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Executives

Jeanne Leonard - IR

Bill Hankowsky - CEO

George Alburger - CFO

Mike Hagan - CIO

Analysts

Jordan Sander - KeyBanc Capital

Sloan Bohlen - Goldman Sachs

Michael Bilerman - Citi

John Guinee - Stifel

Sheila McGrath - Keefe, Bruyette & Woods

Alexander Goldfarb - Sandler O’Neill

Brendan Maiorana - Wells Fargo Securities

Mitch Germain - JMP Securities

Ross Nussbaum - UBS Securities

Ki Bin Kim - Macquarie

John Stewart - Green Street

Liberty Property Trust (LRY) Q3 2010 Earnings Call October 26, 2010 10:30 AM ET

Operator

Good afternoon. My name is [Wes] and I will be your conference operator today. At this time, I would like to welcome everyone to the Liberty Property Trust Quarterly Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker’s remarks, there will be a question-and-answer session. (Operator Instructions). I will now turn the conference over to Ms. Jeanne Leonard. Please go ahead.

Jeanne Leonard

Thank you, Wes. Thank you everyone for tuning in. Today you will hear prepared remarks from Chief Executive Officer, Bill Hankowsky; Chief Financial Officer, George Alburger; and Chief Investment Officer, Mike Hagan.

During the call, management will be referring to our quarterly supplemental information package. You can access this package, as well as the corresponding press release on the investor section of Liberty’s website at www.libertyproperty.com. In this package and in the press release, you will also find a reconciliation of non-GAAP financial measures we reference today to GAAP measures.

I will also remind you that some of the statements made during this call will include forward-looking statements within the meaning of the Federal Securities Laws. Although Liberty believes that the expectations reflected in such forward-looking statements are based on reasonable assumptions, we can give no assurance that these expectations will be achieved.

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

Bill, would you like to begin?

Bill Hankowsky

Thank you, Jeanne and good afternoon, everyone.

On Sunday evening, Liberty lost one of the architects of our vision as a company and a dear friend, Larry Gildea. Larry was the long time Head of our North Carolina operation and more recently served as a Regional Director for Mid-Atlantic and Midwest regions. I think some of you in the audience have probably met Larry on a property tour or in a meeting. So you know what a great person he was. Larry believed that everyday you get up and try to make the world a better place, and if you do you will prosper. He chose real estate as his path to making life better in business and he worked tirelessly to see that his ideals were replicated throughout our organization. We will miss him.

Let me now turn to the quarter. I have two major topics I want to comment on during my opening remarks. First, our third quarter performance and, second, our guidance for 2011. The third quarter was another solid quarter evidencing our consistent performance during this extended economic down turn. We leased 6.277 million sq ft, the largest quarter leasing levels in our history. This high production was assisted by a 73% renewal rate also higher than our typical quarterly average.

Occupancy increased 30 basis points to 89% which was driven by 110 basis points increase in industry occupancy offset by occupancy declines in our office and flex portfolios. Transaction costs declined and rental declined at 9% and minus 9% were consistent with the first half of the year.

On the capital front, we renewed our line and had terrific execution on a $350 million senior debt issuance, both of which speak to our balance sheet strength. We acquired 941,000 sq ft of industrial product in Orlando and Houston consistent with our long term strategic goals. In sum, another quarter of consistent performance.

Let me turn to our guidance for year end 2010 and full year 2011. The fundamental building blocks for our guidance are our views on the economy and real estate markets over the next five quarters. Our view of the economy is totally consistent with the view we held over the last year. This economic recovery will be very long and slow. We assume that unemployment remains above 9% for at least 4 of the next 5 quarters and we also assume that GDP growth will be between abut 1.5% and 2.5%.

This economic view then frames our view of real estate fundamentals. This quarter, the national office and industrial vacancy rates each declined 10 basis points, the first decreases in 3 years. Each product also had positive net absorption nationally. That is the good news. The problem is the vacancy for office and industrial remain at 16.6% and 14% respectively. At 10 basis points per quarter, it is going to take a long time to bring straight to these markets.

We think we have hit inflection points and that the markets will improve over the course of the year more quickly and pronounced in industrial and slowly and more muted in the office, but in neither case will be improvement be sufficient to provide for positive market revenue growth.

As we look more closely over the next five quarters we anticipate occupancy to be flat in the fourth quarter, dip the first quarter of 2011 and move up gradually during the remainder of the year. This will be driven by industrial product with office and flex trailing.

Given the higher average ranks in the office and flex versus industrial even with overall occupancy gains our net position for 2011 will be similar to this year. However, 2011 will be a year of improvement, market vacancies will fall, rents will firm and then some industrial markets perhaps grow. Our portfolio we will have meaningful occupancy growth by year end.

On the investment front, we will remain very diligent picking opportunities to acquire with a focus on value and opportunities.

With that, let me turn over to George who is going to walk you through the quarter and our guidance for rest of the year and next year, and Mike will talk about the investment climate. Rob Fenza is in North Carolina and will not be giving his usual operation summary, but George and Mike and I can answer any questions about markets and operations.

