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Executives

Jeanne A. Leonard – Investor Relations

William P. Hankowsky – Chairman, President & Chief Executive Officer

George J. Alburger, Jr. – Executive Vice President & Chief Financial Officer

Michael T. Hagan – Executive Vice President and Chief Investment Officer

Robert E. Fenza – Executive Vice President & Chief Operating Officer

Analysts

Craig Mailman – KeyBanc Capital Markets

Joshua H. Attie – Citigroup

Alexander Goldfarb – Sandler O'Neill

Ki Bin Kim – Macquarie Research Equities

Brendan Maiorana – Wells Fargo Securities, LLC.

John Guinee – Stifel Nicolaus & Company, Inc.

John Steward – Green Street Advisor

Liberty Property Trust (LRY) Q4 2011 Earnings Call February 7, 2012 1:00 PM ET

Operator

Good afternoon. My name is Melissa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Fourth Quarter Earnings Conference 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)

Thank you. Ms. Jeanne Leonard. You may begin your conference.

Jeanne A. Leonard

Thank you, Melissa, and thank you everyone for tuning in today. You are going to hear prepared remarks from Chief Executive Office, Bill Hankowsky; Chief Financial Officer, George Alburger; Chief Investment Officer, Mike Hagan; and Chief Operating Officer, Rob Fenza.

Liberty issued a press release detailing our fourth quarter results this morning as well as the supplemental financial information package. You can access these in the Investor section of Liberty’s website at www.libertyproperty.com. In both documents, you will find a reconciliation of non-GAAP financial measures we referenced 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 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 in the company’s filings with the Securities and Exchange Commission. The company assumes no obligation to update or supplement forward-looking statements that become untrue because of subsequent events.

Bill, would you like to begin?

William P. Hankowsky

Thank you, Jeanne, and good afternoon, everyone. I’d like to spend just a couple of minutes reviewing our fourth quarter results, looking at our overall performance in 2011 and then giving you a sense of where we see the world six weeks into 2012.

The fourth quarter was another solid quarter of results for Liberty. We leased 4.6 million square feet bringing year-end leasing production to 15.8 million square feet. Our renewal rate remained above historic norms, rent declines were less than expected, and we saw a marked increase in occupancy to 91.3%, our best level in three years.

The fourth quarter was also a solid quarter in which we completed our 2011 capital and investment activity. We acquired $250 million in assets in 2011 totaling 4.2 million square feet. We also sold $365 million worth of real estate and another 4.2 million square feet. And finally, we started 10 development projects, a total of 3.1 million square feet valued at $289 million. All of these were either at the high-end or exceeded our projections for the year.

But perhaps more importantly, 2011 was the year that allowed us to significantly move forward on our long-term strategy. We were able to decrease our portfolio in suburban in high-finish flex product while increasing our industrial and metro office product. We either have or are in the midst of exiting the suburban office markets in Greenville, South Carolina, Greensboro of North Carolina, Richmond, Milwaukee and Lehigh Valley.

By the end of this year 2012, and upon completion of our development pipeline, we’ll increase Liberty’s industrial square feet since 2008 from 49% to 62% of our portfolio. So 2011 was a very solid and productive year for us. We performed well in the core, we exceeded our investment activity and re-advanced our strategy.

Where we see the world now, particularly, since our guidance call in December? There were solid job numbers last Friday, which is encouraging. However, we still have a long way to go to get to a landlord’s market particularly on the office side. So we see a very competitive landscape for office in most markets.

The industrial side is stronger in terms of demand. We see our 2012 business plans remaining as we plan them. This would include a dip in our occupancy during the first half of 2012 due to planned expirations while occupancy would rise in the second half of the year. And as a result, we reaffirm our 2012 guidance of $2.45 to $2.50 a share.

And with that, let me turn over to George and Mike and Rob to provide some further details.

George J. Alburger, Jr.

Thank you, Bill. FFO for the fourth quarter was $0.63 per share. The operating results for the quarter include $700,000 in lease termination fees. For the year, lease termination fees totaled $3.6 million which is a little less than the low end of our guidance, which was at lease termination fees would be in the $0.04 to $0.06 per share range for the year.

During the quarter, we sold three operating properties and 39 acres of land for $27 million. We’re very active on the acquisition front acquiring 11 properties for $125 million. We also acquired two large land parcels this quarter for $32 million. We immediately put one of these land parcels under development with a start of a 1.2 million square foot warehouse in the Lehigh Valley. We also began construction this quarter on two build-to-suit projects.

With the $117 million in development starts this quarter, our committed investment in development properties is $289 million, and the projected yield on this investment is 9.8%. For the core portfolio, during the quarter we executed 3.1 million square feet of renewal and replacement leases. For these leases, rents decreased by 3.6%. For the 12.7 million square feet of renewal and replacement leases we executed for the year, rents decreased by 7.2%, this decrease is on the low side of our guidance range which was that rents would decrease by 7% to 12% for the year.

Operating income for the same store group of properties increased by 1.9% on a straight line basis and increased 3.6% on a cash basis for the first quarter 2011 compared to the first quarter of 2010. The comparative results for the quarter were favorably affected by the bad debt charge for the Tasty Baking Company that was booked in the fourth quarter of 2010.

