of the Liberty that will be very effective going forward.

Operator

Your next question comes from the line of Ki Bin Kim from SunTrust.

Ki Bin Kim - SunTrust Robinson Humphrey, Inc., Research Division

Just a couple of follow-ups, Bill. First, the 8% to 10% cap rate you quoted for your suburban office portfolio that you're looking to sell, was that a trailing 12-month number or a forward number with some lease-up embedded?

William P. Hankowsky

Mike, you want to...

Michael T. Hagan

I would tell you the stuff that we're looking at is fairly well leased, stabilized leased. And I would say it's more of an in-place NOI number that we'd be pricing that cap rate range off of.

Ki Bin Kim - SunTrust Robinson Humphrey, Inc., Research Division

Okay. And how would you describe the quality of the office before you're looking to sell versus, if I look at your current average, it's varying about $20 a square foot in net rent. And if I take the midpoint of your assumptions, it looks like where you're looking to sell might be around $10 a square foot. Is that -- I guess, first of all, do I have my math correct? And what do you think that -- I guess, first, do I have my math correct? And second, what does that imply about kind of your remaining quality of your office portfolio?

William P. Hankowsky

I'm not sure actually, candidly, I got your math. Let me deal with the quality question and maybe I'll ask -- I think generally the quality of Liberty's real estate across-the-board is very high. I mean, we have high-quality real estate. This is not an issue that this is old real estate or challenged real estate or anything of that nature. This is a lot about the markets we're in. It's about suburban versus metro versus industrial. So it's about mix. We take tremendous care of our real estate so this real estate's in good shape. As Mike said, I mean, if you just look at our industrial portfolio -- excuse me, our office portfolio was well leased. So this would be inconsistent. The part we're talking about potentially selling is consistent with being well leased. And so I don't think there's anything peculiar about it. George?

George J. Alburger

No, I get the math. I get your math. But I think Bill's answer is on point given your math. There's nothing peculiar about it. It is due to the markets that it's in. I mean, our real estate isn't homogeneous. We're in a variety of markets and the rental rates for the real estate, for the office real estate, run a pretty good extreme. We have rental rates in the Navy Yard that are in the, what, Bill, in the mid-20s?

William P. Hankowsky

Well, better than that.

George J. Alburger

They're in the 30-some dollar range. Comcast is -- obviously, the Comcast Center is up there. And then you have suburban office real estate in some of the tertiary markets that are in -- at lower levels.

Ki Bin Kim - SunTrust Robinson Humphrey, Inc., Research Division

Okay. And just a quick question. Do you have -- are you able to provide same-store NOI growth profile in the third quarter for the Cabot portfolio just given you probably that -- given that you probably have historical financials. I just wanted to gauge the quality of that portfolio versus your overall performance. That was my last question.

William P. Hankowsky

I'm sorry. George, did you get that one?

George J. Alburger

I did not get that one. You kind of broke up a little on the phone.

William P. Hankowsky

Could you just do it one more time, sorry.

Ki Bin Kim - SunTrust Robinson Humphrey, Inc., Research Division

Yes, it's no problem. Just my last question. I was wondering if you could provide the same-store NOI growth in the third quarter year-over-year for the Cabot portfolio?

William P. Hankowsky

Same-store growth NOI growth year-over-year.

Ki Bin Kim - SunTrust Robinson Humphrey, Inc., Research Division

Yes, I mean, if you -- assuming hypothetically if you owned it for that time period.

George J. Alburger

I don't think we have that.

Operator

Your next question comes from the line of Jordan Sadler.

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

Just have one for you on market rents. So Bill, in your commentary, you alluded to the fact that there's been continued net absorption on a national scale, within the industrial space. And this has resulted in some positive pressure on rents. Can you quantify for us in some way what you've seen in terms of the upward pressure in market rents across your portfolio, either year-to-date or year-over-year?

