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Executives

Jeanne Leonard - Vice President, Corporate Communications and IR

Bill Hankowsky - Chief Executive Officer

George Alburger - Chief Financial Officer

Mike Hagan - Chief Investment Officer

Rob Fenza - Chief Operating Officer

Analysts

Craig Mailman - KeyBanc Capital Markets

Paul Adornato - BMO Capital Markets

John Guinee - Stifel

Kevin Varin - Citi

Brendan Maiorana - Wells Fargo Securities

Ki Bin Kim - SunTrust Robinson Humphrey

Eric Frankel - Green Street Advisors

Brendan Maiorana - Wells Fargo Securities

Liberty Property Trust (LRY) Q4 2013 Results Earnings Call February 4, 2014 11:00 AM ET

Operator

Good morning. My name is Laurel, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fourth Quarter Earnings Call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer session. (Operator Instructions)

Thank you. I’ll now turn the call over to Jeanne Leonard. Please go ahead.

Jeanne Leonard

Thank you, Laurel, and 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?

Bill Hankowsky

Thank you, Jeannie, and good morning, everyone. The fourth quarter for Liberty was really a remarkable quarter for the company. We continue to post solid operational results. We are also executing significant transactions as part of our strategic repositioning of the portfolio. This quarter will stand as one of the most significant in the company history. Let me spend a few minutes discussing the quarter, the year 2013 and an update on our strategic activity.

We leased 5.7 million square feet in the quarter and had a renewal rate of 79% yielded an uptick in occupancy to 91.6%. Same-store grew by 1.6%. The development pipeline grew to 393 million with 5 million square feet under construction. This was also the quarter where we closed on the Cabot Industrial portfolio, acquiring 23 million square feet in 177 industrial assets across 24 markets for $1 billion -- $1.47 billion.

We also closed on the first tranche of our $697 million sale of 6.6 million square feet of suburban office and high-finish flex product. The second and final tranche closed last week. This was a remarkably active quarter.

The fourth quarter capped an extremely active 2013. For the year, we leased 26.8 million square feet the company record. We initiated 362 million in development, a clear ramping up of development activity.

We acquired $1.67 billion of assets and sold $549 million. We executed significant capital transactions to maintain our conservative balance sheet. This year represented a remarkable amount of activity and work on behalf of the entire Liberty team.

The result of this effort has been a huge advancement of Liberty strategy. With last week's closing on the final tranche of our large portfolio sale, Liberty now has a portfolio where 61% of our NOI comes from industrial assets and 39% from office assets. This is a total reversal of where we were five years ago.

Our industrial portfolio is now national in scope across 24 markets, eight of which are top 10 markets, providing us with access to 67% of the nation’s industrial demand. Our office activity is now focused in eight markets down from 16 and concentrated in the Washington, Philadelphia and select Sunbelt metros. This strategic activity is well time to benefit from uptick in the U.S. economy and particularly increased industrial demand and rents.

Let me turn it now to George and Mike and Rob, who will provide some further color and I will comment on the recently announced Comcast transaction in my closing remarks. George?

George Alburger

Thank you, Bill. FFO for the fourth quarter was $0.63 per share. There were two significant transactions this quarter. First was the acquisition of the 23 million square foot Cabot Industrial portfolio. This acquisition closed on October 8th and the purchase price was $1.47 billion. The in place NOI for this 93% occupied portfolio is approximately $97 million.

The second significant transaction was the sale of the 6.6 million square foot suburban office and flex portfolio. This sale closed in two stages. The first closing, which took place on December 24th was for 4 million square feet and 140 acres of land. The sale price for this closing was $368 million.

The second installment for the remaining 2.6 million square feet and 19 acres of land closed on January 30th. The sale price for the second closing was $330 million. The blended yield on this portfolio sale was slightly less than 9%.

With that, let me move on to the more routine activity for the quarter. In addition to the Cabot portfolio during the quarter, we acquired two industrial buildings in the Chicago market for $40 million. The acquisition costs for the quarter were $4.9 million and are included in general and administrative expense.

During the quarter, we brought into service one development property with an investment of $9.2 million and we started five properties, which have a projected investment of $104 million. As of year end, our committed investment in development properties is $393 million and the projected yield on this investment is 8.1%.

For the core portfolio during the quarter, we executed 5 million square feet of renewal and replacement leases. For these leases, rents increased by 1.2% on a straight-line basis and decreased by 5.4% on a cash basis.

For the same-store group of properties, operating income increased by 1.2% on a straight-line basis and increased by 1.6% on a cash basis for the fourth quarter of 2013 compared to the fourth quarter of 2012.

Now, let me cover two finally items, one is a reminder about the impact that the accelerated vesting of long-term incentive compensation will have on our operating results for the first quarter of 2014. This accelerated vesting will result in $4.2 million more G&A expense in the first quarter of 2014, compared to a level charge for this item for the remaining three quarters of the year.