For the year, operating income for the same-store group of properties increased on a straight line basis by 1%, and it increased on a cash basis by 3%. During 2011, earnings calls and when we gave earnings guidance in 2012, I highlighted the one time items that favorably affected 2011 same-store performance compared to 2010. If it wasn’t for these items, same-store results for the year on a straight line basis would have been flat on a straight line basis, and on a cash basis it would have increased by 2% rather than by 3%.

One last item I want to cover is the impact that the accelerated vesting of long-term incentive compensation will have on operating results for the first quarter of 2012. This accelerated vesting will result in $3 million more G&A expense in the first quarter of 2012 compared to level charges for this item for the remaining three quarters of the year.

With that, I’ll pass it on to Mike.

Michael T. Hagan

Thanks, George. Let me start by summarizing our 2011 investment activity. For the year, we acquired by 4.2 million square feet at a purchase price of approximately $250 million, 90% of this square footage was industrial, and concentrated in the Charlotte, Chicago, Minneapolis and Lehigh Valley markets. These acquisitions averaged 57% occupancy at closing and upon stabilization will have an investment of approximately $276 million, and will yield approximately 7.7%.

On the disposition side, we sold 4.2 million square feet at a sales price of approximately $365 million, 70% of this square footage were suburban office for high-finish flex. And these sales were concentrated in the Lehigh Valley, Richmond, Milwaukee and Greenhill markets. These dispositions averaged 87% occupancy, and were sold at an approximate nine cap on in place NOI.

Also as we mentioned on our December call, we are currently under contract to sell a portfolio of approximately 2.4 million square feet of our office and high-finish flex for $190 million. 65% of this square footage is located at Milwaukee and Greensboro, and also includes building in New Jersey, Maryland and Richmond. The buyer is currently in their due diligence period, and we are on target of a closing late in the first quarter.

Now let me try to give you a little color on the investment sales market. Food real estate continues to be a desired investment. Capital flows and the private equity funds continue to rise and pension funds are increasing their allocations to real estate.

On the debt side, while the CMBS markets remain sluggish, life companies and banks are increasing their allocations to real estate. This capital availability continues to put pressure on pricing, especially for industrial product in top-tier markets. Poor Class A product in top market such as South Florida and Chicago will trade in the 6.5 cap range with some transactions trading below 6, other primary industrial markets such as Lehigh Valley and Central PA will see cap rates in the 6.5 to 7 cap range for core Class A product. Other markets such as Minneapolis and Charlotte will trade in the 7 to 7.5 cap range.

Given the market conditions in 2012, we expect to invest between $100 million and $300 million in acquisitions at deals between 6% and 8%. We expect to sell between $250 million and $350 million at cap rates between 8% and 11%.

As always this guidance for both acquisitions and dispositions represents place holders as opposed to actual targets for the company. We will continue to be opportunistic in both our acquisition and disposition activity, and anticipate taking advantage of opportunities to continue to build in more valuable portfolio.

With that, I’ll turn it to Rob.

Robert E. Fenza

Thank you, Mike. Liberty wrapped up 2011 with a strong finish in Q4. For the quarter, we completed 200 new and renewal transactions for nearly $4.6 million square feet of leasing. This performance increased our overall occupancy from 89.9% to 91.3%, a 140 basis point increase.

For the full year 2011, Liberty exceeded budget leasing over 15.8 million square feet in 848 separate transactions. Portfolio occupancy increased from 88.7% at the start of 2011 to 91.3% at the close of the year.

This strong performance increasing occupancy by over 260 basis points for the year, underscores the value of our experienced seasoned people and our reputation in our markets. During the fourth quarter, Liberty also began construction on three new development projects, a fully leased built-to-suit warehouse in Charlotte, North Carolina, a fully leased built-to-suit office in Philadelphia central business district, and an inventory warehouse in Lehigh Valley, Pennsylvania.

These three new projects bring our development pipeline to ten projects under construction for a total of over 3 million square at an investment of nearly $290 million. 55% of this investment is pre-leased. Subsequent to quarter’s end, I am pleased to report that we have signed leases for two built-to-suits, a 46,000 square foot office building in Jacksonville, Florida and a 126,000 square foot industrial distribution building in Suffolk, Virginia for a total investment of $15 million. Construction of these projects will commence in March and in April. This build-to-suite activity was made possible by owing approved land in the right locations, having a strong and flexible balance sheet and having a seasoned team of leasing development of property management people on the ground locally to secure the business efficiently.

Our build-to-suite pipeline, which is a terrific generator of future earnings growth remains active. Because of a general lack of new supply, larger blocks of space in both office and industrial are becoming more scarce. This bodes well for build-to-suite opportunities, evidenced by the six build-to-suite projects in our development pipeline. Additionally, we have prospects and suspects for nearly 9 million square feet of potential opportunities spread over 10 of Liberty’s markets.

George spoke earlier of two land investments we made in the fourth quarter. The 107 acre parcel we purchased in the Lehigh Valley was immediately put into service to develop a new highway industrial inventory building, which is reflected in the development starts for the quarter. The other parcel is a 126 acre distribution site adjacent to the Florida Turnpike in Miami-Dade County. We plan to develop 1.6 million square feet of Class A industrial distribution space over the next few years to meet the strong demand in this market.

