Lexington Realty Trust's (LXP) CEO Will Eglin on Q2 2014 Results - Earnings Call Transcript

Aug. 8.14 | About: Lexington Realty (LXP)

Lexington Realty Trust (NYSE:LXP)

Q2 2014 Earnings Conference Call

August 7, 2014 11:00 AM ET

Executives

Gabby Reyes - IR

Will Eglin - CEO

Robert Roskind - Chairman

Patrick Carroll - CFO

Analysts

Craig Mailman - KeyBanc Capital Markets

John Guinee - Stifel Nicolaus & Company

Todd Stender - Wells Fargo Securities

Dan Donlan - Ladenburg Thalmann

Anthony Paolone - JPMorgan

Operator

Good morning and welcome to the Lexington Realty Trust’s Second Quarter 2014 Earnings Conference Call. At this time, all participants have been placed in a listen-only mode and the floor will be opened for your questions following the presentation. Today’s conference is being recorded.

It is now my pleasure to turn the floor over to your host Gabby Reyes, Investor Relations for Lexington Realty Trust. Please go ahead ma’am.

Gabby Reyes

Hello, and welcome to the Lexington Reality Trust second quarter 2014 conference call. The earnings press release was distributed over the wire this morning and the release and supplemental disclosure package will be furnished on the Form 8-K. In the press release and supplemental disclosure package, Lexington has reconciled all historical non-GAAP financial measures to the most directly comparable GAAP measure in accordance with Reg G requirements. If you did not receive the copy, these documents are available on Lexington’s Web site at www.lxp.com in the Investor section.

Additionally, we are hosting a live webcast of today’s call, which you can access in the same section. At this time, we’d like to inform you that certain statements made during this conference call, which are not historical, may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Although Lexington believes the expectations reflected in any forward-looking statements are based on reasonable assumptions, Lexington can give no assurance that its expectations will be attained. Factors and risks that could cause actual results to differ materially from those expressed or implied by forward-looking statements are detailed in today’s press release and from time-to-time in Lexington’s filings with the SEC and includes the successful confirmation of any of lease, acquisition, build-to-suit financing or other transactions or the final terms of any such transaction. Lexington does not undertake a duty to update any forward-looking statements.

Joining me today from management are Will Eglin, Chief Executive Officer; Robert Roskind, Chairman; Patrick Carroll, Chief Financial Officer, and other members of management.

Will Eglin

Thanks Gabby and welcome everyone. Thanks for the joining the call today.

As always, I would like to begin by discussing our operating results and accomplishments for the quarter. For the second quarter of 2014, our company funds from operations as adjusted were $0.28 per share, a 12% increase compared to the second quarter of 2013, primarily driven by investment activity and refinancing savings. In the quarter, we invested $32.8 million in acquisitions and other projects and further lowered our weighted average cost of debt to approximately 4.5%.

Our strong and steady leasing work continued and we executed leases totaling approximately 927,000 square feet ending the quarter with a more balanced rollover schedule and occupancy of 97.8% representing a 60 basis point sequential compared to first quarter. We are pleased with these accomplishments which we believe has improved our balance sheet portfolio while also reducing the risk associated with lease rollover.

Overall we continue to be active in the single tenant market investing 141.9 million in the first half of the year and we believe our investment pipeline is strong. Our second quarter investment activity consisted of 10.1 million invested in underway build-to-suit projects a $13.3 million acquisition 0.5 million in loan advances and the completion of two build-to-suit projects totaling 48.6 million. During the second quarter we placed one industrial build-to-suit project under contract for a commitment of 22.6 million which we expect will be completed in the second quarter of 2015.

Our current expectation for 2014 investment activity continues to range from 300 million to 400 million although the volume is now more weighted toward build-to-suit which do not generate cash flow or funds from operations until construction is completed.

The recent build-to-suit transactions and forward commitments provide us with a visible pipeline into 2015 and beyond. Cap rates on our forward build-to-suit and purchase pipeline average about 7.2% on a cash basis and 8.7% on a GAAP basis. The long-term leases with escalating rents that we’ve been adding to our portfolio further strengthen our cash flows extend our weighted average lease term, balance our lease exploration schedule, reduce the average age of our portfolio and support our dividend growth objectives.