With that, let me turn it over to George.

George Alburger

Thank you, Bill. First I would like to review our performance for the third quarter and then I would like to provide earnings guidance for 2011.

FFO for the third quarter was $0.69 per share. The operating results for the quarter include $2 million in lease termination fees. This is inline with our guidance that least termination fees would be in the $0.04 to $0.06 per share range for the year.

During the quarter the remaining properties that were in our development pipeline were brought into service, one was wholly-owned office building which is a 100% lease. The investment in this building is $10 million and the yield on this investment is 12.5%. The second property which was brought into service was a 176,000 sq ft Washington DC office building which is owned by a joint venture and which the company has 25% interest. This property is 39% leased and in occupancy at September 30. There are leases for an additional 33% of the space which haven’t yet commenced bringing the total site occupancy to 72%. The yield on the $134 million investment in this property is 4.7%.

During the quarter, we purchased three properties for $38 million and sold one property and 5 acres of land for $3.9 million. Mike will provide color on this activity.

For the core portfolio, during the quarter we executed 5.8 million sq ft of renewal and replacement leases. For these leases rents decreased by 9%. This decrease is slightly less than our guidance that rents will decrease by 10% to 15% for the year. Tenant improvements and transaction cost for these leases total $14.5 million. For the first two quarters of the year leasing cost averaged $22 million. As you may recall, we had a few leases in the first and second quarters that had unusually high tenant improvement costs; one lease alone in the second quarter had $10 million in cost.

With the same store of group of properties operating income decrease by 3.8% on a straight line basis and decreased by 2.1% on a cash basis for third quarter 2010 compared to third quarter 2009. These decreases are primarily due to decreases in office and flex occupancy.

There was a lot of financing activity in this quarter. We replaced our $600 million credit facility which was due to mature in January 2011 with a new $500 million credit facility. The new facility is a three year facility. At our current credit ratings borrowings under the new facility will be at 230 basis points over LIBOR whereas for the old facility they were 65 basis points over labor.

On August 2, we repaid $170 million of 8.5% senior notes which became due, and in late September we issued $350 million of 10-year on secured notes. These notes were priced at 4.75%.

At this point, let me move to earnings guidance, the first I want to do is cover what we see happening in the fourth quarter the balance of 2010. The financing activity for the third quarter, which I just described, will reduce fourth quarter earnings as compared to third quarter by approximately $2 million. We also assume that termination fees in the fourth quarter will be $0.01 per share; they were $0.02 per share in the third quarter, primarily because of these two items we believe fourth quarter earnings will be in the $0.65 to $0.67 per share range. Earnings at the midpoint of this range $0.66 per share will result in FFO per share for 2010 of $2 66 cents. I would like to use this midpoint of $2 66 for 2010 as a starting point for developing guidance for 2011.

Let me start with our guidance for acquisitions and dispositions for 2010 and 2011. We did not acquire any properties in the first and second quarters of 2010. We invested $38 million in acquisitions in the third quarter and expect acquisitions in the fourth quarter to be approximately $10 million. Our original guidance for 2010 was $0 to $100 million. Our activity for the year will be close to the midpoint which is $50 million.

We believe the acquisition environment in 2011 will be similar to 2010. Consequently, we believe acquisitions in 2011 will be in the $25 million to $75 million range and cap rate will be in the 8 to 10% range.

With respect to dispositions, for 2010 through the end of the third quarter, we sold $20 million in assets. We think the total for the year would be approximately $30million. We anticipate that sales activity for 2010 would be under $75million to $125million range. We won’t meet the low end of our 2010 guidance. We will lower our 2011 guidance and suggest a disposition range of $50 million to $100 million with cap rates in the 9% to 11% range. The combination of this acquisition disposition activity will increase or decrease FFO by $0.02 per share depending on the level and the nature of the activity.

We believe G&A expense for 2011 will be in the $52 million to $53 million range. For 2011 we believe it will be in the $52 million to $53 million range, for 2011 it will be in $54 million to $56 million range. As the midpoint this would be a $2.5 million increase. Approximately $1million of the increase is due to the expensing of costs relating to acquisitions. The midpoint of acquisition guidance is $50 million, 2% of course from $50 million of acquisitions is $1 million.

There is lot of financing activities in 2010, prepaying $127 million in mortgage loans satisfying $170 million maturing senior notes, issuing a $350million senior note and finally putting in place a new credit facility. This capital activity will increase FFO by $0.07 to $0.09 per share. We believe least termination phase for 2010 would be $0.05 per share. For 2011 we will step with our historical range $0.04 to $0.06 per share, so FFO could increase or decrease by $0.01 per share, depending on whether we’re at the high end or low end of this range.

For 2010 we expect to realize $0.03 per share from UK land sales. For 2011 we’re projecting net profits from UK land sales would be more consistent with historical levels of $0.01 per share.

The final item to discuss is the most significant. What do we expect for the same store group of properties which represent over 90% of our revenue? For the first nine months of 2010, rents for renewal and replacement leashes decreased by 8.8%. Our guidance for 2010 was the rents would decrease by 10% to 15%. So, actual results would better than the low end of our guidance. We’re projecting that rents for 2011, would decrease by 7% to 12%.