William P. Hankowsky

Yes, good question. So I'm going to -- I'll try to give it some quantitative feel in a minute, but let me start with some qualitative feel to it. So I would say generally across almost all of the industrial markets, you're seeing rent growth. But we all have to remember where it was and where it's going, right? So Chicago, in the depth of the cycle, was kissing $2 a foot. I mean, there were even $1.99 specials. And so it got pretty rugged. I mean, I think most experienced Chicago industrial folks said it's kind of some of the worst rents they've ever -- they had seen in kind of their career. Chicago has clearly come back and now you're looking at, I would say, low 3s in the Chicago world. But they're not back to "peak." So if I -- and again, Jordan, it's a good question because partially if I look at the average rent or the worst-case rents against the best, that's a lot of movement. So if it was $2.30 and now it's 3.30, that's a lot of moment. But I wouldn't necessarily feel that, that movement -- that I would draw a line through that and just continue that trend out. I mean, it had a lot of depth to come back from, sort of rebound or bounce back, whatever the right phrase is. If I look at Lehigh Valley Central Pennsylvania, I mean I think there, now we're talking rents that are beginning with 4. We are still -- I mean, but rents got to -- at one point, there were rents that were touching $5 back in the day. So I think markets still have room to go. There's other markets where I think the -- they didn't go down -- let's take Houston, it didn't go down as much, it didn't have to come back as much. So rent growth in Houston might actually be less, but it stayed pretty decent. So I think, if I'm trying to kind of average it out or -- and I can't -- I'm doing this in my head. It's kind of a weighted average like what's happened to market rents. I think market rents have generally come back. I think they've generally come back in what I would consider sort of single-digit kind of categories. I think they run a range, so some might be $3, $4; some might be $5, $6. When we're looking forward, there's all kind of people that put out numbers, research firms, et cetera, who all think that, that's probably also a range of industrial rent growth that you might see going forward. So -- and here again, as I said in my comments, the one thing we're all watching is supply. But supply, even though it's picked up, we're still looking at supply, I mean we looked at the markets, just the markets we're in, and the percent of inventory that's under construction is like 0.5%. So it doesn't feel like supply is going to undercut this. So I think you still have -- I think you got some real runway here for, again, decent single-digit kind of rent growth, low, mid-single digit going forward.

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

Low, mid-single digit, right. Okay. And would that be consistent with what you underwrote on Cabot?

William P. Hankowsky

Yes, what we did on Cabot, we went -- we got pretty granular. So we took submarket-by-submarket, took research data that was out there, looked at where those markets were going. And so I think on -- again, on average, not -- it's not a weighted average, they ran a range from about 2% to 5% kind of annualized rent growth that would be in those markets. Now you also always have to be careful. That's rent growth. That's not necessarily mark -- that doesn't necessarily -- you have to put that against the portfolio. So where was the portfolio? So if it had a 5-, 6-, 7-year-old lease in it, you might not be getting back to where that rent is, particularly if it had bumps. You still have that phenomenon of meaning it. But shorter-term stuff, obviously stuff you signed 2 or 3 years ago, that stuff can move now because the markets have moved past it.

Jordan Sadler - KeyBanc Capital Markets Inc., Research Division

Right, that's helpful. I think Craig has one as well.

Craig Mailman - KeyBanc Capital Markets Inc., Research Division

Just Bill, on the development side, now that you guys got a lot of the work done in Central PA, just your thoughts here on how much more spec industrial development you're comfortable with? Which markets look the most interesting at this point?