During this year, we have seen continued cap rate compression making the acquisition market less attractive for already build product while we will continue to pursue accretive acquisition opportunities that fit our long-term investment profile about 95% of our investment pipeline is currently build-to-suit in forward purchase transactions. At this point in the cycle build-to-suit is our favorite strategy even though the accretions from these investments take time to impact our operating results.

We continue to execute our disposition strategy and in the second quarter we made good progress on our capital recycling efforts selling 62.2 million on non-core assets from the portfolio consisting of a three building multi tenant office campus, a vacant office property and two single tenant suburban office properties. We continue to be focused on dispositions from a strategic perspective augmenting the transformation of our portfolio and providing cost effective timely capital to support investment activity.

In the third quarter we have completed an additional 48.3 million of dispositions and our current expectation for 2014 is that disposition activity will be approximately 200 million to 250 million with our main focus on multitenant and some single tenant office sales. Asset values have continued to rise this year making dispositions even more compelling and capital recycling is also likely to continue in 2015.

As we have stated before, one of our strategic objectives with our disposition activity is to achieve a better balance between office and industrial revenue and the part of our portfolio that has lease term shorter than 10 years. Recently the office and industrial mix in this part of our portfolio has been about 3:1 and we continue to be focused on managing this ratio down to about 2:1 over the next several years. This ratio was 2.8:1 for the six months ended June 30, 2014 so we have made some measurable progress this year. The target in sale is certain office buildings will speed this transition and make our portfolio less capital intensive to manage as evidenced by our six months results when tenant related capital expenditure were modest in relation to leasing volume and declined approximately 85% in the first half of 2014 compared to the first half of 2013.

With regard to our leasing we continue to achieve a steady pace of activity in the quarter. In the second quarter of 2014, we executed approximately 927,000 square feet of new leases and lease extensions. During the quarter, we had 38,800 square foot lease which expired and was not renewed. Overall in the quarter, we extended seven leases with annual GAAP rents of 3.7 million which is 19% less than the previous rent and cash rents declined 25% on renewals principally driven by one office renewal in Carrolton, Texas, where expiring rents were far above market.

Notable successes included a 62,000 square foot office lease in Los Angeles, California with Bank of America and a 69,000 square foot office lease in Houston, Texas with the U.S. Government neither of which were expected when the year began. In Houston we invested 5.6 million in connection with the lease but were able to raise net rent per square foot by approximately 40% from its previous level.

Our same store cash NOI increase 0.9% in the first half of 2014 partly reflecting the fact that about half of our portfolio now has annual escalations. As we execute our acquisition and capital recycling strategy, we expect that our portfolio is likely to include a greater number of leases with annual or other rent increases which we ultimately expect will support a sustained healthy growth rate in cash net operating income.

Looking ahead, we currently have 2 million square feet of space which is vacant or subject to leases that expire through 2014. In the third quarter we have addressed 86,000 square feet and we believe that by the end of the year we can address an additional 270,000 square feet of such expiring or vacant square footage primarily through dispositions.

As a result of our leasing activity in new investments for the six months ended June 30, 2014 approximately 40% of our revenue came from leases of 10 years or longer, and we are well on our way to achieving our goal of deriving at least half of our revenue from leases 10 years or longer. Our single tenant lease rollover through 2018 has been reduced to 27.1% of revenue from 35.2% of revenue at quarter a year ago and we no longer have concentrated risk of lease rollover in any one year. By any measure we have made very good progress in managing down our shorter term leases and extending our weighted average lease term which is now approximately 11.3 years on a cash basis. Each of these metrics is an important measure of cash flow stability and we will continue to be focused on further improvement.

The composition of our balance sheet continued to improve during the quarter and we have included details in our supplemental disclosure package on pages 22 and 23 showing our credit metrics. We continue to pursue our goal of having 65% to 70% of our assets unencumbered and have reduced our secured debt to less than 20% of gross assets which is a target that we have been working towards for a considerable time.

