Liberty Property Trust's CEO Hosts 2012 Earnings Guidance Call - Event Transcript

Dec.13.11 | About: Liberty Property (LPT)

Liberty Property Trust (LRY) 2012 Earnings Guidance Call December 13, 2011 11:00 AM ET

Executives

Jeanne Leonard - VP, Corporate Communications

William Hankowsky - Chairman, President and CEO

George Alburger - EVP, CFO and Treasurer

Michael Hagan - SVP, Acquisitions and CIO

Robert Fenza – EVP and COO

Analysts

Ki Bin Kim - Macquarie Equities

Josh Attie - Citigroup

Michael Bilerman - Citigroup

Brendan Maiorana - Wells Fargo Securities

Sloan Bohlen - Goldman Sachs

John Stewart - Green Street Advisors

Dan Donlan - Janney Montgomery Scott

Operator

Good afternoon. My name is Sarah, and I will be your conference operator today. At this time, I would like to welcome everyone to the Liberty 2012 Earnings Guidance 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). I would now like to turn the call to Ms. Jeanne Leonard. You may begin your conference.

Jeanne Leonard

Thank you, Sarah. And thank you everyone for tuning in today. You are going to hear prepared remarks from Chief Executive Officer, Bill Hankowsky; Chief Financial Officer, George Alburger and Chief Investment Officer, Mike Hagan. And our Chief Operating Officer, Rob Fenza is also here should you have any market or operations questions.

Liberty issued a press release detailing our 2012 guidance this morning. You can access this in the investors section of Liberty’s website. In this document, you will also find a reconciliation of non-GAAP financial measures 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 law. 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 the company’s filings with the Securities and Exchange Commission. The company assumes no obligation to update or supplement forward-looking statements that become untrue because of subsequent events.

Bill, would you like to begin?

William Hankowsky

Thank you, Jeanne, and good morning, everyone. The purpose of our call today is to share with you our thinking for 2012. I am going to spend a few moments giving you our sense of where the economy and real estate markets will be over the next 12 months. It will set the context for our specific earnings guidance. George will then walk you through the numbers and Mike will discuss our investment activity in 2011 and 2012.

The economic situation seems a lot like the movie Groundhog Day. Going into 2012, we’re replaying the same view we had going into 2011 a year ago. The U.S. economy is in a long slow march forward. We think GDP growth in 2012 could be ranged bound in the kind of 2% to 3% area. Unemployment may hover in the high 8% to 9% range and with significant U.S. structural economic issues unresolved in an election year, a sense of uncertainty probably will continue to prevail.

Volatility could remain high and the debt risk is ever present. With that said, larger corporate users are cash rich and as evidenced in the last few quarters, prepared to make long and major investment decisions. Smaller firms remain more hesitant in the current environment to hire or expand.

For the real estate market, we think this environment will continue the trends we’ve been seeing in the office and industrial markets this year. On the office front, weak job growth translates to weak demand. Rent should remain flat. There may be built to suit opportunities for larger firms that there will be minimal spec developments.

The office markets continue to firm up, we think, over the course of 2012. Industrial markets are more active. Retailers, consumers products, food products and logistics firms are looking for mid to large sized bases. Certain industrial markets have tightened and there is the beginning of select upward rent pressure.

In addition, the industrial build-to-suit opportunities, inventory industrial product will be developed in select markets. The investment sales markets which have been a little choppy of late, would see us fairly active in 2012. George and Mike will discuss large urban and flex sales we anticipate closing in the first quarter of 2012. We’re very excited by this future sale and our activity in 2012, which has allowed us to execute our strategy of downsizing our suburban office portfolio and increasing our industrial portfolio.

For Liberty, 2012 will be a year where we’ll continue to outperform our markets on the leasing front, where we will continue to build up our development pipeline and where we will continue our portfolio repositioning by the sale of suburban office and flex and the acquisition of industrial assets.

2012 would be an inflection point in the company’s earnings trajectory. And with that, let me turn it over to George.

George Alburger

Thank you, Bill. The first I’d like to do is cover activity due date for the fourth quarter of 2011 and then I would like to build guidance for 2012 using 2011 projected results as a starting point.

During the third quarter earnings call, we suggested that FFO would be in the $0.61 to $0.64 per share range for the fourth quarter. To date, for the fourth quarter, the core portfolio performance is as expected generally in line with guidance and sales activity for the quarter was modest.