We expect that average occupancy for 2011 will increase by 0% to 2%, compared to 2010. We believe there will be an increase in industrial occupancy offset by decreases in office and flex occupancy. We projected industrial occupancy increases by 1% to 3%, for office and flex occupancy will be flat or down by 1% to 2%. Accommodation of the 7% to 12% decrease in rents and changes in occupancy will resulted in a range of $0.02 per share increase in FFO to $0.04 per share decrease in FFO.

All the above items result in FFO estimate of $2 60 to $2 78 per share. We’ll round of this estimate and provide FFO earnings guidance for 2011 of $2 60 to $2 80 per share.

With that, I would turn it over to Mike.

Mike Hagan

Thanks George. I would briefly review three topics with you. Investment market conditions as we have see them, our activity for the quarter, and our expectations for the next 15 months.

Let me start with observation on the state of the investment market. Activity is up from 2009. For the first nine months of the year, transaction activity nationwide has doubled compared with same period last year, according to Real Capital Analytics. We have under written in fact approximately 8 million square feet of industrial space that is traded in our markets. These buildings averaged 93% occupancy and traded in an average cap rate of 7.25%. It is clear that there is strong demand for quality industrial product in top tier markets.

On the office side, we attract significantly fewer transactions but activity seems to be geographically focused on Class A properties with stabilized rent values. As for value add opportunities, they are out there both on the office and industrial side, but there still seems to be a gap between the bid and the ask.

Next let me discuss our activity for the quarter. On acquisition fund, we acquired 941,000 square feet of industrial building in two transactions. In the first transaction we acquired two vacant buildings in Houston, in the second transaction we acquired 100% lease building in Orlando. In the Houston acquisition leasing activity has been strong and to-date we have leased 46,440 sq ft in the larger building bringing that building to 30% lease. In the Orlando transaction, we have acquired a fully leased building for approximate 3,250 per square foot. We expect stabilized returns consistent with our guidance of 8% to 10%. We believe these transactions and the type of value add transactions Liberty is known for and we will continue to look for these types of acquisitions.

On the disposition side, we sold an empty warehouse for user for $3.19 million. This brings our year-to-date sales including land sales to approximately $20 million in eight transactions; six of these transactions were users.

Last let me close with our expectations for the coming year. As George mentioned, our guidance for acquisitions is $25 million $75 million and disposition is $50 million to $100 million. Given the current market condition these ranges represents placeholders as opposed to actual targets for the company. We’ll continue to be opportunistic in both our acquisition and disposition activity and could exceed or not meet this range.

With that, I will turn it back to Bill.

Bill Hankowsky

Thanks Mike and thanks George. With that, Wes, we will open up the questions.

Question-and-Answer Session

Operator

(Operator Instructions)

Our first question comes from Jordan Sander of KeyBanc Capital.

Jordan Sander - KeyBanc Capital

Just wanted to drill down into the leasing a little bit. For the quarter obviously, as you mentioned, best quarter in Liberty’s history. Is that a trend that we should expect to continue or will tail off? I know you had a big expiration in the quarter but obviously also good retention rate. Can you just dwell into it, and give us little bit more detail about around what you are seeing?

Bill Hankowsky

Sure, we will not be doing 6 million sq ft leasing a quarter going forward. Actually, if you look at 2011 we have left real estate expiring than we normally do in a typical year, I think its around 8% 6 million something or is what expiring in 2011 versus normally it will be more like 12% of the portfolio. So, we should less of that to do. We obviously have fair amount of vacancy that we would like to get filled, but in the first half of the year we did about 8 million sq ft, about 4 million a quarter, this is a six. Our run rate is probably is more like 3.5, 4 million a quarter, but with less expirations next year might even be of tad below that.

The renewal rate also, to be candid, we put to bed some of the 11 already, so to use a phrase, the low hanging fruit has been taken care off. So next year I would anticipate our renewal rate will be more where we are historically, probably in the low to mid 50%, 50%, 55%. I’m hopeful it’s better than that, but when we think that the numbers that George walked you through are assuming that kind of low rates assuming that kind of leasing activity. It’s based on us having already gone through every space that vacant and expiring over the next five months, we have done that for every city space by space. So this is a fairly whetted analysis based on where the world is today, will get better, it will be better. As we said in our remarks where we think the world unfortunately it will take a while to get better.

Jordan Sander - KeyBanc Capital

There’s some significant known move outs that are driving the retention rate expectations?

Bill Hankowsky

Part of what’s happening is there is a phenomenon that did recovering now a couple of quarters that I would characterize as follows. We all talked about the way the world looked about a year ago. I occasionally used the phrase the fifth desk phenomenon, which was that you’d go into spaces and find every fifth desk empty as a function of job freezes, layoffs whatever. There was a fair amount of underutilized real estate in the market what’s happening may know is the lease expires. Nobody had the incentive at that company to rationalize the space and take the 10% or 20% that was underutilized and suddenly get it all on one floor, you create a sublet opportunity, one of the interesting things in this cycle has actually have been relatively small amount of sublets in the market.