In the second quarter of 2014, we reduced our secured debt by 151.3 million net and issued 250 million of 4.4% 10 year senior notes which are unsecure and were rated investment grade by Standard & Poor’s, Moody’s and Fitch. As a result, our company has little debt maturing in the next 12 months. While we continue to unencumber assets from time to time we may access secured financing when we believe it is advantageous to do so particularly if financing for the term longer than 10 years is available or we can effectively monetize the remaining revenue from the asset such as in a credit tenant lease financing.

A good example of this strategy was the second quarter financing of our Cummins Inc. property which was financed in April for 27.8 million with a five year term and a fixed rate of 2.2%. We believe our company has substantial financial flexibility with approximately 384 million of current availability under its revolving credit facility and the stronger than unusual cash position. We have biased and favorite dispositions and maintaining line capacity and the strong cash position as we continue adding build-to-suit projects to our pipeline. Our forward funding projects currently totaled approximately 270 million.

During the quarter our weighted average cost of debt was reduced by 5 basis points to 4.5% and our weighted average maturity was 7.3 years compared to 6.7 years at the end of the first quarter. We continue to believe the current rates on long-term financing remain quite attractive and that there is great value in locking in fixed rates on long-term debt.

Turning to guidance while we’ve produced solid results this year while reducing the risk profile of the company and building our investment pipeline. We are adjusting our FFO per share guidance by $0.04 per share at the top end of our prior range, this is due to our decision to not pursue $100 million ground sale leaseback transaction it would have contributed $0.04 per share to GAAP rent and $.01 per share to cash for the year had closed at the end of the second quarter.

We have stated that we would remain disciplined in our approach to investments and unfortunately efforts due diligence we opted not to proceed with the transaction shortly before the scheduled closing. At the midpoint of our revised guidance FFO per share we grow by that 7% in 2014.

In summary, it was a good quarter for Lexington and we believe our achievements have position the company for continued success. We remain committed to our strategy of enhancing our cash flow growth and stability growing our portfolio in a disciplined manner with attractive long-term lease investments and maintaining a strong flexible balance sheet to allow us to act on opportunities as they arise. These successes let our Board to approve an increase in our common share dividend earlier in the year as we’ve expected.

Now I’ll turn the call over to Pat who will take you through our results in more detail.

Pat Carroll

Thanks Will. During the quarter, Lexington had gross revenues of 109.8 million comprised primarily of lease rents and tenant reimbursements. The increase compared to the second quarter of 2013 of $15 million relates primarily to acquisitions and build-to-suit projects coming online.

For the quarter and the six months ended June 30, 2014, GAAP rents were in excess of cash rents by approximately $16 million. On Page 18 of the supplement, we have included our estimates about cash and GAAP rents for the remainder of 2014 through 2018 for leases in place at June 30, 2014. We have also included same-store NOI data and the weighted average lease term of our portfolio as of June 30, 2014 and 2013.

Property operating expenses increased $1.6 million primarily due to the increased use in occupancy and multi-tenant properties with base year cost structures, the acquisition of a property with full recovery of operating expenses and weather-related conditions in the 2014. Non-operating income increased $1.8 million related primarily to interest earned on our loan portfolio. In the second quarter of 2014, we recorded $8.4 million in impairments relating to property sold in the second quarter and the third quarter 2014 we also recorded 3.5 million on gains on sales of properties.

Debt satisfaction charges of $4.5 million consist of $3.7 million of yield maintenance incurred primarily on the early retirement of about 144 million in non-recourse mortgage debt.

On Page 40 of the supplement, we have disclosed selected income statement data for our consolidated but non-wholly owned properties in our joint venture investments. We also have included net non-cash interest recognized in the six months ended June 30, 2014 on Page 41 of the supplement. For the six months ended June 30, 2014, our interest coverage was approximately 3.4 times and net debt to EBTIDA was approximately 6.3 times.

Now turning to the balance sheet, we believe our balance sheet is strong, and we have continued to increase our financial flexibility and capacity. We had about a 151 million of cash at quarter end including cash classified as restricted. Restricted cash balances relate to money primarily held with lenders as escrow deposits on mortgages.