The second item is another reminder, which is at the benefits of our portfolio repositioning, won’t begin to be reflected in our operating results until the sale proceeds have been fully deployed. At the end of January, we had $370 million in unrestricted cash. These proceeds won’t be fully deployed until the latter half of 2014.

So we are comfortable with our earnings guidance for the year but it is backend loaded. We believe that FFO per share will be in the $0.68 plus or minus penny range by the fourth quarter of 2014.

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

Mike Hagan

Thanks, George. Let me start by summarizing our fourth quarter investment activity. In addition to closing the Cabot transaction in the fourth quarter, we acquired two distribution buildings in Chicago, totaling 720,000 square feet. These buildings are well located in the Carol Stream submarket.

Our mid-90s construction with clear heights, truck court, sprinkler systems and lighting of modern buildings, these buildings are 100% occupied and the purchase price was approximately $55 per square foot. On the disposition side in addition to the large portfolio sale we have been working on, we sold two building to users during the quarter.

One was a 100,000 square foot high-finish flex building in the Lehigh Valley and the other was a 59,000 square foot, both finish flex building in Greensboro, North Carolina. In addition to the wholly-owned sales, our Washington JV sold a four building 171,000 square feet office Park in Northern Virginia known as the Pender Business Park.

At the time of the sale, these buildings were 99.5% leased. The sell price for the buildings was $31.5 million and was a seven and a half cap on in-place rents at the time of the sale. In addition to this activity, the large portfolio of sale we have been working on is now completed.

As you may recall in November, we announced an agreement to sell 97 properties, totaling 6.6 million square feet and 159 acres of land. When we announced the sale, we expect it to close in two stages. The first stage, which consisted of approximately 4 million square feet and 49 properties on 140 acres of land closed in December and generated proceeds of approximately $368 million.

Subsequent to the quarter end, the second stage closed and consisted of approximately 2.6 million square feet and 48 properties and 19 acres of land. With the completion of this sale, we have sold our Jacksonville portfolio in its entirety, exited the office markets in Maryland and Southern New Jersey, exited to Fort Washington submarket of Philadelphia and decreased the flex portfolio on Minnesota.

Let me conclude with some comments on the steady investment sales market. 2013 sales volume across the office and industrial sectors for the year exceeded 2012 sales volumes. Starting out for 2014, there continues to be strong demand in the market as both the debt and equity markets remain active. In addition, there are currently several large industrial portfolios on the market and is expected that transactional volume for 2014 will exceed 2013. However, even with this demand, cap rates have remain fairly constant over the rest of the quarters.

With that I will turn it over to Rob.

Rob Fenza

Thank you, Mike. Good morning. Q4 was another solid quarter for Liberty. As Bill pointed out, we leased 5.7 million square feet of space in 210 separate transactions. Occupancy increased by 100 basis points to 91.6% lease. For the year, Liberty leased a record 26.8 million square feet in 769 transactions.

Prospect activity for the fourth quarter remains steady, and we continue to see more optimism among our customers for continued economic growth in the year head. The continued improvement in the economic outlook is contributing to an increase in the number of tenants looking to expand and also enhancing our retention rates, which reached 79% in the fourth quarter.

You may recall last quarter’s conference call I reported that Walmart had executed a lease with us for 1.2 million square feet in the Lehigh Valley, Pennsylvania. I’m happy to report that Walmart moved into their new fulfillment center on January 1st and has begun paying rent. Even with the Walmart lease commencement in Q1 ‘14, budgeted lease expirations including two plan warehouse acquisition expirations in Chicago containing 1.3 million square feet show occupancy dipping for the first quarter of 2014.

Before providing some color on our expanded development pipeline, I want to provide an update on the 23 million square foot Cabot industrial portfolio. You may recall that 64% of the assets are located in 14 of our existing markets where Liberty has an on the ground team in place. Within 90 days of closing, we successfully transitioned the tenants in eight cities from third-party property managers to Liberty customers, embraced by Liberty property management, Liberty leasing and Liberty development people.

During Q1, we will transition the tenants in six more cities from third-party property management to Liberty customer care, fully integrating into the Liberty family, all of the tenants where Liberty has an operating platform. In the remaining cities, we will continue to utilize the services of third-party property management relationships.

We’re coupling this with Liberty Property Management’s best practices accounting national leasing and development oversight, leveraging our strengths and fostering growth opportunities from the tenant base of this acquisition.

Moving now to the development pipeline, Liberty delivered one completed industrial development into service in the fourth quarter in Houston and it was 82% leased. Since the quarter’s end, we have signed another lease bringing this 88,000 square foot project to 100% lease.

During the fourth quarter, we also have began construction on five new projects for 1.1 million square feet at an investment of $103.7 million. One of these projects is 100% pre-leased 80,000 square foot office building at the Philadelphia Navy Yard where we are experiencing very strong demand.

The second 100% pre-leased project in this group is 227,000 square foot industrial warehouse in Minnesota. The other three starts this quarter are inventory projects located in Houston, Tempe and Southern New Jersey.