What happens now given there hasn’t been job growth, so that fifth desk doesn’t have anybody in it yet. Lease is expiring. I want to go from 40,000 square feet to 30,000 square feet and want landlord to give me some TI to make that happen because I really don’t want to pay for it anymore.

The part of that decrease is literally downsizing and shrinkage and occasionally it’s a dark space that people to pay the rent, did make generally have year or two left in terms did make sense so what at it as it just going to expire to backward. We built in six months, four months to get a least. That is what happened.

Jordan Sander - KeyBanc Capital

The fifty, so you’re saying 50 to 55, that’s not directly a function of some known significant move out that’s your feeling about what’s about to happen, given your (inaudible).

Bill Hankowsky

It is literally going through every expiration and say, and okay, this one is going to downsize because that’s what was we think. This one is dark, therefore it can’t be renewed. You are not there. Just what we are renewing and this one is going back to the mother ship that are going to consolidate in their own space on campus, everyone has a little bit of a story, but its not a big phenomenon.

Jordan Sander - KeyBanc Capital

George just clarification, I’m not sure if you mentioned the expense, seems to expense growth, but I might have missed that. You were saying that seems to NOI openly would contribute to a negative 4 of positive 2% back next year. If you could confirm for me?

George Alburger

These numbers do bake in there expense growth, but it also bakes in there the recovery of expenses and our recoveries are in the 95% range, what drifts to the bottom line, it does impacted bottom line, but that’s been considered.

Operator

Your next question comes from Sloan Bohlen of Goldman Sachs.

Sloan Bohlen - Goldman Sachs

To Mike’s comments about the placeholders for acquisitions or dispositions, do you have a bias towards it looks like you’d want to sell maybe more than you’d buy, but I wonder whether you would frame that question around whether you are seeing a gap in the pricing between least assets versus those that have some lease potential and whether that would plan your strategy to buy or sell one or the other.

Bill Hankowsky

We really don’t have a bias about what we want to sell more and buy more in one respect. Our disposition appetite is driven by our strategy, so we have been fairly clear to what we would like to do, is decrease our investment in suburban office product and it was an opportunity to do that. We would take that opportunity and do it. That is not been the most active market out there, we had modest, last year might what 60% what we did with suburban office are 70%. It’s a focus what we do, you will see it as you see the dispositions, that’s driven by strategy.

On the acquisition side we would love the opportunity to grow the portfolio. We have offices in 20 markets and it’s a great platform to build off of. We are very interested, but as Mike said, we made the point about the amount of industrial real estate we booked that is one of the one of the key product that we are interested in and there is absolutely a gap between lease product and under-lease product.

We fundamentally what’s out there right now is, if you got an asset that is well leased at 90% plus with credit, with term in a historically liquid market in terms of lots of investment may not be liquid today, but has been historically. You are getting tones of interest, lots of offers, and we have seen cap rates move from beginning of the year until today down as people gone after that stabilized product. You go to the under-lease product by the way the least region you could do that, you can put down that product and get a light mortgage for a well leased asset today might in the fours, high fours, low five.

That creates the financial math that allows that capital to invest. You go to an under-lease building, empty building, (inaudible) and that’s point Mike was making about disconnect between buyers and sellers and the pricing of what that products were. We would love to buy more of it we just haven’t found enough people, who agree with us about what it works.

Sloan Bohlen - Goldman Sachs

It help us frame what return are you guys are looking for say, for instances you are using the assets or are you buying them with some lease potential. What’s the IRR and things like that as an acquisition opportunity versus something that’s already fully leased?

George Alburger

We didn’t really calculate the IRR on that. We are looking at longer-term hold on and guess rate is that what the cap rate would be or comfortable that will hit the range of guidance, where we gave you on a cash-on-cash return on those buildings once that leased. We could at that point in time dependent where our building are trading, we could get a positive lift on a sale on those assets if we chose to sell them.

Sloan Bohlen - Goldman Sachs

Just one last question, are there any markets where wouldn’t take on that lease up type of risk?

Bill Hankowsky

I want to go back to the strategy again, sir because I want to make sure. We are not interested in buying more suburban office in Richmond, if it was bake in and it was a great price, okay because it is inconsistent with strategy. In almost everyone of our markets will be interested in multi-tenant industrial. There are some markets, where we would entertain metro office so it’s going to started the strategy question and then a market question, but if the pricing made sense even if we thought we have to hold it for a while given the slowness of releasing markets we would make that investment because we’d think over time it would be valuable to our shareholders.

Operator

Your next question comes from Michael Bilerman of Citi.

Michael Bilerman - Citi

This is [Josh Ady] with Michael. What are you seeing on the development side, and is there anything factored into guidance for built-to-suit developments next year?