William P. Hankowsky

Sure. Well, we have some amount of it out there at the moment. So I think we've talked in the past. We try to be very thoughtful here. And so generally, we're looking at spec development kind of at least through 2 filters. One filter's our own portfolio. So do we have product available for our customers to lease. So that deals with how well leased up our portfolio is, what the role is, do we have a -- could we meet that demand by, for example, buying vacant space. Example, this quarter, Phoenix, we bought a building. We bought a couple of buildings earlier in Chicago that have become available because leases are rolling off in the first quarter of '14. So we won't be building spec in Chicago. We will have inventory in Chicago naturally through the roll of the portfolio. So we look at that. Then we look at the market and what's the market feel like? Are we building into a receptive market or a tough market? So at the moment, we think Minneapolis had made sense. We didn't have anything on the shelf. So we started a building in Rogers. We're having -- we've had some success. We've had pretty good deal flow out there. If we see that building get done, could we start the second building? Or is that -- and in fact, because that building is about 2/3 done, I don't -- we can't do a bigger deal. We've got a building under construction in Miami. We're going to wait to see that we get some success on leasing there. But if we did, we might well start a second one. We started 2 because it kind of made sense from a development perspective in the BWI quarter. We need to get those leased up, but we have land there. So if that could make sense, we might, again, with success, follow up. We -- I think in the Lehigh Valley, there's a couple of things we're working on right now. We have land. We're not exactly ready at this moment to pull the trigger on another building on an inventory sense. But I think it was George in his remarks, I mean -- or somebody, I mean, we're 98% leased there -- maybe that was Rob. So we don't have a lot on the shelf in the Lehigh Valley. So again, I think we have -- we want to do it market-by-market. Liberty is always a bottom-up thinker from the standpoint of what's the market telling us we should be doing, what's our teams telling us, what should make sense. But we're okay having a product per market in these stronger markets. And obviously, I missed Houston, which obviously we've got a couple. We want to get them leased before we start another one.

Craig Mailman - KeyBanc Capital Markets Inc., Research Division

That's helpful. And then just quickly, any update on a potential Comcast build-to-suit?

William P. Hankowsky

No. I mean, we have nothing to talk about in downtown Philly at this point, no.

Operator

Your next question comes from the line of Jim Sullivan from the Cowen Group.

James W. Sullivan - Cowen and Company, LLC, Research Division

Bill, your opening comments were interesting and it's always difficult to know what trends are cyclical and which ones are secular in nature. And I'm curious, your comments imply that the weaker demand for suburban office, the trends, at least in part there, are secular. I'm curious, in the stronger demand trends for industrial, do you think there's something secular going on? Or is it just in the nature of a cyclical recovery in your view?

William P. Hankowsky

This is a great question across products. So I just want to be clear. I mean, I think -- I'm going to talk about -- let me just do the office, too. Look, we could deal with a lot better job numbers than we've seen. I mean, actually, today's job number, we're now on average in 2013 per month at lower job creation numbers than we were last year. So that sure doesn't feel like a robust recovery. So if we had a better recovery, it clearly would help the office space and clearly you'd see better demand. So I think a piece of this is about -- is cyclical, the economy. But there's a piece of the office space that I really do think is about structural change. And there's just no question. I don't need file cabinets. I don't need law libraries. I don't need server rooms because I can do it in the cloud. So the number per square feet per employee is going down. That's a fact. It depends on the company, it depends on the industry, but it's going down. And not only that, but the kind of space I want might be I want more columns, I need more parking because I can put more people in. So it's about something that's going on where people want -- we use the term high-performance buildings. And when we use that, we're talking about that the building's high-performance. It can get a lot done. But also, that the companies working in it perform well, that their employees are excited, and et cetera. I mean, to be blunt, I was at the Navy Yard yesterday. We had a groundbreaking for a new build-to-suit. I mean, you can just go down there, go from building to building and you can see this kind of productivity enhancement in new product. So I think a piece of this is about right product, right place. On the industrial side, we -- I think what's happening is, one, I think there's just a raw piece that's population growth. We did an analysis a few years back, it's about 50 to 60 square feet per person per metro area of warehouse space you need just to drive a local economy. Forget big boxes. I'm just talking mid -- that multi-tenant stuff that Rob talked about that just drives the local market. Having said that, there's no question that companies are getting more sophisticated about distribution patterns. I mean, we're building the biggest building we've ever built in size, 1.6 million square feet, because somebody has thought that there's a somewhat different way to distribute a product and we can help them get that done. When you look at e-commerce, I mean, that's a whole phenomenon that requires industrial buildings that have a lot more parking, that run 3 shifts, that run seasonally, that just operate in a way that's different than a rack building serving a network of stores. And that's a systemic change in that those buildings are needed and necessary. Lots of conversation about same-day delivery. That's going to create space that's closer in to metros that can be much more efficiently turned over. So there are trends that are affecting the nature of both office and industrial space, as well as the cycle. And so we think we're pretty good in this business, right? We think we know something about real estate and buildings and how to help people solve their real estate problem. And so that's why we want to be in both spaces because we can bring something to this equation to help our customers be more successful. That's what we do, that's what we've been doing and we're going to keep doing. And we think part of this is paying attention to these trends.