With respect to acquisitions, however, we were very active. We purchased an office building in Washington for $50 million and we purchased a little over 1 million feet of industrial real estate in Charlotte for $61 million.

G&A expense for the fourth quarter will include a charge of $1.5 million due to the expensing of costs relating to these acquisitions. Given the fourth activity is generally in line with our expectations, we believe that FFO for the fourth quarter will be within the $0.61 to $0.64 per share range we previously provided.

Using a fourth quarter FFO estimate of $0.62 per share would result in an FFO for 2011 of $2.60 after adding back the $0.04 impairment charge we took in the first half of the year. Adding back this impairment charge is consistent with the NAREIT recent release clarifying the treatment of impairments.

I’d like to use this $2.60 estimate as a starting point for laying out guidance for 2012. I’m going to start with a capital transaction activity. Our investment in property acquisitions for 2011 was approximately $250 million. We believe the acquisition environment for 2012 will be similar to 2011. Consequently, we believe acquisitions for 2012 will be in the $100 million to $300 million range and cap rates will be in the 6% to 8% range.

For 2011, we were very active in the disposition area. Proceeds from the disposition, primarily our suburban office and high finished flex properties in 2011 will be approximately $370 million. For 2012, we will continue to sell suburban office and high finished flex properties. Our dispositions for 2012 should be in the $250 million to $350 million and the cap rate will be in the 8% to 11% range.

A significant portion of this disposition activity will be in the first quarter of 2012. We have under contract to sell for 2.4 million square feet of suburban office and high finished flex properties. This sale is scheduled to close late in the third quarter – I am sorry, late in the first quarter and the proceeds from this sale should be approximately $190 million.

When I finish running through the guidance, I will turn this call over to Mike who will provide some details on these pending sales.

Development starts for 2011 will be close to $300 million and we believe development starts for 2012 will be in the $200 million to $300 million range. We have nothing under development at the beginning of the year. Obviously it takes time to build the building, lease it, and bring the property into service. But development deliveries will begin in the latter part of 2012 and should be in the $30 million to $70 million range.

The combination of this acquisition, disposition and development activity will decrease earnings in 2012 compared to 2011 by $0.04 to $0.07 per share. A big part of this decrease is the $18 million in annual NOI that comes out of earnings in the first quarter because of the $190 million sales transaction.

G&A. G&A expense for 2011 should be approximately $58 million. Included in G&A expense is $2.5 million of acquisition related expense. We believe G&A expense for 2012, which will include the expense of acquisition related costs, will be flat to $0.02 higher than it was in 2011. To the extent there is an increase, it will be primarily because of higher acquisition related costs.

One other observation on G&A. As you may recall, there is an accelerated vesting of a portion of our long term incentive compensation award which results in higher G&A expense in the first quarter. For 2012, this accelerated vesting will be result in $3 million more G&A expense in the first quarter of 2012 compared to the remaining three quarters of the year.

We recast our credit facility in October, only two months ago but we didn’t have any long term financings in 2011. The 7.25%, $246 million note that matured in March was satisfied with the proceeds from asset sales. In August of next year, the $230 million, 6 and 3/8% loan matures.

Our capital plan for 2012 includes a long term financing that would be in the $300 million range. The timing for this financing would be somewhat dictated by the timing of other capital activity, acquisitions, dispositions and development spends. Overall, however, interest savings should increase 2012 earnings compared to 2011 by $0.03 to $0.05 per share.

For lease termination fees, our historical experience has been in the $0.04 to $0.06 per share range. For 2011, it appears that lease termination fees would total $0.04 per share, the lower side of our range. For 2012, we will stick with our historical range of $0.04 to $0.06 per share.

For 2011, we recognized approximately $0.06 in earnings from a variety of miscellaneous items. These miscellaneous items included land sales in the UK, management fees, the $1 million land sale gain we recognized last quarter and a few other miscellaneous items. We projected earnings for these items will be flat to $0.02 per share in 2012 compared to 2011.

The final item I want 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 2011, rents for renewal and replacement leases decreased by 8.3%. Our guidance for 2011 was that rents would decrease by 7 to 12%.

We are again experiencing rent rolldowns as we’ve been experiencing rent roll-downs for the past several years. For 2012, we were again projecting decreases in rents for renewal and replacement leases. The decreases are moderating, partly due to the firming of rents that Bill mentioned.