Mike Hagan

Yes, we are still talking to bunch of people about built-to-suits. We put it on the margin (inaudible) we didn’t talk about this now for three or four quarters and yet haven’t heard fish on onboard. These decisions are just taking seemingly in an ordinate amount of time. It is conceivable and we do still think we are going to land some maybe even by the end of this year that would be undergoing next year, by the time we sign it, documented, design it, and started it is probably that going to have whole tenant have no income left in calendar ‘11 and we have a number guidance of what is going to remain in terms of cash.

George Alburger

Yes, we do in terms of capital plan we figure that it would probably be investing anywhere from $50 to $100 million in development, but none of it that we project will be brought in to service in 2011.

Michael Bilerman - Citi

Some of the deals that you are working on what will prevent them from going forward or cause them to go forward to the rent to the economics make sense for the user?

Bill Hankowsky

It almost where it was simple as just striking a deal on economics, in almost every instance what is driving it is the most fundamental decision by the customer from a business perspective about they’re willing to make the commitment. Not about the price it’s about the commitment to take on new space or new facility or whatever fits in to your business. So, there are folks here we’ve been having conversations with that go back two years, six months. It varies is the length, but it’s them finally pulling the trigger.

Michael Bilerman - Citi

For some of those suburban office product that you are looking to sell, has there been a change in the level of activity on those assets and what type of buyers are interested in those?

Mike Hagan

I’d tell you that compared to where we are now versus the beginning of year, you do have more people looking at it and are willing to look at it, and the lion share of that is more private equity-type transactions, but I’d also say it’s still a struggle to have the (inaudible).

Michael Bilerman - Citi

What is causing that gap? Is it ability to get secured debt is, what you are selling is it well lease been can buyers get secured debt on it?

Bill Hankowsky

What we’re trying to sell clearly can be leveraged. There’s no question about that. It’s a question of us trying to find a right deal to be quite honest with you. Everybody is trying to search out what the market is right now, so if you get a fair price for your real estate, and that’s where it is right now.

George Alburger

Just to be clear, we obviously have no need to sell assets from a capital perspective, so we obviously merge with our capital plan, but we’re not at the stress seller, we don’t have to do it for some reason, there is feel like every quarter we find another way to strengthen this balance sheet. It’s pretty robust, so if we don’t like the pricing, we’re just not going to take the bid.

Operator

Your next question comes from John Guinee of Stifel.

John Guinee - Stifel

Jeanne First and foremost you were a little slow on your prepared comments this morning. You need to speed that up if you could. Second, George, you did a great job of providing excellent guidance for ‘10 and ‘11 on FFO, and if you can, you can give some insight as to PIs and leasing commissions as I recall 2008 was about $69 million a year, 2009 was about $60 million a year, so far you’ve spent about 58. What do you expect to spend in the fourth quarter of this year and then what do you expect to spend next year for TI leasing commission as well as base building capital?

Bill Hankowsky

John, I’m going to take a shot at that one.

George Alburger

I can do it too, but go ahead Bill.

Bill Hankowsky

As George said in his comments, the $20 million in the first two quarters per quarter generally had one big one in there. This quarter are 14, we don’t have one big one in there, so when we look at next year, we will probably still a run rate at that 20-ish, to make as an assumption that we’re going to find some deals, replacement deals and take some amount of space and require some fair amount of TI, so you’re something around 20 run rate per quarter it’s not a bad number to be thinking about.

If we don’t land a big deal, it might be another low-teen quarter like this one is, but our hope is actually we lease the space, and spend the TIs and get the long-term income that investment generates.

John Guinee - Stifel

That do you think we ought to look at $80 million for TIs and lease and commissions for the full year 2011 and then another $10 million for base building.

Bill Hankowsky

$80 might be a little risk, but maybe it’s mid-70s, yes, mid-70s and probably (inaudible) the full year term CapEx.

George Alburger

Yes, you are talking CapEx, right, roof, parking lots, lobbies things like that, right?

Bill Hankowsky

Yes, that’s 10 to 15.

John Guinee - Stifel

10 to 15 for the base building for the CapEx and then another.

George Alburger

75 plus or minus a little bit for the TI leasing commissions.

John Guinee - Stifel

So, it’s safe to say that 2011 won’t cover the dividend?

George Alburger

Well, we cover this quarter it will depend.

Bill Hankowsky

We’ll stick with where we were, which is we don’t see it happening in the first half, but we’d suggest that we’d be there by the end of the year.

George Alburger

It’s pretty obvious what happened this quarter, John, which is that the expense side went down therefore recover, so it is conceivable to take another quarter, depending on how the leasing, where you cover, because the expense side is down, but when if we can get to where we think, we’re going to end the year from at least portfolio perspective and the income run rate should get us to a point where we’ll cover on the ongoing basis.

Operator

Your next question comes from Sheila McGrath of Keefe, Bruyette & Woods.

Sheila McGrath - Keefe, Bruyette & Woods

Your initial comments indicated that the suburban office and flex products is the weakest versus industrial. I was wondering if you could give us a little more detail or visibility on where you see each of the segments going and what stage of the recover are there therein and also are your dispositions or acquisitions focused on by segment industrial or office?