James W. Sullivan - Cowen and Company, LLC, Research Division

And kind of a related question, but was a more national industrial footprint always your objective? And how do you think about the alternative of having a deeper, more focused presence in what had been your core industrial markets to be a regional specialist as it were?

William P. Hankowsky

Yes, right. So I think the industrial world -- there are a series of customers and 3PL is a very good example of this. But there are consumer product guys, retailers, food guys who are really multi-market. I mean, go back to that 50 to 60 square feet per metro. There's a whole bunch of people that need to be in that 50 and 60 square feet to serve that metro. And so there's a tremendous amount of repeat customers leveraging a relationship. Several years back, one of our area managers got a request from a customer and he said, look, we have needs in these 6 markets. And at that time, we could only respond to 1. Today, if he got that request, we could respond to all 6 because of the footprint we now have with Cabot. So we think there's a way to leverage relationships among brokers, among clients, customers in markets. But by the way, even in the Carolinas, our team has done a very, I think, great job of even looking at what I would call regional customers who service the Southeast, that they can now service them in 4 cities along a corridor. And now, we'll be able to add Atlanta, a fifth city along that corridor, to a local Southeastern company that services the medical industry or something. So we think there's much more kind of that kind of leveraging of relationship in business. And so when we looked at this, we said to ourselves, we're missing opportunity to, candidly, to get business from our customer base because we're not in certain places. And that's why we want to do it. We're not going to be everywhere. We're not going to be in every industrial market. So there'll still be places we won't, but we think a footprint that's wider than we've had historically is a valuable place to be.

James W. Sullivan - Cowen and Company, LLC, Research Division

Okay. And then final quick question. Out of your U.K. assets, and I know they expand with this deal, how do they fit into that strategy?

William P. Hankowsky

Sure. The U.K. assets are terrific assets. They're in the sweet spot of the U.K., which is the Midlands, which is the distribution center. They're actually pretty well leased. There's no roll. I know next year there's none and it might even be a couple of years. So we're very comfortable with them. We've got a great team over there. We've talked about that in the past. I mean, much of our success over there has been about value creation through entitlement process. So at the moment, this gives us an opportunity to think about whether there's some value creation entitlement process that we could do on the shed side, not just on the office side. So we think it creates kind of an interesting opportunity that we're going to look at.

Operator

Your next question comes from the line of Eric Frankel from Green Street Advisor.

Eric Frankel - Green Street Advisors, Inc., Research Division

Bill and George, or especially you, Bill, given your position at Citizens Bank, maybe you can just talk about the lending environment and whether financing has loosened up on the private side?