We project that for 2012, the change in rents for renewal and replacement leases will decrease by 0 to 4%.

Moving on to occupancy, for 2011, average occupancy compared to 2010 improved by approximately 1%. We expect this trend to continue and are projecting that average occupancy for 2012 will increase by 0 to 3% -- 0 to 2% compared to 2011.

The other item that will affect same store performance for 2012 compared to 2011 is one-time items. As you may recall, we had the reversal of the Tasty Baking Company bad debt reserve in the first quarter of $880,000. In the first quarter, we also had a one-time property expense credit of approximately $1 million. And finally, during the second quarter, we reduced our bad debt reserve by $1.5 million. These one-time items that benefited 2011 totaled $3.4 million, approximately $0.03 per share.

These unusual one-time items that helped 2011 won’t be around for 2012. The combination of the change in rents and the change in occupancy and the absence of the one-time items will result in a decrease in same store performance for 2012 compared to 2011 of $0.03 to $0.07 per share.

All the above items result in an FFO earnings guidance for 2012 of $2.45 to $2.60 per share.

The last item I want to cover is the dividend. Going into 2011, we suggested that cash flow from operations would not cover the dividend and that shortfall would be in the $30 million to $35 million range. We had good renewal rate experience in 2011 and controlled costs very well. As a result, we covered the dividend in 2011. We feel good about this but there is a couple of million per square feet of lease expirations in 2012 than there was in 2011. So we believe this increase in leasing volume and the associated costs would put pressure on dividend coverage. As a result, we believe there will be a dividend shortfall in 2012 of $15 million to $25 million.

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

Michael Hagan

Thanks George. Let me start by recapping our 2011 investment activity. On the acquisition side, to date we’ve acquired approximately 3.9 million square feet at a purchase price of approximately $235 million.

On a square footage basis, 90% of these acquisitions were industrial and concentrated in the markets of Minneapolis, Charlotte, Chicago and Lehigh Valley. Industrial properties were acquired at an average price of $50 per square foot.

Keeping with our goal to acquire value-add opportunities, the average occupancy of these properties at the time of acquisition was 54%. Upon stabilization, the acquisition should yield approximately 7.7%.

Turning to the disposition side, 2011 was an active year for Liberty. We will have completed building sales totaling over 4.3 million square feet at a sales price of approximately $370 million. On a square footage basis, over 70% of the dispositions were office and high-finish flex.

Much of our sales were in the Lehigh Valley, Richmond, and Milwaukee markets. The average age of the properties exposed during the year was 18.4 years. In addition to this activity, we are currently under contract to sell a portfolio of approximately 2.4 million square feet for $190 million. Upon conclusion of the buyer’s due diligence period, we anticipate the closing late in the first quarter.

The portfolio consists of flex and office buildings, approximately 50% of the portfolio on a square footage basis is flex or single story office. 65% of the square footage is located in Milwaukee and Greensboro with the balance of the portfolio located in Southern New Jersey, Richmond and Columbia, Maryland.

The portfolio was currently 83% leased. The cap rate is in the mid-9s. In addition to this activity, our development pipeline is now at ten buildings totaling $290 million. All of this new development is either industrial or metro office.

In 2012, we expect to invest between $100 million to $300 million in acquisitions at yields between 6% and 8%. We expect to sell between $250 million and $350 million at cap rates between 8% and 11%. This guidance for both acquisitions and dispositions represents placeholders as opposed to actual targets for the company. We will continue to be opportunistic on both our acquisition and disposition activity and anticipate taking advantage of opportunities to continue to build up more valuable portfolio.

To put our executions into perspective for you, with the completion of the sale, and the 2011 investment activity, we would have exited the Milwaukee market, excited the Lehigh Valley office market, excited the Richmond office market, exited the North Carolina and South Carolina office markets, increased our investment in Chicago and big box industrial, increased our investment in Lehigh Valley big-box industrial, increased our investment in the multi-tenant industrial in Charlotte, increased our investment in multi-tenant industrial in Minneapolis and increased our investment in office in Metro DC.

All of this activity is consistent with our stated goal of repositioning the portfolio out of suburban office and into industrial and metro office.

With that, I’ll turn the call back to Bill.