Let me now shift to market color. As Bill pointed out, the industrial activity in our markets continues to improve, while office demand in most cities remains challenged. In several of Liberty’s markets, industrial occupancy is high enough and demand strong enough that we are starting to see modest rent growth. Houston and Lehigh Valley, Pennsylvania are examples of markets where we can begin to push industrial rents. The office site in most of our markets is another story. Rents are flat at best, and market conditions remain very competitive. And as we have said before, tenants looking for smaller spaces have many choices and are forcing landlords to be aggressive. Our most challenging markets on the office side are Northern Virginia the Baltimore-Washington corridor and New Jersey.

In markets where there is weak demand and higher occupancy and higher vacancy, we will aggressively pursue every opportunity to convert prospects and suspects to Liberty tenants. Our advantage is our reputation for quality products, exceptional property management service and our strong financial position giving us the ability to pay brokers to invest in our buildings and invest in tenant feudal.

In 2012, we will continue to be a leader in our markets. As more jobs are created and demand increases, we will begin to see balance in our markets first, and then the start of upward pressure on rents. It is not here yet, but we are definitely moving in the right direction. And with that, I will turn the call back to Bill for questions. Thank you.

William P. Hankowsky

Thanks Rob, and Mike and George. I think that completes our prepared remarks. So, Melissa, we would be prepare to take questions and answers.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Jordan Sadler from KeyBanc Capital. Your line is now open.

Craig Mailman – KeyBanc Capital Markets

Hi, it’s Craig Mailman here with Jordan. Maybe on the development side, can you just give us a little bit more color on the 9 million square feet of potential opportunities, what the split out is between industrial versus office?

William P. Hankowsky

Yeah. I think it’s predominantly industrial in square footage, because as Rob mentioned, you’ve got – the lack of large spaces in certain markets is driving the need to create product that doesn’t exist fundamentally. So I’d say, three quarters and it’s probably industrial prospects. When he was talking about invested dollars, obviously it’s a little different, because office probably is more expensive than industrial building. So it’s a little different. But it is predominantly industrial in both prospects, and in terms of square feet.

Craig Mailman – KeyBanc Capital Markets

Okay, that’s helpful. And just you guys have signed (inaudible) in the 4Q, two more now. Are you seeing a shift in tenant sentiment or people or just the lead time just getting shorter, people are feeling more comfortable and willing to put the dollars out? Or is it just they’ve been in the work for a while, and they’re just sitting now?

William P. Hankowsky

I think the fundamental thing that’s happened, and I think it built up momentum in ’11, and it’s now roughly the case. It’s that, companies in ’09 and ’10 who were still nervous about where the economy was going, we’re hesitant to make long term commitments and build-to-suites represent long term commitments or 10 year leases, 15 year leases.

And so they were more prone to stay put, do short renewals et cetera. And what has happened now is, we see greater, I mean I think everybody sees generally a sense that the economy is doing better, not robust but better, that there is some prospect that it has some legs here, this economic recovery.

And I think that companies then say to themselves, okay, we’ve been sitting on, let’s take a industrial company. I’m sitting on a logistic solution, that my logistics consultant told me would save me money. And I’m not prepared to implement that solution in a way that’s going to provide profit to the bottom line. And I need to do it in, Rob, mentioned like we have value, I need to do it simply, and I look in there’s no space.

So my only option is that, somebody build me what I need. And even though the rent might be higher than market rent, which is generally the case here, when you’re trying build-to-suit, that delta is massively swamped by the savings in implementing the decision. Or the other scenario is like a Glaxo, so here they’re in office space, the office space is 70s and 80s (inaudible), they decide they want an open floor play, there is literally nowhere to find that solution in the market.

So the only option I have is to construct new space that solves the workplace environment issue that you’re trying to address their workforce. So I would say, it’s about clarity with the economy, and now making decisions with certainty about implementing something to do with you business, logistics, workplace something. I’m ready to go, I’ll send a long-term lease, I’ll pay higher than market rent, but the benefit to me outweighs at higher than market rent, that’s what’s happening.

Craig Mailman – KeyBanc Capital Markets

That’s helpful. Then just, on the spec you decide, you guys one hand Lehigh Valley, you have a little bit in Houston. It sounds like maybe Miami could be another candidate, outside of those markets would you start spec anywhere, and maybe what’s your thinking on the kind of the premium you would need over a stabilizer value and acquisition to start the spec building?

William P. Hankowsky

Right. Well, first just, I mean I know you know by the way you’ve decide those markets, but just to be clear the only product we’re thinking about is industrial, so there is no – there is sort of no market for spec office.

So talking about industrial, and what we’re talking about, you name them. I mean these are markets where we have very, I mean we’re on the ground, we’ve tremendous market knowledge. So we should look at end market and say, yeah there is three vacancies over 500,000 square feet, but we know there’s 11 prospects in the market, we think those three spaces were gone in the next six to eight months. If we start a building, and our building will rise three or four quarters from, now we’ll be the only product in the market of that size.

And we make judgments, with that kind of market knowledge that let’s us say, okay, let’s do seven in Lehigh Valley, let’s think about the Class A industrial vacancy in Dade in single digits. In Houston, it’s just a – there’s a lot of activity, energy quarter, other activity of that nature. But I don’t – there’s not a lot of places you would do it. And in our portfolio, those may be the ones that make sense right now.