George Alburger

First on the portfolio side, we’ve been saying for couple of quarters here. The industrial market has more prospects in it, steel is more robust. There are some of our markets Houston, Lehigh Valley, I would call pretty active. You’ve seen a pick up in Chicago; you’ve seen a pick up in the Carolina’s, and on the industrial side, so those markets seem to be doing better.

As a result in our analysis going forward, we have our industrial portfolio having its occupancy increased 1% to 3% next year for industrial. Whereas on the office side, except there are less prospects in the market. Go back to my comment to one or two questions ago. The underutilization of space that’s coming back into the market and therefore people downsizing, that is an office and flex phenomenon that is not really an industrial phenomena, and that will deep the downside pretty quickly that’s all happened earlier in this cycle. While these leases are expiring without job growth, the office side you see the rightsizing of peoples’ office space.

As a result, even though we’ll probably renew these people, we’re going to renew them in less space, so with that occupancy number is more like flat?

Sheila McGrath - Keefe, Bruyette & Woods

To office?

George Alburger

I said office and flex would decrease by 1% to 2%, and the office is probably more like the 1% piece and the flex is a little bit higher, so that’s on kind of on the portfolio side.

On the disposition side, as I indicated earlier, we have a strategic focus on downsizing the amount of invested capital that everybody has in suburban office, so we have been selling suburban office like the last two years and kind of as the opportunity has a reason, so we do have a bias that that would be generally what we would be more interested in selling.

And candidly, we have a bias that we’d be more interested in acquiring industrial and that again is delicate system with our buy and sell patterns over the last two years.

Sheila McGrath - Keefe, Bruyette & Woods

You did mention that downtick in occupancy in first quarter. I’m sorry if I missed, but could you tell us what’s driving the downtick in the first quarter ‘11.

Mike Hagan

It is nothing more than the way leases are expiring, signed leases haven’t yet commenced and when you put all that together. I can think of a couple of large leases don’t commence (inaudible) second quarter. Now, it’s just the way the portfolio is one of our form given as I said sort of expiring leases, side leases, commence date etcetera. It’s not fundamental, economic phenomenon it’s just the nature of how this portfolio going to operate over the next three quarters.

Sheila McGrath - Keefe, Bruyette & Woods

Last question on the acquisition side. Are you looking currently at any portfolio opportunities or the all individual assets?

George Alburger

We never quite discuss the playbook until the players are executed, but we are open to single-asset acquisitions and we are open to portfolio of acquisitions, so we look at both.

Operator

Your next question comes from Alexander Goldfarb of Sandler O’Neill

Alexander Goldfarb - Sandler O’Neill

Just on the repositioning. The portfolio, something that you guys have been speaking about sometime. Just given the difference between the aggressive bid for industrial versus softer bid for suburban. Is there every a point that would consider accelerating and taking the dilution or its your view that let us just wait until suburban cap rates tighten and then when we sell when we feel pricing is more appropriate?

Bill Hankowsky

I think a simple answer is we would accelerate if we would comfortable it is what we would interpret as a fair price. So, we are not adverse to taking a dilution. If somebody came in and said, we will buy a million sq ft of the suburban office and sweeping all the markets you identified we’ll just take it and sell it, and we will take the short term result because we think it would accelerate our strategy. If it just if the pricing does interest we are not going to it likely. Mike?

Mike Hagan

The only thing I would add it out is I do not think right now you are going to get a premium for size.

Alexander Goldfarb - Sandler O’Neill

More specifically on the industrial, last cycle there was a lot of money that had to be put to work and obviously those investments did not turn out to too well. Just given the imbalance and the strong demand to once again own real estate it sounds like you never seen the industrial side, are you seeing you know money sort of itching to get put to work and therefore are you seeing signs of people doing the same stuff that they did last time or are people trying to stay disciplined at least thus far?

Bill Hankowsky

That is a good question. I can sort of think about industrial cap rates in one market having gone from like a 7.2 or something like in the first quarter to a 6 something in the second quarter and one its like a high 5 in the third quarter. We do sometimes sit here and scratch our heads and say wow. By the way those cap rates tend to be on in place rates that’s (inaudible). This is done on market rate. Now run an Argus run and say to yourself, okay, even with this wonderful debt that I can get from a life company in a high fours, those lease is term and even if I assume that market rents begin to grow and I look and an actual point what’s my exit cap rate, better than the cap rate today, assume the same cap rate? It is hard to see where there is a lot of vague that is going to be in the (inaudible). So, sometimes we do think there is a little bit of impatience in some of these transactions. I would say it is already in the place. I think there is a fair amount of discipline in the market, but there is an occasional transaction where you say to yourself what it feels there’s a little itch.

Alexander Goldfarb - Sandler O’Neill

So it sounds like even though you guys have a sort of funding advantage by able to tap the unsecured or the public equity, the private guys whether it LTV or being more aggressive on the pro formas can still you know it sounds like they can once again outbid the public the public reads fair?

George Alburger

Only on well least in the 95% lease with term and credit only in certain markets, you move off of that and start going into the stuff we bought this quarter empty, least expiring in two years, they are not there. It is market change in the nature of who is at the table taking a look at it, it is a market change.