William P. Hankowsky

So lending. I think that there is pressure in the financial space for people to put loans on the Street. The banking industry is struggling to get earnings. They kind of used up the elimination of reserves as a technique. Their fees have been curtailed by government regulation and they're getting pinched by the tight NIM given the interest rate environment. So it's a pretty tough business to be in. So growing your loan portfolio is one place to try to make some money. Having said that, it is very clear -- I mean, it's kind of a story a week at least, about regulators at some fairly -- not slapping hands anymore, I mean we're now talking about some very significant enforcement activity that is making lenders nervous about the quality and nature of the loans they put out. So you've got this tension. That tension is allowing there to be somewhat more lending. So it's, for example, I think CMBS is a place that's gotten a little -- but it's nowhere near where it was. By the way, you might pay attention to non-federally regulated lenders versus federally regulated lenders. The state banks might be a little more aggressive -- state charter banks might be a little more aggressive than federally regulated banks for obvious reasons. I think you're also seeing that you might see private equity get into the space a little bit and provide some level of lending, though that lending might have some enhanced returns to those lenders. So there's a little bit more money coming into the space. But it's not so much that there's any -- that it's going to like create any, for example, development, any explosion of development. I mean, you can get lending for a build-to-suit because you've got a tenant, hopefully credit tenant term, that all works. You start talking about inventory spec and it gets a little -- so the guys building, you'll see guys with private equity partners who were able to put up some equity consideration as a piece of the puzzle. That can unlock lending. But the old-fashioned, non-recourse, "just give it to me, I'll go do it" still not available everywhere.

Eric Frankel - Green Street Advisors, Inc., Research Division

George, can you just touch upon what industrial releasing spreads were on a cash basis in the portfolio?

George J. Alburger

Just the industrial?

Eric Frankel - Green Street Advisors, Inc., Research Division

Yes. And select maybe, if that counts.

George J. Alburger

All right. Industrial, on a cash basis, they were up 10%.

Eric Frankel - Green Street Advisors, Inc., Research Division

Cash?

George J. Alburger

Cash basis was up 10%.

Eric Frankel - Green Street Advisors, Inc., Research Division

Okay, great. And then finally, could you guys just discuss what you feel like the growth trajectory is going to be for the Cabot portfolio versus what you already have in your industrial portfolio over the next few years? Or said differently...

William P. Hankowsky

We'll answer that question on December 17. We'll give you all of that on the 17th. I mean, I think, candidly, it is -- it's in the markets we're in -- a lot of the markets we're in, it's in some new markets. It's got characteristics, Rob talked about, similar to ours, so I would think it'll behave like the markets behave that probably we're in generally. But we'll get more specific when we talk about next year.

Operator

Your next question comes from the line of Josh Attie from Citigroup.

Joshua Attie - Citigroup Inc, Research Division

How should we think about the reinvestment of sale proceeds in terms of how much might go towards acquisitions that could be leased up quickly versus developments that might take longer to feed into earnings and if anything might be earmarked for debt reduction? Just to help us understand the near-term earnings dilution and also to help numbers get in the right place before you provide guidance in mid-December.

William P. Hankowsky

Right. Josh, I mean, I think, generally, and again, we've talked about -- so we're pursuing this in active discussions, happen over the next 1 to 3 quarters, so let's see what all happens here. But we've got a pipeline, the $300 million we have to pay for. Rob talked about the potential of prospects that we're looking at. We just broke ground on a building yesterday. So one obvious constant place where we can put capital and put it to use pretty effectively is paying for development pipeline. And here, we could do it with cash versus better equity. So that's a good thing. We are, as you point out, have historically been, and as Mike said, we've been a little busy with this one big one, but we can kind of get back to looking for value-add via the markets we're in. So there will always be some level of acquisition activity that could be out there. And so this -- I think we can put these proceeds, should they occur, should these deals transpire, to good use, investing them in real estate that'll create earnings. And the mix of that is going to depend a little bit about what the markets give us and timing.

Joshua Attie - Citigroup Inc, Research Division

Okay. In August, I remember you mentioned $150 million of asset sales and that included some from Cabot. Is that separate from the 6 million square feet to 7 million square feet that you announced today?

William P. Hankowsky

Yes -- no, that's a -- so that's a good question. So the $150 million we talked about when we did the Cabot transaction was in our heads at the time kind of -- sort of a mindset. I would say that, that $150 million of sales is inside of, which is part of this $650 million to $750 million. It's not on top of the $650 million to $750 million. It's inside of it. We also did talk about the fact that there's -- and I'm looking at Mike because -- it's about 10 to 12 assets that are kind of one-offs in particular markets -- excuse me, within the Cabot portfolio that probably we would not hold long term, it's that $50 to $60 million. I mean, it's not a huge -- I mean, it's a number. I mean, it's a big number, but -- which, again, I would look at as part of this $650 million to $750 million.