William Hankowsky

Thanks Mike and Thanks George. As you can see, 2011 was a year of significant accomplishments. $235 million in acquisitions, $370 million in sales with another $190 million scheduled for the first quarter and $290 million in development starts, $1.1 billion in activity.

As I am sure everyone on this call knows, in 2008, Liberty put in place a five-year strategy for repositioning our company’s asset portfolio. Our goal was to reduce our exposure to commodity office base, suburban office base while increasing our exposure to high performance office and industrial properties. Making that work and some suburban assets in certain markets and acquiring and developing new product.

The transaction markets from 2008 to 2010 made that execution challenging, to say the least. And, of course, the economy made the development portion impossible. So I am very pleased to say that despite those roadblocks, execution on these strategic goals has been outstanding.

If we execute on the anticipated sales, executions and development we are forecasting, by the end of 2012, our industrial distribution portfolio will have increased from 49% of our square footage to 62%, our suburban office ownership will have decreased from 31% of our square footage to 23%. And in addition, our flex portfolio will have declined from 16% of our square footage to 11% and it will have more of an industrial look to it. As we have been very successful in selling higher finish flex buildings as part of our repositioning.

The result is clearly more valuable portfolio from an asset perspective. As Mike said, by the end of the first quarter 2012, we will have exited the Milwaukee, Lehigh Valley, Richmond and North and South Carolina office markets and positioned Chicago, Houston, Lehigh Valley, Central Pennsylvania, Richmond, Raleigh, Charlotte, Greensboro and Greenville as pure industrial markets.

I mentioned earlier that we see an inflection point in 2012. We believe our enhanced portfolio, expanded development pipeline will allow us to reap an even greater share of our market’s performance than we’ve experienced in the past and to grow Liberty’s earnings.

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

Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes from the line of Ki Bin Kim from Macquarie. Your line is open.

Ki Bin Kim - Macquarie Equities

Thanks. First, on your same store NOI guidance, I am not sure if I heard a percent number. Do you guys give that guidance?

George Alburger

I didn’t give it during the prepared remarks. I am happy to give it to you now. The range that we suggest would be that same store would be down anywhere from 1% to 2%. If you eliminate those one-time items that benefited 2011 that won’t benefit obviously 2012, the range would be flat to 1% decrease.

Ki Bin Kim - Macquarie Equities

Okay. Thank you. And on your dispositions, I guess, for your 2012 target and $190 million that’s locked up, I guess, first on the $190 million. The 9% cap rate, how do you calculate – what are you assuming with that trailing NOI cap rate or is that stabilized cap rate?

William Hankowsky

You can answer that Mike?

Michael Hagan

It’s predicated on what the in-placed NOI is at the current occupied level of that portfolio.

Ki Bin Kim - Macquarie Equities

And given that it’s 83% of this, without knowing the building well, it seems kind of high especially we assume kind of lease up, is that where the market is for some of the suburban – I mean some of the office –

William Hankowsky

What is it Mike – there is a vast percentage of the high finish flex single story office. That’s the majority of what it is. It’s in markets like Milwaukee and Richmond and Greensboro. So I think in fact, that is what it’s – these assets are trading at. Mike, would you give a sense of like square footage per pound?

Michael Hagan

Yes, if you look at the markets and what the occupancy percentage within those markets for that type, some of them I said is not a whole like a lot of opportunity to lease up. So when I think if you put these things on a per pound basis, we have some mid-rise office buildings and if you allocate it by $100 a foot to, the single story in a flex are in a range from $50 to $75 a foot which we think are market prices.

Ki Bin Kim - Macquarie Equities

And I know it’s a different mix of something of suburban office and industrial but if you had to give a kind of average number, what would the market occupancy be versus the 83%?

William Hankowsky

For the markets that we are selling these assets in, what’s the market occupancy?

Ki Bin Kim - Macquarie Equities

Yes.

Michael Hagan

My guess is at mid 80s.

Operator

You next question comes from the line of Michael Bilerman from Citi. Your line is open.

Josh Attie - Citigroup

Hi, thanks. It’s Josh Attie. As you mentioned, 2012 is somewhat of a transition as you take asset sale dilution upfront and then lease up some of the acquisitions and development deliveries as the year progresses. Can you give us some sense as to where you think FFO bottoms may be in the first or second quarter and then what you think the run rate could be heading into 2013?