Bill Hankowsky

I think there is a little more discipline right now on the public side, to be honest. May be you comment about the private side is to be more aggressive, no I think the flip side is that just the public side just may be a little more disciplined, I am not sure which one is answer to this.

Operator

Your next question comes from Brendan Maiorana of Wells Fargo.

Brendan Maiorana - Wells Fargo Securities

Just to follow up, you guys just raise a fair bit of debt at 4.5% rate but your cap rate assumptions on your acquisitions have remained 8-10%. Have you guys looked at your cost and capital both from debt equity prospective and thought about lowering the return requirements given where you can raise capital today?

Bill Hankowsky

We obviously look at out cost and capital we think about what we are doing on a pretty consistent basis, but from our perspective in terms of what we think we should do to bring value to our shareholders. We like the idea of buying an empty building taking the team in the market all of our relationships then in 4 months, 18 months it takes that to get the thing leased and bring it back an 8.5% return. That is what we should be doing. We’re only careful that we are not just chasing the intermittent capital movement, we’re thinking about this from a long time value proposition perspective. I understand the question but that’s where we are headed. Our head is where our head is.

Brendan Maiorana - Wells Fargo Securities

Just on the flip side so I understand that the disposition guidance or the expectations disposition 9% to 11% and I understand you guys want to get a fair price on the disposition but does that suggest that you are having trouble in meeting the market at 9% to 11% exit cap rate or is that just what’s included in the guidance and maybe what your view of fair value is a number that’s a little bit different than the cap rates you’re providing us?

Bill Hankowsky

I think that there is one other aspect which is what are we selling? What we’re selling is suburban office probably it’s our older product. It’s in markets we are not excited about. So, it represents what we think is fair pricing for that product with all those characteristics in the markets where they are in. We’re not selling great kind of corporate center which would have a whole different kind of cap rate on it if we were selling our best suburban office. It’s non-core real estate to the long term business plan the company

Brendan Maiorana - Wells Fargo Securities

Lastly, George, you stated a debt rate of 4.75 and you got the maturity that coming at eleven so you got to take care of that but then you have the maturity in 2012. Would you think about given favorable financing rates maybe doing another unsecured issuance maybe seven year you can fill out that 2018 maturity schedule and maybe and early tendering for the 2012 maturity you have got coming up?

George Alburger

The 2012 maturity is not until August. So, it’s later in 2012 and I know a lot of people have been out there tendering and maybe that makes sense for some. It is such an extraordinary environment to and such attractive rates to sell that at then its very, very expensive to tender for that debt release. So, we have not on that and baked into these numbers right now there is early retirement for the 2012 maturity

Operator

Your next question comes from Mitch Germain of JMP Securities.

Mitch Germain - JMP Securities

Bill, just on your comments regarding dispositions, are you see increased capital certified investments in the suburbs?

Bill Hankowsky

Mitch, the answer for that is yes. I can’t tell there’s a lot of it, but as I said earlier compared to where we were nine months ago now we look at an asset you have a little bit of a market there. It may not be a great market but there’s a little bit of market there.

Mitch Germain - JMP Securities

Who is bidding for assets out there?

Bill Hankowsky

For the most part they are going to be on the private equity side and it will be folks looking to lever it up and get as much of return of it as they can.

Mike Hagan

Some local players.

Operator

Your next question comes from Rob Salisbury of UBS.

Ross Nussbaum - UBS Securities

I am confused by a comment that was made early on in the call. I thought I head that you said your 2011 acquisition volumes you thought were going to be similar to 2010. Did I catch that one correctly?

George Alburger

Yes.

Ross Nussbaum - UBS Securities

My curiosity comes from the fact that we’ve got significantly more transactions going on in the marketplace today call it double of the rate today that we had earlier on 2010. Your cost to capital on the debt side is now 5% or below your public market pricing; your activity is 5.5% AFFO yield. Why not take the opportunity to step up and get a little more aggressive on the investment fact you’re particularly given how strong your balance sheet and where your cost of capital is?

Bill Hankowsky

Mike used the phraseology of these numbers are somewhat placeholders. So, we look at 8 million square feet of real estate this year and ended by in a million. We would have been happy to borrow 8 million. We couldn’t get ourselves to a place where the pricing made sense to us. So, we are what we try to tell us we have put a guidance model out there, we want to make sure you totally understand the assumptions behind it, that we’ve laid out a capital plan that hangs altogether and that leads to the guidance we gave you today.

Somebody asked a question a few minutes ago about when we sell much more than not even that was dilutive, and the answer is yes, if it made sense. Would we buy more than what we projected? Absolutely, if we saw an opportunity and we are working pretty hard. There’s a lot of stuff that we are looking at and taking hard looks at and talking to people about so we could well break to these numbers, but we don’t want to project that in terms of growing at a guidance number to you. If it happens it happens and we’ll do it, and we used that balance sheet to make those moves.

Ross Nussbaum - UBS Securities

With respect to the 9 to 11 caps on dispositions that you referred to, what percentage of your portfolio by asset value or NOI would you say falls into that non-core older than I am bucket?