The Tempe development start represents the kickoff of our 970,000 square foot master plan business Park located just west of Arizona State University and the Tempe Town Center. This project will consist of state-of-the-art office space, corporate headquarters and industrial assets in one of the premier submarkets in their Phoenix area.

For the year, Liberty delivered into service seven projects containing 2.9 million square feet at an investment of $281 million. And for the year, we began construction on 14 projects containing 4.7 million square feet at an investment of $362 million. The expanding development pipeline now stands at 17 projects under construction, containing 5.2 million square feet at an investment of $392.5 million.

The pipeline comprises 14 industrial projects, three office projects, of which 12 are inventory and five are build-to-suits, spread over 11 of our markets. The pipeline is 69% pre-leased. Prospect activity for the inventory projects continues to remain strong with mobile prospects for each of our projects.

Prospect activity for build-to-suit also continues to be robust. Our teams are in discussions with over 15 prospects for more than 5 million square feet spread over eight Liberty markets.

And with that, I'll turn the call back to Bill.

Bill Hankowsky

Thanks Rob. Excuse me -- we've undergone a transition to move more toward industrial focus company. But that doesn't change the fact that we are company with tremendous ability to develop office space with the changing needs of American business. To that end, last month, we announced we will develop a spectacular new office environment in Center City Philadelphia.

Comcast Corporation and Liberty announced on January 15th that we will form a joint venture, 80% Comcast, 20% Liberty to own a 1.5 million square foot, 1121 foot tall, 59-story tower at 1800 Arch Street in Philadelphia. The building designed by Norman Foster, will contain 1.28 million square feet of office space, which Comcast will lease at least 957,000 square, 75% of the space for 20 years.

The project will also include a 200 plus room Four Seasons Hotel below grade pedestrian connections to the commuter rail system and will seek LEED platinum designation. The joint ventures investment will be approximately $900 million. Liberty will be the developer and manage the joint venture.

Groundbreaking is anticipated this summer with completion in the fourth quarter of 2017. This new development will be known as the Comcast Innovation and Technology Center, which when combined with existing Comcast Center will create an urban vertical campus for this Fortune 50 corporation.

The building will house the firm’s media, technology and innovation activity, bringing 4000 jobs to Center City. This is an exciting and dynamic project for Comcast, for Philadelphia and for Liberty. Please feel free to visit our website to see a video about the project.

This announcement is yet further evidence of our work effort of 2013 and the foundation and momentum we’ve created for 2014 and beyond.

And with that, I’d like to open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Craig Mailman from KeyBanc Capital Markets. Your line is open.

Craig Mailman - KeyBanc Capital Markets

Good morning. Jordan Sadler is on with me, also. Bill, maybe just a follow-up on the Comcast here to shift thoughts between you and Brandywine, you guys are bringing on about 5% of our additional Class A space in the market. And so the tendency that you guys are drawing are existing tenants in markets. Just your thoughts long-term on the impact this could have on the Philly CBD?

Bill Hankowsky

Sure. I think the way to think about it is, you’re right, it will be two new buildings are being proposed, FMC going into one with some additional space that Penn’s taking and Comcast going into the second.

Those two buildings represent about 1.8 million, 1.9 million square feet of which 70% of it is pre-leased. And so the remainder is sort of available in the market about 220,000 square feet at (inaudible) about 328,000 square feet at the Comcast Center.

And if you throw in the FMC backfill at Mellon Bank, that’s another 220,000 square feet that there actually. So you’ve got about 700,000, 800,000 square feet kind of to talk about.

As I indicated in our comments about the project, I mean, Comcast has a right to take potentially all of the space in the new Comcast building or some subset or not. So it conceivable that they might take it all, you might not be talking about this all or some portion.

I think you also have to look at some of the dynamic of the Center City market and I think what will happen is the following. I think that there has been people moving into space sort of entering that market adding demand.

One place that comes out obvious sort of meds and eds, an example would be the Three Franklin building downtown, or Three Parkway, excuse me, which effectively Drexel taken over with medical school uses, nursing uses, et cetera.

We’ve also got situation where people move up, quality move up, so people may exit old Penn Center building and move into (inaudible) center, they might move into our building, they might move into Brandywines building. That’s a very historic pattern. We’ve had a couple of companies who come into town, recently small, but tend to be more tech, have a younger workforce.

I think they’re very consistent with what’s happening in downtown, Philadelphia from a demographic perspective. So Philadelphia has seen. Its population grow, but more important is population center city grow particular kind of the young age group. So, actually, in four years we are seeing the need more there to draw employees. I think you also could have consistent with that idea is the fact that this innovation center for Comcast by the incremental space.

So you could have people whose kind of want to be around this very large, as I’d said vertical campus. So our sense is that the combination of existing company's growing which one might be Comcast in taking you the more space then they have committed too. Of people moving up in quality and look -- by the way what happens then is those building convert to hotels and apartment buildings. Move in some tech companies and maybe even moving some people tracked by Comcast, I don't see a problem?