At quarter end, we had about 2.2billion of consolidated debt outstanding, which had weighted average interest rate of 4.5% of which 100% is at fixed rates. We have entered into LIBOR swaps of both the 255 million outstanding on our term loan which materializes in 2019 and the $250 million outstanding on our term loan which matures in 2018. The current spread components of our 2019 term loan can range from 1.5% to 2.25% and currently stands at 1.34%. And on the 2018 term loan can range from 1.1% to 2.1% and currently stands 1.35%.

The significant components of other assets and liabilities are included on Page 41 of the supplement. During the quarter ended June 30, 2014 we paid approximately 2.5 million in lease cost and approximately 1.6 million in tenant improvements. For the balance of 2014 we projected spend approximately 19 million in these costs. We also included on page 14 of the supplement the funding projections for our three current build-to-suit projects and our forward commitment along with historical NOI recognize on build-to-suit projects that have come online.

Now let’s turn the call back over to Will.

Will Eglin

Thanks Pat. During the balance of the year, we’re going to continue executing on our strategy and build an ever better and stronger company. The impact of our acquisition activity combined with our capital recycling continues to change the composition of our portfolio and has resulted in cash flows that are far more secure given the number of leases we have with annual escalations.

We expect to continue to execute proactively on leasing opportunities in order to maintain high level occupancies and further address lease expirations; two, realize values on non-core properties and certain fully valued properties with a bias toward reducing our suburban office exposure given improving pricing in this sector; three, capitalize on refinancing opportunities; and four, investing build to suit projects and other accretive investment opportunities.

Our company remains well positioned with an attractive dividend yield and conservative payout ratio and we continue to be encouraged by the opportunities we have to improve our cash flow, enhance our portfolio and provide ongoing value creation for our shareholders.

Operator, I have no further comments at this time. So, we are ready for you to conduct the question-and-answer portion of the call.

Question-and-Answer Session

Operator

(Operator) And I will go ahead and take Craig Mailman with KeyBanc Capital Markets.

Craig Mailman - KeyBanc Capital Markets

Good morning, guys. Will, on the abandoned acquisition, what during due diligence did you find that turned you guys off on it?

Will Eglin

Well, there wasn’t just one thing Craig but when you go through a process obviously there is detailed title work and there is diligence around environmental and things of that nature. So there were some things that we discovered in diligence that we didn’t think had been sort of that advertised upfront in connection with the transaction. So we reached to conclusion that the pricing wasn’t right and made the decision to walk away from the opportunity.

Craig Mailman - KeyBanc Capital Markets

Okay.

Will Eglin

And this was just to put in perspective Craig this was roughly a $100 million ground sale lease back which as you know from analyzing the New York transaction that we did they have very high revenue from a GAAP standpoint. So in this case the purchase on a GAAP basis is that about 20% cap rate but on a cash basis is only at about a 5% cap rate. So, it was really from that straight lining impact it had a fairly sizeable impact on FFO but much less so to AFFO.

Craig Mailman - KeyBanc Capital Markets

Okay. And do you guys take any debt deal cost in the quarter?

Will Eglin

We’ve incurred about 200,000 on a cash basis.

Craig Mailman - KeyBanc Capital Markets

Okay. Is that -- what's in the $945,000 of other? And where does that show up?

Will Eglin

On the FFO reconciliation?

Craig Mailman - KeyBanc Capital Markets

Yes. Is that included in that?

Will Eglin

Yes, couple 100,000 is included in that and what’s also included in that is when acquisitions close you’re not allowed any longer to capitalize the cost associated with buying properties they get expensed so it’s included in that number also.

Craig Mailman - KeyBanc Capital Markets

Okay. So that's basically in G&A then, the 945,000?

Will Eglin

We put that in operating.

Craig Mailman - KeyBanc Capital Markets

Okay. Alright, that's helpful. And then just one quick cleanup, on -- are you guys adopting the new standards on disc ops? Should we still continue to pull out the dispositions you had? Or is that all running through discontinued operations?

Will Eglin

We could have early adopted it this year, we did not, it’s effective for next year whereby you don’t have you’re not allowed for to show sales and discontinued operations that will go next year. But we could have early adopted and we chose not to. I personally think it’s good to show it down in disc ops just so you can analyze what’s not to recurring revenue source.

Craig Mailman - KeyBanc Capital Markets

Okay. And then…

Will Eglin

First quarter of next year we will no longer showing disc ops.