William Hankowsky

I think you analysis is totally right, Josh, which is that, you’ll have a scenario where it will ‘go down’ at the beginning of the year and come up towards the end of the year. George mentioned you have this peculiar accelerated vesting of, which is just what the current rolls are for the first quarter. So George what –

George Alburger

Yeah, I hesitate to give you precise numbers for every quarter. I think directionally, you’ve got it right, Josh, and burden the first quarter with usual $3 million in additional expense were LTI. But you have the sense of it right, that it will build up as the year progresses. I also mentioned that it will be a development delivery but it will happen in the fourth quarter. It’s only $30 million to $70 million. So you will start to see some of this redeployment of proceeds from asset dispositions kind of improving earnings towards the latter part of 2012. But you really don’t see it in a more significant extent that you will see it until we get to 2013.

Josh Attie – Citigroup

Okay. Thank you very much.

Operator

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

Brendan Maiorana - Wells Fargo Securities

So first, just a question on, I guess, the FFO guidance or just kind of the rough numbers that you gave us in terms of the dividend shortfall. I would think that selling the suburban portfolio, the suburban flex portfolio would probably improve that FFO to AFFO ratio but it sounds like you kind of expect that, that rate is going to be a little bit wider as you’re looking to 2012. How should we think about the disposition of that 190 or 9.50 cap rate, on kind of more of an economic NOI basis as opposed to just the cash?

William Hankowsky

I think there are a couple things going on. So you need to see each of the factors. You have isolated one factor, which is your selling suburban office, you are losing the NOI. You are also losing the CapEx and TIs that are associated with it.

But as George pointed out, one of the things you need to understand is 2011 was a somewhat lower leasing year for Liberty because we had less expirations in ’11. We talked about it roughly a year ago when we talked about the year we mentioned occasionally over the course of the year. So you actually have an uptick between ’11 and ‘12 just on the expiration side of about another 2 million square feet of leasing activity that has to occur in ’12 over ’11. You’ll roughly do about 13 million square feet of leasing in ’11 and you will do 15 million plus in ’12.

So you have greater transaction costs driven by that somewhat of that uptick. And you don’t yet have the increased income from your pipeline and your lease-up of your acquisitions. So you end up with the earnings value that has to get bridged as you go from leasing volume pick up, without getting the earnings pick up from your investment activity. And that’s the number George put out there 15 to 25.

Brendan Maiorana - Wells Fargo Securities

Bill, do you have a sense of where that cap rate would be if you kind of layer on a normalized level of TI leasing commissions and building improvements relative to the 9.5 that you guys provided on the cap rate?

William Hankowsky

I think we’re going to leave at where we are in terms of how we’ve described it. I mean, we’re still in due diligence. We are still working with the folks. Basically, we’ve given you a sense of what the dollars are, or what the price is and what the occupancy is and that’s where it’s at.

Brendan Maiorana - Wells Fargo Securities

Fair enough. And then a couple for George. First, in terms of the acquisitions that you guys have done in ’11 and maybe kind of what you expect in ’12, the yields are relatively low. Those properties by definition aren’t in the same sort of pool but if you – how much do you think that those acquisitions at low yields for ’11 are actually contributing to 2012? Is that a big number or do you think more of that lease-up growth hits as you kind of get into ’13, as you get those properties on a stabilized level?

George Alburger

It does contribute to – it will contribute to ’12 for two reasons. One is, you’re going to own it for a full year in ’12 and you only owned it for a partial year in 2011. And you are going to hopefully advance the leasing. You are correct. They are primarily industrial, they have lower yields than some of the suburban office and high finish flex that we are selling. But it does contribute a couple of pennies.

William Hankowsky

George is accurate that its fullest impact will be in ’13. Because you’ve finished the lease-up, so you get – you will have a full year of the 50% that’s leased, you will lease some of the other (indiscernible) – yes, yes, right.

Brendan Maiorana - Wells Fargo Securities

And then just last question –

Michael Hagan

Brendan, all of that is baked into the $0.04, the $0.07 range I gave in the guidance. You have the up on the 2011 acquisitions that has the up on the 2012 acquisitions. It has the down on the 2011 dispositions and we have a pretty meaningful disposition plugged in for the first quarter of 2012 which has pretty meaningful impact.