Craig Mailman - KeyBanc Capital Markets

Okay. And that’s helpful. What are you guys asking on the remaining space at Comcast?

Bill Hankowsky

We haven’t yet put out a number into the market. Remember, number one is not available into the market. We’ll constrain from market it until September of 2015. It will be consistent basically what the rent the Comcast was paying. It will also depend on what floors they end up taking. So, obviously, higher floors will charge more than lower floors.

Overall, this will be, this is a trophy building, this will be the most trophy building, the most state-of-the-art building in the market. So we’ll have the highest market, highest rents consistent with that. So I think, you will be looking at numbers that are 530s and some 740.

Craig Mailman - KeyBanc Capital Markets

What does that translate into a potential yield bonus?

Bill Hankowsky

Well, we put out the yield when we announced at just north of 8 on a straight-line basis. And then, George, often points out, I mean, you can convert that to cash, you 50, 75, or 100 basis points depending, but there’s a lot of straight-line in here to 20 year lease with Comcast, but it's north of an 8 straight line.

Craig Mailman - KeyBanc Capital Markets

Great. Thank you, guys.

Bill Hankowsky

Thank you.

Operator

Your next question comes from the line of Paul Adornato from BMO Capital Markets. Please go ahead.

Paul Adornato - BMO Capital Markets

Thanks very much. So, given your larger industrial footprint and given the Comcast commitment, how should we think about the overall development pipeline from here, should we expect additional growth beyond announced projects or how are you thinking about the volume perfect?

Bill Hankowsky

That’s fine. We gave our guidance in December. We talked about variety of numbers. But I think the one that’s most relevant to your question, Paul, is we’ve pick those between 400 million to 600 million at starts in 2014. And we have a pipeline with shy of 400 million right now, 392. You get deliveries, you get start, it may go up and down over the course of year a bit.

But I wouldn't -- I think it’s clearly possible, probable and possible that it might well be exceeding 400 by the end of the year, is it 500, is it 600, want to see what where everything lands. But as Rob indicated, there is a series of build to suits that we are talking to people about things like that. So I think we’re pretty comfortable that the pipeline grows over the course of year.

Paul Adornato - BMO Capital Markets

Okay. And looking at the development returns, you’ve quoted a number of 8.1%, I think on the existing pipeline. I was wondering if you could comment on the new industrial markets that you’re in, are they more competitive, what kind of development returns might you expect there and are they kind of rights for developments?

Bill Hankowsky

I think the returns will vary. So the build to suit market is competitive market so that tend to get sort of often throwing in terms of bid on a bid depending. I think that you build to suit on the other hand we have tremendous group of relationships with customers that often yield of direct transactions, so they tend to do a little better. The inventory, as Rob indicated, we got fair amount of inventory in the pipeline which is fundamentally industrial.

But I think, development pipeline that’s kind of been 80-ish range when you can think about industrial assets can trade, stabilize at the 6, either at -- 6 depending on the market. We’re making pretty good value add contributions for the company across all these assets. But I, kind of in an 80-ish range is sound reasonable I think for the course of year.

Paul Adornato - BMO Capital Markets

Okay. Just one more follow-on, if I could, Bill, in the past, you've been able to comment on the percentage of all development activity that has contributed by the REIT. I was wondering if you could give us that number as you see it today?

Bill Hankowsky

You’re talking sort of in a national perspective?

Paul Adornato - BMO Capital Markets

Yeah. Yeah. In the past you said, it’s ranged from X to Y in terms of…

Bill Hankowsky

Yeah.

Paul Adornato - BMO Capital Markets

… the contribution of REITs in or the composition of the REITs in the overall development pipeline?

Bill Hankowsky

So let’s think what’s happening fundamentally is that, to be what, and it’s be anticipated. You’ve got construction activity is picking up generally, it’s reflecting that tech economy is getting better and the markets are getting tighter and people entering the markets. Pretty good example would be sort of the Inland Empire, Southern California. I think, maybe one or two buildings are being build by REITs, fundamentally being built by private parties in the market. You see little bit more that across other markets.

On the other -- and I think, but I think it remains, what I would, use the term discipline. So when we look at, for example, what’s under construction nationally, the numbers we’ve got for the portfolio is about 80 million square feet of industrial under construction, it represents about like 1% or more than 1% of total inventory, which is as you know significantly below historic replacement kind of number, so it's still -- I know it's picking up, but it's still below historic levels. And about -- just about 50% of it is pre-leased.

So I think what's happening though is that the percent of it that it’s REIT is going down, but REITs tend to be fairly disciplined. We're kind of -- you know, intend to do a building for a market kind of thing, depending where your markets are or your footprint is. And others are coming in. So the percent that is being done by REITs, I think as a percent of everything is probably "going down" and my gut would be I'll have to actually look quite if it’s sort of -- look at this protocol.

But my gut is, REITs are definitely less than 50% of what's happening out there. I think -- I understand there was serious private guys with serious capital partners who are in the market. And I think you know about those kind of folks, right. I mean who would have their capital alliance, others have capital alliance as Goodman. So these are well capitalized players, happened to publicly traded REITs that are active in the market.