Craig Mailman - KeyBanc Capital Markets

Okay, that’s helpful. And then just a more broad question, I just noticed looking at your EBITDA margins, 2009 to today, they're down about seven percentage points. Just curious where do you guys think that stabilizes that? And what's really been the driver of that? Is it GNA or the roll downs just curious.

Will Eglin

Well, I mean I think where we are today is where I think that’s a good stabilization rate. It’s combination of a couple of things but we do have leases that have operating expense requirements now. So as we get away from that lease there will be more and more of that to certainly not reimburse the 100%.

Craig Mailman - KeyBanc Capital Markets

Okay, thanks.

Operator

(Operator Instructions) Our next question will come from John Guinee from Stifel.

John Guinee - Stifel Nicolaus & Company

John Guinee here. Thank you. A real quick just a handful of things, first, kind of walk through the dispositions, particularly the one in Foxboro. What did you guys decide to do there? Did you sell both buildings or just one? How did that shake out?

Will Eglin

No, we sold the one building John so we still have the other one that comes off lease next June.

John Guinee - Stifel Nicolaus & Company

So what happens is one lease comes off next June, do they have a purchase option on that also or is that being occupied now?

Will Eglin

No, they do not have a purchase option then our expectation that the building will be empty next June.

John Guinee - Stifel Nicolaus & Company

Okay. So they’re still paying rent on what 80,000 square feet or whatever?

Will Eglin

They’re paying rent on the other facility, yes.

John Guinee - Stifel Nicolaus & Company

So what happened was they bought, what, an 80,000 square foot building for $11 million? Is that a good way to look at it?

Will Eglin

The purchase price was $11.1 million I forget how much the square footage of the building was. But yes, they had a purchase option on this one facility and they exercised it.

John Guinee - Stifel Nicolaus & Company

Got you. And then, it looks like you got out of carry at about $120,000, $120, $125 the square foot, the same with Richmond. Is that kind of a good way to look at it?

Will Eglin

Sure, yes.

John Guinee - Stifel Nicolaus & Company

Okay. And then Boeing, you’ve got an industrial building you bought. It looks to us like its 120,000 square feet, you paid $170 a foot for it? I s that why it turned out to be 12.3 cash and the 12.9 GAAP yield? Is it a heavily improved building?

Will Eglin

It’s a heavily improved space for a defense function and rents need be higher than amortized cost during the term.

John Guinee - Stifel Nicolaus & Company

Okay. And then, what are you thinking about dividends going forward, is it an annual thought process or a semi-annual thought process?

Will Eglin

I think for the most part it’s an annual thought process, still we looked at the dividend mid way through the year and we felt like having essentially reached our leasing budget in the first half of the year and having refinanced that bumping the dividend earlier than usual was wanted. So there maybe another discussion around the dividend later in the year but honestly with a 6.3% dividend yield right now we think investors are being pretty well compensated.

John Guinee - Stifel Nicolaus & Company

Okay, okay. And then, you’ve mentioned about 2 million square feet of lease expirations through the second half of 2014 of which you’ve renewed I guess 86,000 feet. You expect to sell 270,000 square feet of buildings once the tenants vacate I guess. Can you walk through the other 1.65 million square feet?

Will Eglin

Yes, we’re working on leasing vacancy John but we don’t have in our expectations for the balance of this year that we’re going to put many new leases in place on what’s currently vacant.

John Guinee - Stifel Nicolaus & Company

Okay, so the 1.65 million is not leases coming vacant in the second half of the year, it’s leases coming vacant plus.

Will Eglin

It’s a combination of what is vacant today plus what becomes vacant over the balance of the year.

John Guinee - Stifel Nicolaus & Company

Got you. Okay, thank you.

Operator

Up next we’ll take Todd Stender from Wells Fargo.

Todd Stender - Wells Fargo Securities

Hi. Good morning, guys. Can you give us a sense of the mix within the disposition candidates, whether or how much you’re going to give back to lenders. Many have high CapEx commitments or multi-tenant office, is there a way to kind of break that out?