Brendan Maiorana - Wells Fargo Securities

And then just last one, so if I look at the balance sheet, it seems like you’ve got – you’ve got a lot of investment capacity as we’ve talked about and probably 930, call it $700 million to kind of get in the middle of the 40% to 45% range. But if I look at kind of –

Michael Hagan

That’s a good number.

Brendan Maiorana - Wells Fargo Securities

So if I look at the plan for ’12, you’ve gotten that investment activity but it’s not a significant number. Is the governor on that just the opportunity set you see out there as opposed to being a little bit more conservative on the balance sheet, or are you sort of purposely being a little bit more conservative that your balance sheet strategy given some of the uncertainty that’s out there?

William Hankowsky

It’s driven mainly by our judgment of opportunity. It’s not a balance sheet decision. And so as Mike said, we did $250 some million of acquisitions this year. And we found that in terms of opportunity that makes sense to us, it’s been two buildings here and a building there. And it’s been a lot of work. We’ve looked at several billion dollars’ worth of assets to get to that number.

And as Mike said and I want to emphasize this point. If we saw an opportunity that was bigger and made sense to us, we would take advantage of it. That’s what that dry power is there for. So we look at this as sort of the practical if we just play out the way it’s been explained, that is what we think happens and this is how we run the model and this is how all the guidance is together.

But if there was an opportunity to do another $100 million, an opportunity to another $300 million, we wouldn’t be hesitant if that made sense and advance both the strategy and its good economics. That’s what sets the numbers.

Operator

You next question comes from the line of Sloan Bohlen from Goldman Sachs. Your line is open.

Sloan Bohlen - Goldman Sachs

Just a question maybe to be a little bit more granular on the same store guidance for the fundamentals. I am wondering if you could maybe break out your expectations for, however you want to do – how the rent-rolls between the office versus industrial, just as we look out into next year?

George Alburger

We gave a range of 0 to 4% down for the rent rolls. On the distribution piece of the portfolio, we would suggest that the number would probably be slightly positive for the year and for the office and flex we think it could be down anywhere from 5% to 7%, 8%.

Sloan Bohlen - Goldman Sachs

And then in terms of occupancy, maybe just what your assumptions are, or retention ratios on a lease-up for out of those pools?

George Alburger

For the distribution we see occupancy maybe being anywhere from flat to up 3% and for the flex and office, I’d say flat to up 1%.

Sloan Bohlen - Goldman Sachs

And just one question, George, on the markets that you guys have exited on the office side, does that do anything on the G&A side with regards to management in those markets?

George Alburger

That’s plugged into the G&A numbers. And I will tell you a lot of selling that real estate some of the management fees could go with that real estate or exiting of course in some of the overhead because with it, we are also exiting, I don’t know if you want to add to that, Bill.

William Hankowsky

I mean, one way to think about this is the G&A for the company, take the G&A that’s attributed to acquisition costs out of it, is basically flat. And so inside that flat G&A, we’re absorbing salary increases, helpdesk increases. So we have some costs going up and effectively the G&A is flat. So there is some savings that’s guarded from these sales. Number one.

Number two, as George said, some of this is about property management. And that was – that’s in the property management cost center, so that kind of is in and out. It’s kind of a washed. Three, as we have stayed in these markets, so we want to maintain these platforms because of these markets, now a fewer industrial markets on the whole, so we are still there. And we have done some consolidations. So today in Milwaukee and Chicago offices basically being consolidated basically, our Virginia Beach, Richmond teams under a single manager. So there has been some effort. There will be some continuation of that as the strategy plays out.

Sloan Bohlen - Goldman Sachs

Okay. But nothing that should move around the guidance (inaudible)

William Hankowsky

I mean, as George said, everything that’s happening is all inside these numbers. All those moving parts.

Operator

You next question comes from the line of John Stewart from Green Street Advisors. Your line is open.

John Stewart - Green Street Advisors

This one may be for Mike, could you please speak to the DC acquisition you announced yesterday? Both going in yields, stabilized yields, and how you underwrote government risks and then on the ownership structure, I understand the existing ownership was bit convoluted. So are you buying a 100% and did your JV partner take a look at this, how did you handle that relationship?

Michael Hagan

See if I can get all these questions back to you, John. First, we did not but you are right about the ownership structure – the previous ownership structure was very convoluted. We did not step into the shoes of any of that ownership structure. We acquired pretty simple interest in the building. However, we did do in sort of a tax advantage to some of the partners that were in that previous ownership.