Craig Mailman – KeyBanc Capital Markets

Then just on the yields, kind of where you would need the premium over acquisitions?

William P. Hankowsky

Well just to be clear, we – I think the good news is, from our perspective, if you sort of think about it, we know how to build these things, so we don’t see construction risk as a big issue for Liberty. We’re going into these markets, so that would lead you to the question you asked, which is leasing risk. But we’re doing these in markets where we think there is – we both, we add one year of lease up time. We underwrite these and give you these projected yields on the spec space that includes a year of lease up time. So we’re pretty comfortable doing that.

And so the pipeline is like in high 9s, and we’re doing acquisitions in the 7s, again averaging both. So we’re picking up, I mean clearly the pipeline gets us 100, 150 basis points of pick up. And that’s probably what you need to do spec, on the build-to-suit front, we’ve been very fortunate to have good customers who are interested enough doing stuff. I mean we kind of enjoy the pick up both on the build-to-suite side and on the spec side.

Craig Mailman – KeyBanc Capital Markets

Great. Thank you.

Operator

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

Joshua H. Attie – Citigroup

Hi, thanks. This is Josh Attie with Michael. The industrial GAAP rent spreads were much better in the fourth quarter than they had been all year. I guess first, can you tell us what the cash spreads were? And second, were there any abnormalities or individual transactions that influenced the fourth quarter or do you feel like that’s a good run rate heading in to 2012?

William P. Hankowsky

George do you want to?

George J. Alburger, Jr.

Yes, Josh, I can give you the GAAP number. And the GAAP number was – I’m sorry, the cash number, you have the GAAP number. The cash number was down 1.9%.

Joshua H. Attie – Citigroup

Thank you.

George J. Alburger, Jr.

So that’s better than the other three preceding quarters.

Joshua H. Attie – Citigroup

All right.

William P. Hankowsky

And I think, George, I think in terms your second – which is in terms of run rate, I mean when we gave guidance just a few weeks ago, as you know, we do that in a – as we’re sharing a micro detail space-by-space using assumptions for everyone. And so yeah, we do think that industrial rents were doing better than office rents, but I would tend to say that is basically “baked into the guidance”. So what you saw in the fourth quarter, it doesn’t make us – this is why we reaffirmed our guidance, it doesn’t make us change our mind on where we think things are going.

Joshua H. Attie – Citigroup

All right. Let me ask a little more specifically, the industrial spreads had been negative for the first three quarters of 2011, and they were positive in the fourth quarter, was that influenced by any particular transactions or as you go into 2012, do you expect to have positive spreads on the industrial leases?

William P. Hankowsky

I don’t think it was – Josh, I don’t think it was driven by like a single secure deal that changed it. But I want to be very precise. It’s – as we’ve talked about in prior calls, what happens here is that market by market, candidly space by space, you begin to get uplift. You’re the only guy with 500,000 square feet left in the Lehigh Valley and you say to yourself, I can get another quarter on this and you’re going to get up an uptick. Whereas the 25,000 square foot vacancy you have, there’s ten of those and I’m still kind of meeting the market. So I think on the industrial side, it’s a, or you can terms as scattering of good news that has lifted the average up. And George do you recall what – when we gave guidance, what we thought the rent spreads where on industrial?

George J. Alburger, Jr.

I don’t recall exactly Bill, but I know that we suggested that the industrial was going to be better than the [flagship] office.

Robert E. Fenza

And on a straight line, it’s geared to minus four.

George J. Alburger, Jr.

Yeah.

Robert E. Fenza

So they’re probably slightly flat to positive.

George J. Alburger, Jr.

Probably.

Robert E. Fenza

I think that’s, right, slightly flat from positive.

Joshua H. Attie – Citigroup

And if I can ask one more question. Could you talk a little bit more about Miami, and is that a market where you think you could start speculative industrial development in the next 12 months or is that longer-term?

Robert E. Fenza

Jose, this is Rob. I do believe we could start in the next 12 months. It’s a market that has an enormous amount of uplift right now, lots of prospect activity and we’re growing through the entitlement process on the piece of land we purchased, the 126 acres. We expect that process to be completed in the summer and we want to be in a position with product teed up and approved and ready to go, but we will reassess the market again as we get closer to that date. But I would say, it would be likely that we would start developments this year.

Robert E. Fenza

Late new year.

Joshua H. Attie – Citigroup

Late new year.

Robert E. Fenza

The best we could do is late and we will see where the world is then, but it’s possible.

Robert E. Fenza

Yes.

Joshua H. Attie – Citigroup

Great, thank you very much.

Robert Fenza

Thanks.

Operator

Your next question comes from the line of Alex Goldfarb from Sandler O'Neill. Your line is now open.

Alexander Goldfarb – Sandler O'Neill

Hello, thank you, good afternoon. Just continuing on the Florida conversation, just given the strength of Southern Florida really Miami, would you consider pruning some of the Palm Beach or northern markets to reallocate more towards Miami?

William P. Hankowsky

As you know, Alexander, talking different product types right. So, our predominant product in Palm and Broward is office, suburban office, that is in various submarkets, excuse me – we have industrial in (inaudible), but actually one of the regions we made this move is we are consistent with our corporate strategy, we have been exploring where we could get deeper in industrial and one place that sort of leaps out at you is South Florida and the place that leaps out even more is date and we weren’t there and so this provides us with an opportunity to get there and produce industrial product in the market.