Will Eglin

If I look at dispositions that are probably lender give backs I would say that the two buildings in Issaquah, Washington, and one in Rochester, New York at the end of this year would be expected to go back to lenders and we have one other building perhaps in the next year which should be a building in Huston. So those would be four that’s a disposition with the passing title back to the lender. The sort of multi-tenant buildings that are of meaningful value that might be in the mix, one is Sea Harbor Center outside of Orlando that we think is a sale in for first quarter next year and I think we’ll certainly look at exposing Transamerica Tower in Baltimore to the market as we head into next year.

We do have Brea, California single tenant-building leased to BofA that’s on the market right now and we’re in the process of picking a bidder there. We’ve had several very strong offers so my expectation is that will be under contract fairly shortly. And as we look at next year there is very strong pricing in the disposition market and we’ll being to look a transactions that we completed coming out of the financial crisis that we held for five years now and there will be some that we want to turn into cash and we’d expect that there will be pretty meaningful capital gains as a result of implementing that strategy.

Todd Stender - Wells Fargo Securities

Thanks Will. And just how much mortgage debt will be assumed away do you think in the second half of the year? Just looking at those, is there an expense savings included in your guidance?

Will Eglin

Well, these types of mortgages get -- are projects given back inside efficient mortgages the answer is yes. But if you look at the properties that Will talked about the biggest one is Issaquah, Washington and that doesn’t mature till the end of this year. So that would be [indiscernible] that have negligible impact in 2014.

Todd Stender - Wells Fargo Securities

Okay. And then, just shifting gears, can you describe what other assurances you give to a developer on your forward commitment? You have one now in Auburn Hills, Michigan, for $40 million. I see you've made a deposit. You've got a letter of credit. What do you do internally, I guess, to kind of assure that you have the funding sources at the time of acquisition?

Will Eglin

Well I mean do have a $400 million line with $385 million availability that’s the main thing. And cash flow from operations obviously generates liquidity and when we look at our potential dispositions we try to match up with the dispositions with our funding on something like the Auburn Hills, Michigan, one.

Pat Carroll

So we are, Todd, we’ve a very strong cash position today combined with a lot of line availability. We do want to execute our capital recycling strategy that stay ahead of our liquidity needs but since there is a dilutive impact from sales before they turn into revenue generating built to suits we want to try to match fund that for the best as possible.

Todd Stender - Wells Fargo Securities

Great, thank you.

Operator

And up next we have Dan Donlan with Ladenburg Thalmann. Go ahead sir.

Dan Donlan - Ladenburg Thalmann

Thank you and good morning. Will, just wanted to go back to the dispositions in the quarter. Some of the cap rates were double digits. Is that just simply a function of the weighted average lease terms has being very, very short?

Will Eglin

It’s a function of that’s part of it, part of it is age, part of it is the rent in relation to market. So it all I guess these are all different ways of saying there is residual value risk associated with some of those sales that’s reflected in the cap rate.

Dan Donlan - Ladenburg Thalmann

Okay. And then, going back to the deal that you passed on, is there any chance that you -- this might come back to you at a better price or is this just down and dead in the water at this point?

Will Eglin

There is a chance I mean I am sure the seller will explore their other alternatives for monetizing the asset or financing it. So I don’t view it as likely to come back but it’s certainly possible. And we’ve done we spend a lot of money on the transaction done a lot of work. But we’re not counting on it coming back.

Dan Donlan - Ladenburg Thalmann

Okay. And then just curious on future build-to-suits that you're looking at. Is there any thought process behind using CPI-based bumps versus fixed bumps in order to kind of keep the impact on future straight line rent less impactful?

Pat Carroll

We always look at that the other side the other party i.e. the tenant likes to know what their core structure is going to be. We do like CPI bumps but they’re very difficult to get.

Will Eglin

And we haven’t seen any CPI escalators in build to suit.

Dan Donlan - Ladenburg Thalmann

Okay. Alright, that's it for me. Thank you.

Operator

And up next is Anthony Paolone with JPMorgan.

Anthony Paolone - JPMorgan

Thanks. Will, can you give us some examples or specifics around just where cap rates have gone for your investment grade equivalent type deals with 10-plus years of term? And also, where those yields would go if you were to open up that credit box a bit or play with term?