Joshua Attie - Citigroup Inc, Research Division

Okay. And then just back to the earnings dilution. I'm looking at your supplemental. It looks like you have $200 million of bonds at 5.6% that mature next year. Is that one chunk? Does it mature early in the year? And is that a possible use of proceeds that, at least temporarily, something you can pay down to limit the earnings dilution?

George J. Alburger

This is George. That matures in August, so it's not early in the year. And if you were to tender for it earlier, you'd have to pay up for it.

Joshua Attie - Citigroup Inc, Research Division

But it sounds like your thinking is to not pay down debt, but to reinvest the sale proceeds into real estate?

George J. Alburger

Generally. I mean, I think we need to have the first shoe drop, which is let's have these sales, in fact, materialize and the proceeds come in.

Michael T. Hagan

And see when that happens.

Joshua Attie - Citigroup Inc, Research Division

And then just lastly. Can you just talk about the CapEx profile of what you're selling versus what you're keeping? Just help us understand what the AFFO dilution might be versus FFO.

William P. Hankowsky

Well, again, one, because we don't know whether we're going to do it; and two is we're not giving guidance. But you are hitting on an important consideration, right? So we do know, and we talked about this, for example, with the Cabot transaction, that even though the Cabot transaction was generally kind of modestly accretive in an FFO sense, it was much more significantly helpful in a FAD sense. These are less capital-intensive assets to get rent out of. And conversely, on the office side, it's been the case that suburban office tenanting costs, TI costs, CapEx costs are more substantial than they are for industrial product. And so kind of the math of that versus the rents, these are -- they provide less FAD cushion. So without -- again because we're not at a point where we're going to get into all that stuff, I mean, but just as a -- from a characteristics perspective, those are the characteristics of those 2 kind of assets.

Joshua Attie - Citigroup Inc, Research Division

Okay. And just lastly, if you were able to execute on all of these sales, will you have anything -- does this get you out of all the markets that you'd like to exit? And does this get the portfolio to a place where you really don't have a lot of noncore asset sales going forward? You just have kind of a very -- a low level of culling the portfolio.

William P. Hankowsky

Right. I think there's actually a couple of questions in there, which is fine. It's okay. So from a standpoint of portfolio-wide, as I mentioned earlier, we're trying to get to basically 2/3, 1/3, is kind of a place where we'd like the rent profile to be. Should we be able to execute on these sales, plus with Cabot, et cetera, and looking at development pipeline if that just got delivered, you'd be north of 60%. So you'd be very close to where you want to be. And candidly, if you just did what I would call organic Liberty activity, as you said, some culling, some value harvesting annually of sales, some value-add acquisitions, some development, you'd be in that mid-60s number, it'd take 2 or 3 years. I mean, it wouldn't take that long. You don't need a transformational event to get there. So at a top side, I think these, again, Cabot and the potential of these sales is very, very helpful for where we would like to be. Having said that, you asked a market question. Now, I think markets should prove to us all the time that we should be in them. And obviously, because we're multiple product types, they should prove to us we should be in them whether they're an office market or if they're an industrial or both, whatever. So we sort of reserve the right to think about how we want to -- where we want these products to be and which markets we want them to be. And so you've seen that with us, Lehigh Valley. We had office, flex and industrial. We're now a pure industrial player. So it's not about not liking the Lehigh Valley. We just think the best place for us to be successful there is in that product type. So we may mix -- we may alter or modify mix in markets, which was sort of your first part of your question, at the same time that the overall portfolio is kind of where we want it to be. We'll always be thoughtful and paying attention, trying to be agile on our feet with what we've got.

Operator

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

William P. Hankowsky

Well, thanks, everybody, for listening in. We appreciate it and all the thoughtful questions. We'll see folks at NAREIT, and reminding you that on December 17 we will have our 2014 guidance call and answer some of the questions we didn't today. So thanks, everybody.

Operator

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

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