Second (inaudible) we acquired 100% of this, our JV partner of the account (inaudible) did not enter into this transaction. The third piece is it’s currently an 82% building. The first thing we did with it was there was 30,000 square foot tenant in there that was expired – that was due to expire in May. They were about to leave the building. We turned it out and renewed that lease, so maintaining 82% occupancy in there. And we work through our yield on that by leasing up additional 20000, 25,000 square foot space that we are making in the buildings.

The yield on that is below the guidance that we’ve given, we think it’s probably marked – the yield is consistent with what’s in the market, we don’t really comment on individual yield in the buildings. I would tell you that’s in that range of what that would be. And I think we are very happy about the price per pound that we invested in the building.

William Hankowsky

You asked a bit about the government risk, when I thought of Mike, I mean, it’s got 14 tenants, Mike, we’ve actually found it a kind of interesting building in the sense that it’s got low portfolio tenants. It is not one of these buildings that is leased to kind of government agency. In fact, I think most of the tenants are sort of associations, people who want to be in Washington because the government is there. But it’s actually not the US government.

John Stewart - Green Street Advisors

And just a couple of quick follow-ups if I may. Mike, you said, tax advantage or are you talking OP units. And did you give any comment or a look (ph) is this something because the roadblocks in the White House, you wanted to keep 100% of this to yourself?

Michael Hagan

I would tell you, we did give you a comment or look at it. I think when we started down the path on, this building was marketed, I think, it was under contract with somebody else, they walked away from it. The previous ownership was trying to facilitate the transaction which you are buying the entity, not the real estate. We are starting, and so we gave New York and a look, they understood. What we might be getting into through the course of the process of where we ended up closing on this thing, it was a 180 degree turn. And so I think that’s is a much of a reason as anything that, that’s where we are.

As far as the OP unit piece, George talked about that to some extent.

George Alburger

As Mike mentioned, it was a complicated transaction. We did accommodate some of the investors in that transaction. So there is a modest amount of OP units that have some unique attributes to them. But there is some amount of OP units I think something in the $5 million range that were also facilitated the transaction.

John Stewart - Green Street Advisors

Another quick one for you, George, while I’ve got you. What rate are you assuming on the $300 million long term financing?

George Alburger

I’ll tell you what today’s rates are. And we put out a range out there for our guidance. But today’s rates for us where 7% money would be anywhere from 4.5 to 4.75 in for ten-year money, may be 5.8 to 5.25, we do run a couple cents activities on this -- timing of the financings and things like that. So that’s why we have a bit of a range there. But that’s today’s rates.

John Stewart - Green Street Advisors

So what would be the high end of the range for 10-year paper?

George Alburger

Probably 5.5 or so right now.

John Stewart - Green Street Advisors

And Bill, I think you almost may have been alluding to this portfolio sale you are announcing today, on the third quarter call when you talked about another coupe million square feet of suburban office potential for sale. So two questions on table at the bottom of your supplement. When you look at the kind of 25% suburban office mix and 60% industrial, is that pro forma really only for the $190 million that’s under contract? Or is that the high end of your $350 million disposition range? And then there how much more do we have to go?

William Hankowsky

Okay. The 12/31/2012 is the mid points of the ranges we gave you. So it includes the sale but also as soon as we got to the midpoint of ourselves range of the midpoint of our by range and our development starts. Plus the development that’s underway. So it includes finishing up stuff that is underway, plus the midpoints. Okay.

In terms of are we done so to speak, I think we might be done from the standpoint of lopping off big pieces of the portfolio. But I think we’re not done from trimming. So as an example, in southern New Jersey, over the course of the couple of years, we’ve been active in this. We’ve actually taken that office portfolio down by 50%. It’s been done very gradually, a couple through a user here, a couple there but in the nice kind of the deliberative way and we feel that’s a good thing because we think we should have tightened up in that market.

So I think we’ll continue to be probably year talking to you about a couple hundred million of dispositions and that will probably predominantly be flavored by suburban office high finish flex. And we’ll continue to acquire and development on the industrial side. So these numbers will continue to have the industrial growth and the suburban office shrink. But in terms of – and you were very observant on the last call.

In terms of a couple of million square feet, I don’t think that’s in the transaction of that scale is in the near term in a disposition sense. To an earlier question we were very clear, we could find a couple million square feet on industrial to buy, we’re very open on the acquisition side.