Will Eglin

Yes, I mean we’ve seen long leases sort of 15 and 20 years for high grade credit trading below six for sure. I would say once you get into a high grade credit where the lease might be eight to 10 years, cap rates sort of become in the 7 to 7.5 range. So there is still meaningful premium for long-term commitments versus taking shorter term risk. So that that cap rate compression for lesser grade credit that hasn’t been nearly a severe so probably I would say 100 basis points higher for on the long lease stuff for lower grade credit. So we do have several high grade credit transactions in our build to suit pipeline one is the Dow transaction that we announced earlier but there is a couple of other ones. And obviously for us to get reasonable cap rates on high grade long leases that it has to be in the build to suit market but we do have a couple of good sized transactions in the pipeline to sort of complement our typical focus on higher yielding transactions involving companies that are more in the BB credit area.

Anthony Paolone - JPMorgan

And what do you think that spread is right now that you’re getting on your built to suits versus if the same property where kind of just in the market as an acquisition?

Will Eglin

Depends on the length of the forward but I would say it’s probably 75 to 100 basis points. Which is tighter than it was a couple of years ago but in percentage term since cap rates have compressed all over the place is still pretty meaningful.

Anthony Paolone - JPMorgan

Okay. And then, you talked about just dispositions and the multi-tenant of stuff and so forth, but given where cap rates are and what’s happening there, if this keeps trending the way it is, how much more do you think you’ve got in the portfolio before you start to sell before you start thinking like it cuts too much into the size of the organization, or it just, you’re kind of done?

Will Eglin

I don’t view us as shrinking the asset base right now. We’re clearly calling some non-core assets and that’s probably the case for the next six to nine months and then I think we shift towards recycling capital out of build-to-suit projects that we seasoned for five years that becomes an important part of our strategy. So I don’t think that, I think we can see with some visibility toward where the disposition of non-core assets ends but we always want to be recycling capital both take money of the table from successful projects but also to be proactive about not letting our weighted average lease term get too short. So in our mind equity is not attractive thus right now, so we want to stay focused on capital recycling as it means to reposition the portfolio and also create capital to put to work in new projects.

Anthony Paolone - JPMorgan

Okay. And then, last question I may have missed this. Did you mention what you expect to start in the second half of the year in terms of build-to-suits?

Will Eglin

We didn’t mention what we expect to start, but there are -- some build-to-suits we have about 68 million to fund on the, the one that currently in place, give or take and from the other ones and about another 32 million that we have good visibility on.

Anthony Paolone - JPMorgan

$32 million of cash out the door or $32 million in budget starts?

Will Eglin

Yes, cash out the door.

Anthony Paolone - JPMorgan

Okay. So would that be what, something probably north of $100 million in starts? Is that?

Will Eglin

Well not to be 30 million starts, 68 million in what we already have in place, the three that are currently in place.

Anthony Paolone - JPMorgan

Okay. But that $30 million in starts, that would be the total budget amount not necessarily what’s spent in the second half of the year?

Will Eglin

That’s right, that’s continued deals that we’re looking at.

Anthony Paolone - JPMorgan

Okay, got you. Thank you.

Operator

And we’ll take our final question from John Guinee with Stifel.

John Guinee - Stifel Nicolaus & Company

Great. Pat, you had such a long and informative call I had a chance to go through your asset list. What’s going on at 101 East Erie it’s kind of interesting, I think it’s got about some income in place, but it’s vacant. And then you’ve got about $130 a foot of debt on it.

Pat Carroll

Its’ under contract for sale, at a number slightly above what we’re on the mortgage.

John Guinee - Stifel Nicolaus & Company

Well, congratulations.

Pat Carroll

That property is in the 270,000 feet of vacancy that we expect dispose of between now and year-end.

John Guinee - Stifel Nicolaus & Company

Great, okay. Thank you.

Operator

It appears there are no further questions at this time. Ms. Reyes I would like to turn the conference back to you for any additional or closing remarks.

Will Eglin

Thank you operator and thanks to all of you for joining us on the call this morning. We continue to be very excited about our prospects for the balance of the year and beyond and as always we appreciate your participation and support. So thanks again and have a great day everyone.

Operator

This does conclude today’s conference. Thank you for your participation.

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