So, kind of works at every level, it's consistent with the lack of corporate strategy is consistent with our market strategy. We like South Florida I intended to say we would continue to see that as a multi product market. So this is not a market different than [Novaki] or Richmond or some of the markets that Mike mentioned where we decided, we are going to exit a product type, we are not exiting any product type in South Florida.

Now, but we sell building, because its time to rotate it out or prune it. Sure, but the strategy in South Florida is not to exist office and have industrial it would be to have a mix and we’ll be thoughtful on an asset management basis, asset by asset.

Alexander Goldfarb – Sandler O'Neill

Okay, and then on your DC acquisition, it looks like you spend about 350 a foot, so it sounds like its more of a reposition side, just curious your thoughts especially just given the soft commentary we’ve heard out of that market.

William P. Hankowsky

Well, I will make some comments and I will make one, I mean quite candidly we think the price per pound is very attractive on a current basis, you know in another words people on an [SAR] will be paying more than that with that market or have and so we’ve acquired an asset that we’re comfortable to be sitting on, so to speak for five, seven years, we were – we worked very hard to put that transaction together, it was very complicated. But we are very well to achieve that.

We were literally working with existing tenant in the building to keep that in place waiting for us to get the acquisition in place. So we’re at 84% leased Mike, I think. So we got a little bit upside in terms of lease and rest of that up. We’ve got actually, its not a bad deal flow. It’s a nice spot in the market, you know it is B product as it exists today. But that’s an active market, there is a lot of expirations and we think – an active landlord in that building, which it was not, what that building was experiencing, converting it with some decent lease up activity. You are also right that it is long-term, it’s a potential play. But we are not we didn’t acquire on the assumption that would have been happen anytime soon, we are happy to sit for five, seven years like, I mean that’s kind of we rank performance as if we’ve all been, as if.

Alexander Goldfarb – Sandler O'Neill

Okay, so your point is that you bought it based on the current ultimately there could be a repositioning to upgrade it but, right now the income stream is fine, where you bought it.

William P. Hankowsky

Correct.

Alexander Goldfarb – Sandler O'Neill

Okay. And then just two sort of modeling questions for George, one the G&A in the fourth quarter was higher than what we would have expected, so wanted -- understand it’s a seasonal or is it something, or more a one time issue, because you said that ’12 would be flattish for Q2 through Q4? And then secondly, the depreciation seemed a little bit, the GAAP depreciation was a little less than we expected, but the FFO add back was a little bit more than we expected. So just want to know if there was something going on with the depreciation?

George J. Alburger, Jr.

I’ll answer your second question first. Nothing is going on with the depreciation, I can maybe prove some of those numbers a little later, and give me a call if there is something pops up, but I don’t think there is anything going on with depreciation.

To answer your first question on G&A, yes, G&A was a little bit higher. There was about $1.7 million of acquisition costs that were expensed in the quarter in G&A in connection with those acquisitions that we did in the quarter. Additionally, we had some dead deal costs in the quarter, and this quarter also reflect some performance bonuses in the quarter. So there were a couple of one time items, none of them should affect – we’re still comfortable with the G&A guidance we gave for 2012.

Alexander Goldfarb – Sandler O'Neill

Okay, and just remind us if that includes or excludes transaction expense?

George J. Alburger, Jr.

It includes transaction expense.

Alexander Goldfarb – Sandler O'Neill

The 2012 guidance does?

George J. Alburger, Jr.

Yes.

Alexander Goldfarb – Sandler O'Neill

Okay, great. Thanks a lot.

William P. Hankowsky

Thank you.

Operator

Your next question comes from the line of Ki Bin Kim from Macquarie. Your line is now open.

Ki Bin Kim – Macquarie Research Equities

Thank you. Can you just remind us, where you are in terms of industrial versus office, and where you want to go? And would that be more on one-off acquisitions at portfolio level or via development, especially given in this quarter what you bought per square foot in industrial cost about 50 bucks a square foot an industrial cost market keep up the square foot and you are building at pretty close to a $54 per square foot cost, so given that it’s almost similar where would you prefer it go?

William P. Hankowsky

Okay. It’s a good question and clearly there is probably – there is probably a couple of questions inside that question. So let me kind of look back, if I quickly. Our interest is increasing the industrial and was the lower both for suburban office and high-finish flex. As Mike laid out to you, it’s (inaudible) the 4.2 million square feet of that product in 2011, we have 2.4 million square feet of that product on the contract. So that’s a fairly significant step in advancing the strategy.

Well, Liberty we have guidance for the year doing $250 million, $350 million, so that would maybe able to sell some more stuff this year, move that along. I think every year we would be selling product, but we will significantly advance the strategy from a subtraction perspective. And what we’ve done, again as Mike said, is hopefully this transaction we have in the contract closes this quarter, over the last five quarters. So I think on the whole, we will be advancing the strategy prospectively more by addition. What I mean by that is, it would be the acquisition of industrial and the development of industrial or metro office. And so we’re going to be adding it both to the numerator and the denominator.