Paul Adornato - BMO Capital Markets

Hey. great. Thanks very much.

Operator

Your next question comes from the line of John Guinee from Stifel. Please go ahead.

John Guinee - Stifel

Thank you. Couple of questions just on the -- from a basis perspective, Bill. When you look at Comcast, you can slice and dice the portion you allocate to the Four Seasons and the above standard TIs for Comcast et cetera. But when you guys are drilling down and trying to figure out your yield on costs on a 1.3 million square feet of office space. What do you think your development per square foot number is on the Comcast center?

And then the second question is, you guys are going long land again $30 million for 184 acres about a 165,000 an acre. Can you talk about where you are investing in land and why and whether that's for our land or pad ready?

Bill Hankowsky

Yeah, sure. On the first one, on Comcast, we have not given out a breakdown between the office side and the hotel side and as much as I know you love to have it. I'm not going to do it today exactly. I will agree with you though. Here's -- here's the basic situation. They -- hotel cost more per square foot than the office cost per square foot and that's partially just a function of it, somewhat more elaborate facility and put more into a hotel, because you sort of, as you know, crave for finished product, whereas with office space you're creating core and shell with some TI allowance -- when we described the project originally.

I think Comcast is thinking of putting a -- putting in several hundred million dollars more in terms of investment in TI and technology in their space. So they'll -- that's on top of a $900 million. So one could assume that their costs on the office building cushion is less than it is on the hotel. So the 1.28 million is less per square foot than the 200 -- 323,000 square feet of hotel space.

In terms of the land, lots going on with the land, John. It's a good question. So some land we sold at the sale in some of the markets we were in. So -- when we exited those markets, we exited -- the real estate we owned and the land owned were up. Some of the land has gone into development as this pipeline gets built up and then as a result we're facing a situation where we look out, and we want a several year kind of development, projection on markets and we say to our folks in Lehigh Valley. Okay, where do you think you'll be over the next couple of years and we find out that you go out a year or a two and you find out you're out of land.

So some of this land represents land investments in the Lehigh Valley. Actually there's two particular parcels that I can think of, one was owned by a corporate player who had excess real estate, we’re acquiring that. The other was owned by kind of a guy we bought land forth for years, who has an agricultural business and has a lot of land. So those – that’s an example.

In Houston, where we also run our projections out, we'll run out of land in a couple of years, actually might run out of land in a year and half. So we've also acquired some land there. And we also acquired a site in Phoenix which was an industrial site, which allows us to build kind of in that -- 75th Street, something, kind of in the center of the sweet spot of the industrial market, a site.

Most of them are all -- they are somewhere along the process. Some are -- zone correctly and need plot and plan approvals, some need to get a highway occupancy permit, you know those kinds of things, maybe part of the package. Some are totally ready to go. I don't think any of them are currently what I would call pad ready, probably only a little bit of a site-work from this point going forward.

John Guinee - Stifel

Great. Thank you.

Bill Hankowsky

Thank you.

Operator

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

Kevin Varin - Citi

Good morning, this is Kevin Varin with Josh. Could you give us an update on the development plans in Miami. You bought some land and plan to do some spec development there, and we’re just wondering what the shadow pipeline looks at the moment?

Bill Hankowsky

Sure, you're right, we acquired land right next to the Turnpike in the Medley submarket. We just had an opening for the first building which is to say it is -- from a construction perspective completed literally like two weeks ago. And that building is in the pipeline. So obviously we'd like to get that least stuff before we start another inventory building.

We have as Rob indicated prospect activity on it. So we're feeling pretty good but we've got to get it leased. Should we get that leased, we'd be happy -- and it does not have to commence, we just need to -- we just need to know that it’s side leases than we would start another product as we think the market has deepen up. We also have the potential there. There's a build-to-suit opportunity and Rob talked about the build-to-suit pipeline and some of that -- some of those 15 prospects might be somebody in Dade County.

So maybe that could yield a building that you would build build-to-suit. So I think a shadow way to think about it is, you've got one done, get it leased, start another inventory. Considerably you might start a build-to-suit, should you land one. So you could end up with another one or two started somewhere in the next 12 to 18 months.

Kevin Varin - Citi

Okay, thanks. And then can you just give us an update on the acquisition pipeline and thoughts on timing, guidance called for like $200 million to $400 million in 2014?

Bill Hankowsky

I'll make a couple of comments, then Mike if you want to add to it. Here is stuff out there. I think most people are aware, there’s some very big things out there. So very, very large portfolios that are there in the market. And as we’ve indicated in the past, given everything we did in 2013, we don't need to be doing a transformational transaction, which isn’t to say you won’t look at something that would make sense but we don't -- we're not compelled to do something big.

We're now in more markets than we were in 90 days ago. So there's more opportunity to acquire. We could acquire now in Atlanta or Dallas or Southern California, places we worked or focus now we have our footprint in the market. So that creates more opportunity for us.