Bill Hankowsky

If I think about the markets what we’re trying to sell stuff, Mike, it’s a $200 million may be $300 million or $400 million.

Mike Hagan

That may be on the high side.

Bill Hankowsky

That might be high; $200 million to $300 million is probably in that bucket.

Mike Hagan

Yeah, that would be ready.

Operator

Your next question comes from Ki Bin Kim of Macquarie

Ki Bin Kim - Macquarie

Is there 2011 in your guidance debt mature in 2010, are you assuming that if refinance that 7.23 (inaudible) 4.75?

Bill Hankowsky

No, we’re going to pay that all. The way the guidance works, we think that we’ve already raised the capital to kind of meet that maturity and we’ll take that off the line.

Ki Bin Kim - Macquarie

I mean unsecured note of 200, I guess, I mean toward 255 so, you paying that off is not included in guidance?

Bill Hankowsky

Yeah, there is a $246 million senior note that matures in, I think it’s March and we’re going to pay that off with draw downs on our credit facility. There is nothing outstanding on our $500 million credit facility, and as you see from the September balance sheet we have a fair amount of cash on that balance sheet.

George Alburger

Cash dispositions in line paid off.

Ki Bin Kim - Macquarie

Turning to your new leases, it looks like for the new leases the percent of leases that incorporated a contractual ramp up of decrease of your to a loss also in the past few quarters. Could you give a little bit more detail on that?

Bill Hankowsky

On the new lease analysis?

George Alburger

It was driven by the industrial.

Bill Hankowsky

If you look at the second quarter, the industrial had a 22% growth in rent. I mean basically I think we’ve referred a little bit to at least we did in the second quarter of what we did last quarter that had $2 million in TI cost associated with that and that lease is in that basket, and that’s the one that got the big increase.

Ki Bin Kim - Macquarie

Asking if, if we get page 10 your percent of new leases with total increases decreased to 83%.

Bill Hankowsky

I’m answering all questions.

George Alburger

I don’t think it means anything other than, as you will see, I was mainly driven by the industrial and it’s we worked really hard to get most of our leases with bumps in them and you’re going to see else in that 90 range with 88, 93, 97, 83 it will move backup again. No conclusion to draw on other than the…

Ki Bin Kim - Macquarie

What are the ramp-ups again typically?

George Alburger

They are usually 2 to 3%.

Ki Bin Kim - Macquarie

Your debt EBITDA has improved in the past couple of quarters, you are at 4.7 times now. Where would you lead that (inaudible) before you think about match funding new acquisitions with equity?

Bill Hankowsky

We would like to keep it under six.

Ki Bin Kim - Macquarie

Though, say to say below 6%. You feel comfortable with that.

Bill Hankowsky

Yes.

Operator

Your next question comes from John Stewart of Green Street.

John Stewart - Green Street

Bill, you touched on your desire to reduce exposures in suburban office and that you would be interested in multi-tenant industrial but you haven’t really touched on flex. How should we think about the end game? Is it your intent to be more even in distributor between the three property types or what’s the ultimate target?

Bill Hankowsky

Yep, the thought process is we have invested capital metric. You’re going to see that our suburban office what we started our strategy that we want to strategic analysis couple of years ago was in the high 40% and we want to get it down the low 30%. We wanted to move our multi-tenant industrial for what the mid-teens the low 20s and we would keep our flats which is I think around the 12, 14% roughly flat. Now, that doesn’t need we’re going to buying so right within that, but in terms of where will be on kind of a ongoing basis it would stayed about where it is today, that’s capital and flux.

Operator

The next question comes from Michael Bilerman of Citi.

Michael Bilerman - Citi

Yeah, just on 9 to 10 on disposition that’s on current in place NOI?

George Alburger

Yes.

Michael Bilerman - Citi

So the way you think about the what the acquisitions are doing or buying that these vacant buildings put the improvement and leasing them at the current market rates did in (inaudible) half versus selling these things out at 9 to 10 which probably have at around 15 to 20% above market rents, significant capital requirements the next few years and if you were to do sort of an IRR at the end of your five on what you’re buying versus what you’re selling while it may be dilutive in the short-term it might be use that accretive in the long-term.

George Alburger

So, you’re sitting on our investment committee meetings frankly. That is pretty much the analysis, you got it.

Michael Bilerman - Citi

On the dispositions that you are doing, what would be your 3 to 5 yield on the way you’re thinking about it relative to the 9 to 10 (inaudible)?

George Alburger

I think the numbers are fairly accurate I can do the math. I mean the rents are going down though 10% to 15% we start doing that and then you get tied that to three years, you can get your return on that start on those numbers, I don’t have them in front of me is that I will agree with you , that’s the concept.

Operator

(Operator Instructions).

Bill Hankowsky

Looks like we might be done, Wes. All right, thanks everybody for listening and appreciate it. We’ll talk to you at the beginning of next year.

Operator

Ladies and gentleman, that concludes the Liberty Property Trust quarterly earnings conference call. We appreciate your time. You may now disconnect.

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