And you are right that we acquired, again roughly 4.2 million square feet, roughly it was all industrial and metro office. We’ve got this pipeline of 3 million square feet under construction. Rob mentioned, we just had, couple more built-to-suit or keep adding, or add both by acquiring and by building, it will be both in the product types we want and their effect will be we’ll have a higher percentage of industrial and a lower percentage of suburban office going forward. Well the suburban office shrink somewhat more the next few years, it might because we may trade it back in kind of annual pruning, but the scale of selling 6 million square feet over the five quarters, I don’t think we’ll be quite doing that in the next five quarters.

Ki Bin Kim – Macquarie Research Equities

And was there anything unique about what you started building this quarter, where the cost come down to around the low $50 per square foot or you’re referring that is -- what the market is for those places or should that go up? For the industrial portion or what your target?

William P. Hankowsky

Right, no I mean I think our development costs are pretty straightforward function of (inaudible), I mean again just to remember what our model is, what we are showing you were, total buying in the land for, I think our sites to go with it, it’s the hard construction costs, its not a bad time to buy construction right now, and it continues to be less than in robust construction market, so that’s helpful to us. It involves a TI allowance for when we saw in tenants and we have to put and in involve some amount of carry, because both the construction interest on the building and then a one year carry for lease up, so that kind of all gets baked into a spec building costs.

On a build-to-suit we know we have a tenants, so there is no we don’t have to carry. I mean, what the costs are for the TI, because we’ve signed a deal with somebody. So they tend to be somewhat more precise, but I think it’s fair to say your building industrial buildings, in the low 50s, mid 50s generally, it’s going to be higher in Florida, because the land costs are higher. It’s going to be maybe cheaper in Texas, that was, a very little bit across geography but that’s not a bad number for kind of on average.

Ki Bin Kim – Macquarie Research Equities

And this last question, on your office developments. They’re all 100% leased, is a plan there to lease that up, build it in solid or it to keep it on balance sheet?

William P. Hankowsky

No, again from a strategy perspective, I want to be very clear, we are decreasing the amount of suburban office we’re having, but we’re not exiting the product type. So that’s number one. So there are markets where we feel their markets are deep enough with enough tenants, we have enough of a position that we feel good about it. We also have an interest in what we call metro office. So we think it is good to have office product, whether it’s the building for the University of Pennsylvania Health System, that’s in 8th and Walnut in Downtown Philadelphia or there it’s a Glaxo building at the Navy Yard, those are metro projects. They’re in the core of the metropolitan area, and happens that the building we bought in D.C. it’s an existing product, but that’s a metro building in downtown D.C. literally. So by definition it must be a metro building. So we will have office product, and there will be office product that stays in the portfolio.

Ki Bin Kim – Macquarie Research Equities

Thank you.

William P. Hankowsky

Yeah, thank you.

Operator

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

Brendan Maiorana – Wells Fargo Securities, LLC.

Thanks, good afternoon. Bill, you mentioned that portfolio occupancy is now the highest that it’s been, and I think three years, and it picked up pretty nicely in the quarter, are you guys still kind of comfortable with the 0% to 2% increase for 2012, given that you had a nice pick up in Q4, was that kind of the pick up in Q4 contemplated in that guidance or do you think from where we are today, and does it ratchet back a little bit as you think where you’re likely to be at the end of 2012?

William P. Hankowsky

Yeah, that’s a great question. Let me reemphasize a point that we didn’t mention, but we might not have got picked up in our comments. Actually, occupancy will go down in the first half of the year. So you’re exactly on point when you say is it – was this fourth quarter activity is something we contemplate, absolutely. So we did our rollups of our business plans in the fall, late fall. We knew where we would be ending the year and we also do where we would be going in to next year. So one situation is here in Malvern, suburban Philadelphia that we’ve tripped a customer at Santa Fe, they were in about 300,000 square feet. They’ve decided to shut the operation down. It was leased in the fourth quarter, will not be leased in the first quarter. So that’s an example of something we know is going back.

Secondly, there is a little bit of – there is some amount of seasonal leasing in the fourth quarter, it happens every year that deals with the holidays and then it goes away and that’s okay. So you’re going to get a little bit of that. So you will see occupancy go down. So yes, we are comfortable with guidance, but it was a zero to two on average, which is the average occupancy for the year, it is where we think we will be for the year.

Brendan Maiorana – Wells Fargo Securities, LLC.

I apologize, but where does that likely put you when you get to the end of ’12 if you’re zero to two average for 2012 versus ’11?

George J. Alburger, Jr.

I think it puts us, I am doing this off on top of my head, but I think it puts us, I think we will back kind of where we’re right now or may be to add better.

Brendan Maiorana – Wells Fargo Securities, LLC.

Got it. Okay, great. And then on new investment activity side, you guys, you kind of mention that core product is still very attractive, but what has interested you guys more has been the value add type of product, do you seen the economic indicators get better in the two months since you guys did your December call, are you seeing more interest in the value add product today versus a couple of months ago or do you still think that you’ve got pretty good spreads relative to stabilized value when you’re looking at those acquisitions?

William P. Hankowsky

I think the overarching factor is what lenders will lend to. And so lenders are still pretty much fixed slated on well leased product, good sponsor, liquid market. So if you have a baked building, I think it would be tough to get financing. Having said that, it was pretty clear to us, and I think in the first six weeks of this year, there is a ton of capital started to get invested, that he’s – he’s poking his nose around lots of places.