I think our bread and butter will tend to be a building here, three buildings there that kind of thing. They're in the market. Industrial remains an extremely attractive product type. So they tend to be fairly competitive. And as George indicated in his comments, I mean there's nothing sort of right around the corners. So if this begins to happen, kind of gets distributed over the course of year and probably ends up being a little bit more back-end loaded. Mike, I don't know if you have?

Mike Hagan

Yeah. Bill, I think you touched on, I think there's a lot of products out there. We touched on prepared comments and we're looking at all. And when the right situation comes along, we'll execute on it. We're comfortable with the guidance that we gave in terms of dollar volume and comfortable in terms of the capital management gave.

Kevin Varin - Citi

Okay. Thanks a lot.

Bill Hankowsky

Thanks.

Operator

Your next question comes from the line of Brendan Maiorana with Wells Fargo Securities. Please go ahead.

Brendan Maiorana - Wells Fargo Securities

Thanks. Good morning. So George, just for a point of clarification, the guidance that was given in the December call, is there any change to the development starts or spend with the Comcast development announcement?

George Alburger

Brendan, when we gave the -- well, first of all, when Bill mentioned the guidance, which was $400 million to $600 million in starts that was wholly owned and that’s all the guidance we gave with respect to development starts. We didn’t comment on guidance with respect to development starts for JVs.

With respect to the spend, we said the spend would be anywhere from $300 million to $500 million, captured in there was not Comcast but we are just kicking off Comcast this year. The total spend when you consider the fact that we are only contributing 20% of the 100%, obviously Comcast contributing the other 80%. The total spend for us will be less than $20 million in 2014. So, I don’t think it has a big impact on our capital plan with respect to 2014.

Brendan Maiorana - Wells Fargo Securities

So George, if I just kind of run out the expectations for 2014 at the midpoint of your guidance and look at where your leverage stands today, what the capital plan is for the year, it seems like you probably spend somewhere on the order of $50 million to $100 million more than the proceeds. And that doesn't do a whole lot to your leverage numbers, and if you don't spend a lot on Comcast I guess do you feel kind of that you'd be able to fund Comcast pretty easily in 2015 and 2016, when the majority of the spend happens, given where your balance sheet is likely to be?

George Alburger

Well, the shortcut answer to that is yes. But the long-cut answer to that is, we are not giving -- certainly not giving 2015 guidance here. We got just done given 2014 guidance and you understand Brendan. A lot of things depended on -- hopefully, we do have a more robust development pipeline and we are on the high sides of starts. But we will see where we were at then, but the balance sheet is in good shape. And I feel comfortable that we will have the capital to develop the Comcast and what other development starts we have.

Brendan Maiorana - Wells Fargo Securities

Sure. Okay. No, that's helpful. Bill, any markets or maybe this is for Rob, too. Any markets where supply is a concern, or where you're watching it a little more closely, and maybe that weren't on the radar screen six months ago?

Rob Fenza

Yes. I don’t think -- again, George’s phraseology there. The short answer is none that are a concern at the moment. You are right though, if you go back six months, things have picked up. So it is different and part of why, at the moment I am not too concerned is some fair amount of this activity is pre-leased. As I indicated about half of this nationally is pre-leased. And if you go kind of go market-by-market, half of this stuff that’s underway in Dallas is pre-leased and there is about 12 million square feet under construction.

If I go to the Lehigh Valley, 70% of it is pre-leased, 100% of Central Pennsylvania is pre-leased. So probably another place where it’s significantly -- Southern California, there is a fair amount of activity that is not pre-leased, that’s happening and that’s mainly on the east side, Inland Empire kind of bigger stuff. Nothing at the moment that I think would create a situation where it would either depress lands or create a kind of a negative against markets tightening up and Houston is another place by the way too, I should have mentioned.

Houston got about 5 million square feet, almost 6 million square feet underway. But again a fair amount has pre-leasing on it. It will be -- it’s a good question and I think it will be something we really pay attention to over the course of ’14 to see any of these markets get little ahead of themselves, but at the moment my answer would be nobody is ahead of ourselves.

Brendan Maiorana - Wells Fargo Securities

Okay. Great. And then just last, a clean up one for Rob. I think you mentioned on the development pipeline, chasing 15 prospects, and I think it was 5 million square feet. Was that just for build-to-suit prospects, or is that to fill some of your inventory product as well?

Rob Fenza

No, that was just for build-to-suit prospects and they were active prospects proposals, more than suspects. They were the ones we're actually talking to the customers. So it's 15 for 5 million -- I'm sorry, yeah 15 for 5 million square feet.

Brendan Maiorana - Wells Fargo Securities

Okay. Great. Thank you.

Operator

Your next question comes from the line of Ki Bin Kim from SunTrust Robinson Humphrey. Please go ahead.

Ki Bin Kim - SunTrust Robinson Humphrey

A couple of maintenance questions. First, is the city of Philly giving me any kind of tax abatements or chipping in for the development?