And John, one another comment, your questions about the Washington transaction I just want to say one thing. I think our team did a superb job. I mean, it was a very complicated deal that required Mike shop, Georgia’s shop, and really thinking about how you could get there required our team in DC to keep a tenant in place, we didn’t on the building yet. So it was – I am very proud of the execution of Liberty on that transaction.

Operator

(Operator Instruction). And your next question comes from the line of Ki Bin Kim from Macquarie.

Ki Bin Kim - Macquarie Equities

Could you describe the buyer pool for suburban office properties, how deep it is and what are their motivations primarily compared to an industrial pool buyer?

Michael Hagan

In some respect, you have trading (ph) buyers there, right? That try to do the stuff. I think to the extent that you can get a building financed today, which people don’t do that, I think the primary buyers of suburban office right now are private equity funds.

Ki Bin Kim - Macquarie Equities

And what if – can you remind us what you policy is on capitalized interest? How do you – what kind of interest rate do you assume for that?

George Alburger

We assume the weighted average cost of our debt for capitalized interest.

Ki Bin Kim - Macquarie Equities

And your development starts for 2012, is that predominantly suburban -- I mean, industrial?

George Alburger

Yes.

Operator

Your next question comes from the line of Dan Donlan from Janney Capital Markets.

Dan Donlan - Janney Montgomery Scott

Thanks. Just real quick question on the portfolio repositioning execution and projections, the last chart on the guidance information. If you look at that the end of the year number, how does that look on a net rent basis, if you have that available?

William Hankowsky

Over 50% of the rent is office and just a below 50% is industrial. And candidly, part of the goal is to get it to be 50:50. So maybe you’re 3% or 4% over right now and 4% or 5% under – if I remember.

Operator

Your next question comes from the line of John Stewart from Green Street Advisors.

John Stewart - Green Street Advisors

Just a couple quick follow-ups. George, on your negative 1 to negative 2% same store growth, is that GAAP?

George Alburger

Yes, it is.

John Stewart - Green Street Advisors

What would cash be?

George Alburger

I don’t have that at my fingertips. It’s basically – that has been running a little bit better. We have run pumps in – I don’t know – 85, 90% of the portfolio. So that’s been running a little bit better.

John Stewart - Green Street Advisors

And on the mark-to-market, Bill, you’ve kind of characterized 2012 as an inflection point for earnings. Do you see it as an inflection point for the rent rolldown as well? In other words, I realize you are talking about 2012 today. But could we have a positive mark-to-market in 2013?

William Hankowsky

John, I think it’s a very interesting question. I think that in some industrial markets right now, we are seeing some rent growth. It’s not every deal. And so as I mentioned at the beginning of the call, I think in the larger sized transactions, you are seeing more rent growth than you are actually in smaller sized transactions just because of the nature of how – there is just less of that kind of space in certain industrial markets, it’s gotten tight fast.

And so you could have positive market rent growth in industrial in certain markets in ’12, carrying into ’13. It will spread over the course of ’12 depending on how robust it is. So I am not sure it will hit every market by the end of ’12 but it will get to the more active in tighter markets.

I think the office side is little bit more of a question market because as we stated, at the moment, unfortunately, we think employment stays relatively flat. So that new demand for office space is what you really need in tightening these markets up. I mean, we mentioned this on prior calls, if you look nationally, you are seeing that industrial vacancy is going down like 30 bps a quarter and office is zero to 10. It’s just taken so much longer to chip into that office vacancy standing at 60.

So one is at the bigger number and it’s taken more quarters to chip away at it. So I think you are into ’13 before you would see office rent growth. I have a hard time thinking there is office rent growth in’12 in the market.

John Stewart - Green Street Advisors

And then lastly, George, you talked about – I think it was $15 million to $30 million potential dividend shortfall. But I didn’t catch if you said how comfortable you are funding that?

George Alburger

Well, I think I said $15 million to $25 million, and we are very comfortable funding it. I mean, we’ve got a balance sheet that could handle that without too much difficulty and we are continuing to close the gap on that type of shortfall. So we’ll see where it is for 2013.

Operator

And now there are no further questions in queue.

William Hankowsky

I want to thank everyone for listening in and appreciate it. And wish everyone a happy holiday and a good new year. Thanks.

Operator

And this concludes today’s conference call. You may now disconnect.

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