So I mean, could somebody do it all equity – all cash all equity kind of deal to get a value add, because they think they can do something and put them on it. I wouldn’t be surprised if people started trying to do that, because I think they’re having a hard time finding opportunity. Mike would you?

Michael T. Hagan

Yeah, I agree. I think there’s just less of that out there in the marketplace right now that it is willing to trade. I think everybody believes industrial fundamentals are getting better, and so if I have some vacancy, I’ll try to hold on to it as long as I can to make it work.

Brendan Maiorana – Wells Fargo Securities, LLC.

Sure. That’s helpful. And then lastly, for the build-to-suite portfolio or the type of pipeline – excuse me, that you mentioned, it sounds like one, the activity levels are increasing a little bit. So do you have a land bank today that kind of support the 9 million square feet of pipeline that you’re chasing, and if you have activity levels that are increasing, does that cause you to be – to may be deal a little bit more in terms of land acquisitions this year?

Michael T. Hagan

I mean, yeah, the answer to both is yes. So on the one hand, yes, we have about 1,300 acres that Liberty has in a variety of locations. Generally, in parks we’re already in, pad sites et cetera, and across basically all our markets. Having said that, there is still the reality that stuff comes along, and you don’t have the right piece of dirt in the right place. So this quote is a perfect example. So here we needed to build a building at Bethlehem, were basically Autoland in Lehigh Valley, so we bought a piece and immediately put it – put a building under construction, the same thing that project that Rob just described in South Florida, and we didn’t have industrial land in Dade, so went and bought it. We didn’t have industrial land in Minneapolis, which we bought earlier in calendar 2011. So, we’re going to see both kinds of activity, utilization of our land bank and us, very selective way looking for land that make sense to augment that where opportunity exists.

Brendan Maiorana – Wells Fargo Securities, LLC.

And just to kind of clarify that a little bit, I mean the land balance today, I think it's around 220 million or so of land held for development. When you think about kind of what your normalized development starts are likely to be over the next couple of years, I mean is that a level that you are comfortable with, do you think that number needs to move up to support more starts or how do you kind of think about where land is likely to change?

William P. Hankowsky

I don’t see it appreciably moving up. Now because what happens is, I’m not sure this is right analogy, but somewhat of a production line. So you’re going to put land at the one end, like we did, and then immediately started building, and it’s going to come out the other end, and there’s product in a portfolio.

So we’re going to be moving land out of out current 1,300 acres, we’ll be adding land, but on a probably overall stays roughly where it is. You need enough to be, you need enough to have a presence in the market, you don’t need to really bulk up. So I don’t see it getting significantly bigger, and it will probably be relatively – let me go down intact, up intact quarter-to-quarter, but roughly flat.

Brendan Maiorana – Wells Fargo Securities, LLC.

Sure. That’s great. And then just last quick one. I apologize, if I missed it, but the 9 million square feet of build-to-suit proposals. Do you guys have a rough dollar amount that it equates?

William P. Hankowsky

Yeah. It’s 9 million square feet of prospects and suspects where we have opportunities to go after them, and some of those have gone out in proposals. You see U.S. for a dollar figure.

Brendan Maiorana – Wells Fargo Securities, LLC.

Yes.

William P. Hankowsky

What that would be worth? It’s over $0.5 billion.

Brendan Maiorana – Wells Fargo Securities, LLC.

Okay, great. Thank you guys.

Operator

Your next question comes from the line of John Guinee from Stifel. Your line is now open.

John Guinee – Stifel Nicolaus & Company, Inc.

Hey, okay. Four quick questions and then four quick answers. First, is there something unusual about the DC building, is it midblock or is it – it doesn’t have a garage, no parking? Second, what do you guys think of the Flagler portfolio down in Florida in your backyard that’s on the market? Third, how are you thinking about your 95 million of Series B preferreds right now? And then four, your key item in leasing commissions where historically low in 2011, congratulations, but I think you mentioned earlier that you’re expecting to spike back up in ’12. Can you review your thoughts on that?

William P. Hankowsky

Sure. John, I like this approach. We will try to do exactly the same way you did yours quick back. The D.C. building isn’t particularly peculiar, you’re right, it doesn’t have a garage, but it is actually a corner building, it’s not a midblock building. What was peculiar was the nature of the structure of the ownership. It’s actually, I think the last building left in the Glenborough old RIET, probably remember John. So there were sort of issues, about kind of getting it out of there and partners and stuff like that. So it had more of a kind of ownership structure was used that Mike and his team did a spectacular job resolving, such that we were able to acquire the assets and were able to leave behind the entity. So that deal is around D.C.

On Flagler, yeah, well, it’s got a lot of coverage, right. So we’re clearly aware of pretty much everything that’s going on, pretty much in all the markets we’re in. And we take hard looks at lots of things, given that that transaction is sort of sitting out there yet to be announced what’s happening, I’m going to hit my commentary there. And once we see how that will spaces out, I’d be happy to talk to you about it more. George, you want to do the Series B.

George J. Alburger, Jr.

Yes, I can give that pretty quickly John, it has escaped our attention, we know what the dividend rate is on the Series B, we know that is an above market rate, we know we can do some capital transactions, it could be helpful, but that’s enters some working things going on and I’ll just end the comments there on that one.