George Alburger

For Comcast, yeah. So the Comcast project anticipates, there will be $40 million of public lands that will offset a portion of the costs over and above the $900 million. And those costs are things like widening of one of the streets, did a bus fit for truck operations and actually, the sidewalks surrounded. It involved that public concourse I mentioned, which is the commuter rail system, taking it from where it determinates currently in the 1700 block, extending at under 18th Street into 1,800 Block and actually extending until the end of 1,800 Block. $10 million of those would come from the City of Philadelphia and $30 million would come from the Commonwealth of Pennsylvania, the state.

In addition, the City of Philadelphia offers as a matter of right, that anybody that does new construction no matter what is, a single-family home, a retail store or a 1.5 million square foot, skyscraper or a, 10-year tax abatement. That abatement begins when you complete construction runs for 10 years and the underwriting did anticipate that we would receive that. But it doesn't require any legislation to that to happen. That’s just a matter of right.

Ki Bin Kim - SunTrust Robinson Humphrey

And what percent of the yield, in terms of basis points, does that tax abatement come out for, account for?

George Alburger

It would have been an OP expensed to the tenant. Yeah, right. I mean --

Ki Bin Kim - SunTrust Robinson Humphrey

I got it.

George Alburger

Right. And the tenants pay, for example, there will be a tax on it. There is a real-estate tax on the land. I don’t want to get too granular here. But it doesn't abate the lands, so whatever the lands valued at -- I can't remember off the top of my head. That will pay real estate taxes. Other taxes, if the company's in the building have to pay, they're using our occupancy and other factors. So those are pass-throughs to tenants in the OEs.

Ki Bin Kim - SunTrust Robinson Humphrey

Okay. And just the last question, you've been a pretty big spender of the flex space from the industrial segment. But if I look at the leasing you've done in the past three quarters in the flex segment, the lease spreads are still, I guess a little bit challenging. But what's more interesting is that the CapEx you're spending as a percentage of rental value has been increasing over the past three quarters, maybe three quarters because that was at 28% of rental value, and it was last quarter, 32% and now 38%. Does that change your view on the long-term viability of this type of product, and when do you think this starts to make a change for the better?

George Alburger

You are right. It’s an interesting question. I think one is that there is a subtlety here within the flex bucket so. And we've talked about it over the course, actually probably over the last year plus as we talked about some of the sale activity. And we've characterize the sale of suburban office and high finish flex. High finish flex would be effectively a flex building that started as a flex building and turned into a single-story office building. So if that’s fully build out and as it uses office space and it might be -- like a call center, various kinds of activity where people would want to put into that kind of building.

That building will therefore tend to have suburban office, TI kind of cost related to it. And obviously when leasing turns, that's what you're exposed to. Part of the reason why we sold, for example portion of our flex in Minneapolis in this sale we just did and we've sold flex in other markets, is because in fact it has those attributes and therefore is more likes suburban office. And therefore is part of the type of asset, which we would like to decrease the amount of which we owned.

You also have flex that is at the Philadelphia Navy Yard, so it's a biotech company that does lab stuff and there is a couple hundred people in white suits in their wet lab space and they walk around. There is another one that where it’s a window company and they have their offices there and they also store all the material and they go out and do commercial windowing. There is flex space that we have in Houston which is lab space, four people in the petroleum industry. That would be what we would consider industrial space, that’s flex space we would seek staying in our portfolio.

So I think -- I don’t think there is any deep trend though you are very observant in the analysis which happen the last couple of quarters. And I think that represents some trend, I think it happens to be sort of the nature of the leasing over the couple of quarters.

But overtime what we should be seeing is a flex product in the Liberty portfolio that requires less CapEx because less of it will be high-finish and more over it would be traditional industrial flex.

Ki Bin Kim - SunTrust Robinson Humphrey

Okay. Thanks for that. Thanks.

Operator

(Operator Instructions) Your next question comes from the line of Eric Frankel with Green Street Advisors. Your line is open.

Eric Frankel - Green Street Advisors

Thank you. I was wondering if you could comment on the simulation of the Cabot portfolio, I noticed that the occupancy actually dipped a little bit from the time of the announcement?

Bill Hankowsky

Yeah. Rob made several comments about sort of from an operational perspective, so basically 64% of the buildings, about 58% of the square feet exists in Liberty markets and I am forgetting Rob the exact numbers, but about half of those markets now we have taken internal and are being run by Liberty personnel 100%. The other half of that Liberty real estate, excuse me the kind of real estate in Liberty markets we will fully take over in the first quarter. That will then leave about a third of it which is in that’s called new markets, the Dallas, the Atlanta, the Southern California.

In each of those markets we have now placed a Liberty person in-charge. Massie Flippin who runs our Carolina operation is running the Atlanta operation will be in about another quarter or so deploying direct personnel there. We have moved, the guy was running Jacksonville, Mike Heise now actually runs Dallas and he’s actually moved there.

So, again, within about a quarter or so we will have the sort of either taken it in or put Liberty people in place. I think the dip candidly, Eric, is a function of ups and downs when leases expire and when leases are going to happen…

Rob Fenza

There is one tenant in South Florida.

Bill Hankowsky

Yeah. It really represent, we are comfortable with the performance and is doing fine.

Eric Frankel - Green Street Advisors

Okay. Thanks. I was wondering, I saw the, I know it’s the other bucket in the disclosure in the supplemental, I was wondering are those assets you are looking to dispose off over the next year or so?

Bill Hankowsky

The other represents mainly kind of the one building in Memphis, one building in Delaware that look part of the Cabot portfolio and I would say, yes, long-term they are now probably not part of the Liberty family.

Eric Frankel - Green Street Advisors

Okay. Great. And just final question, I noticed in media report that Comcast might be looking to purchase a Commerce Bank stake in the first Comcast Center. I was -- I want to get a sense from you what would make you want to keep your ownership stake in that building considering that you already have a pretty substantial relationship with Comcast.

Bill Hankowsky

Yes. So, yeah, it is the case that Comcast would be acquiring Commerce interest. I think from our perspective, we think this is a terrific asset. We’ve had a great both return and relationship so return in an economic sense and return in a relationship sense has manifested now in yet another building in Center City, Philadelphia with them. So we are very comfortable staying in that asset and keeping a 20% interest and having a long-term relationship with the major corporate customer.

Eric Frankel - Green Street Advisors

Okay. Thanks, guys.

Bill Hankowsky

Thank you.

Operator

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

John Guinee - Stifel

George, you may have given this guidance a few months ago, but what are your projections for 2014 FAD and how does that ramp during the year?

George Alburger

I didn’t -- Basically I did say that there would be a cash shortfall in 2014 and let me give you and I said it would be somewhere in the $15 million to $25 million. Understand the reason for that is again kind of consistent with what’s going on here which is we have $370 million worth of cash on our balance sheet that hasn’t been fully deployed. When that cash is fully deployed and invested in acquisitions and development, we think this shortfall will evaporate.

And if you look at the current year, I am sorry, if you look at 2013 first quarter, we covered the dividend, second quarter we covered the dividend, third quarter you had a fair amount of things going on. We issued a fair amount of stock before. We in fact invested in the Cabot transaction.

And if you take the fourth quarter and just deduct the acquisition costs, we covered the dividend. So, are we covering it by a lot? No. Is there going to be a shortfall in 2014? Modest, but again a function of how long it will take us to redeploy that capital.

Bill Hankowsky

And George you mentioned in your comments that by the fourth quarter, I mean might be…

George Alburger

Yeah.

Bill Hankowsky

… by the fourth that same.

George Alburger

By the fourth quarter those funds will be deployed and we should be in a covered dividend situation.

John Guinee - Stifel

And how are you treating the Cabot TIs and leasing commission? When you have come up $15 million to $25 million shortfall, are you capitalizing the first couple years of Cabot’s TIs and leasing commissions, are you expensing that?

George Alburger

We are considering them to be part of leasing transaction cost consistent with the rest of our portfolio.

John Guinee - Stifel

Okay. So the 15 to 25 does include the Cabot cost?

George Alburger

Yeah. The 15 to 25 includes the Cabot, in terms of leasing. I think in -- if you look at the -- we did set aside some dollars for capital.

John Guinee - Stifel

Yeah.

George Alburger

And if you look at the, I think it’s somewhere in the package what we consider to be the total investment, I think it’s 1.480 billion rather than 1.469 billion, which is what we spent on Cabot, so we set aside about $11 million for CapEx, kind of the initial investments that we make in these properties, that we set aside. But with respect to leasing transaction cost and retenanting of the space, that is considered in our FAD if you will.

Bill Hankowsky

Yeah.

John Guinee - Stifel

Thank you very much.

George Alburger

Thanks.

Operator

Your next question comes from the line of Brendan Maiorana with Wells Fargo Securities. Please go ahead.

Brendan Maiorana - Wells Fargo Securities

Yeah. Thanks. George, you are very conservative with your TI policy on acquisition. So they had a question for you on same-store. Your year-over-year, your both property expenses and real estate taxes were up about $2 million 2013 versus 2012, but the recoveries were up about $5 million so that was a nice tailwind for you?

As you look out in ’14, do you think that the expenses, net of recoveries is likely to be a tailwind again, do you think that could be a headwind, some of that gain that you got in 2013 reverses or do you think it’s just probably no impact to the NOI growth for ’14?

George Alburger

I would bake in no impact to that. At times some of those recovery items are kind of a little bit oddities that can kind of go through a particular quarter that may or may not be an element that you can charge the tenant. So I would say generally looking to get any tailwinds from recovering kind of excess operating expenses.

Brendan Maiorana - Wells Fargo Securities

Okay. All right. Thank you.

Operator

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

Bill Hankowsky

Thank you everyone. Thanks for listening in. Appreciate it. And as we said ’13 was a great year and I think we are up to pretty strong start in ’14, so talk to you 90 days from now. Thanks.

Operator

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

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