William P. Hankowsky

And finally on TIs and leasing commission, you are right that, we have been or we should be obviously focused on keeping those in check and making sure we’re careful about them. I think and you also are very observing and hearing our commentary, this is a – in some markets, and Rob mentioned like Melbourne and Jersey and couple of places where if they remain fairly soft, you are seeing because rents have kind of bottomed out. But I think you are seeing a little bit of increase concession activity, so (inaudible) TIs or deals, doubling the commissions for brokers or stuff like that. So there might be a slight uptick but when I think about the fact that we leased 15 million square feet, I don’t think when we average it all across the whole portfolio, I don’t think it’s going to use your page George. I’m not looking for to spike but you might get a little bit more per pound on average, but not significant.

John Guinee – Stifel Nicolaus & Company, Inc.

Then George do you have in your guidance paying off to preferred?

George J. Alburger, Jr.

No.

John Guinee – Stifel Nicolaus & Company, Inc.

Okay, thank you.

George J. Alburger, Jr.

Thank you.

Operator

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

John Steward – Green Street Advisor

Thank you. Mike, I think you had indicated that you are in the process of going through entitlement on Miami land, I was wondering if there is I guess essentially what do you expect your (inaudible) basis for the land to be and then what do you think it would cost by the time you are completely built out on a per square foot basis.

William P. Hankowsky

John I can tell you, when we did the models on that where we think we will be on a improved land sight is in the upper 20s per FAR and that by the time we built out, on I what I would say to you is bread and butter product, maybe a 200 feet deep, 24 foot clear, Class A multi-tenant industrial building its probably going to be in the low to mid 80s per square foot on inclusive of total cost.

John Steward – Green Street Advisor

And in terms of yields, do you think that there are rents are there to support the high 9s that Bill talked about?

William P. Hankowsky

I don’t think that’s, no I don’t think you are going to get into the high 9s in that development, but I think if you see product trading in the six cap range, or even maybe even below the six cap range, and where they have traded in a price per square foot that will have a healthy investment in South Florida.

John Steward – Green Street Advisor

Okay. And sorry, if I missed.

Michael T. Hagan

I apologize John, Mike. You have seeing stock trade in South Florida north of a hundred bucks a pound

Robert E. Fenza

120 some dollars a pound.

George J. Alburger, Jr.

Yeah, another way to think about it John.

John Steward – Green Street Advisor

Thank you. Joe if I miss in the commentary but did you say what and where the three buildings in the land that you sold during the quarter where?

George J. Alburger, Jr.

I didn’t say that, I wonder where, they actually were I tell you two of the buildings and a big chunk of the land was in Greenville, South Carolina. And give me a second, I will see if I can find out where the third building was – it was the William’s work.

William P. Hankowsky

Yes and we’ve given Richmond, Virginia, sorry.

John Steward – Green Street Advisor

Okay. Thank you. And then lastly one for you Bill, if I may. When you take your commentary, it sounds very measured in your tone, there’s only a handful of industrial markets that you’d considered building in, you are not talking about suburban office at all, generally pretty measured. But then when you do take a step back and look at the investment activity as a whole, you have six speculative projects under way, you are buying land in Miami and the acquisitions that you’ve done this year were 57% leased. So can you help us understand how you are thinking about your risk appetite today and where you see the best risk adjusted returns?

William P. Hankowsky

Yeah. I think [John], you’re exactly sort of picking up where we are at, which is, there is a piece of us that is wants to remain cautious just given the economic back drop, right. So I mean and as I said, I’m glad to have a 243,000 job number, I’m glad to have a unemployment go to 8.3% and I’m glad to have a 2.8% GDP number in the fourth quarter. That all feels good, in the right direction as if the wind starting to pickup a bit.

But we were a little bit in this position a year ago, when people were getting real excited about some economic news and we ended up with earthquakes and bond, in that way [people] believes debt limits and then the euro crisis. So we also know that that risk is very high, so you don’t want to get too heavy or so. So we feel very good about where we are right now, in terms of where Liberty is at and how we are positioning ourselves against the market, but we want to be very alert to something that could happen.

Having said that, we think this is an interesting time in the cycle, and it maybe, I mean it's an interesting time in the cycle, which is its beginning to get better and you need to think a little bit about what I would call first mover advantage.

So knowing where our markets going to be and being able to look out three to four quarters and making judgments, I mean they are judgments, about the opportunity to make money, because you are going to be there and no one else will be there, is something we think we are pretty decent at. And this is an opportunity to do that i.e. spec development, putting product in markets and being able to sort of pick up some of that wind and opportunity as it exists.

On the other hand, as you pick up, we don’t see to do it everywhere, I mean there is only – there is places to do it. Last year, we had that interesting opportunity, we bought a vacant industrial building in the Lehigh Valley, it has been vacant for roughly four years, our guys knew there were deals in the market and they had it on a sign basis a 100% leased in 30 days.

That’s a kind of stuff I think that we are good at. Rob mentioned the fact, people in the markets know what’s going on. So we are prepared in a very disciplined way to take on some amount of vacancy whether its vacant buildings or whether its spec buildings, and get them leased up overtime.

And if you look at our occupancy schedule on page 10, you can kind of go quarter-by-quarter and see stuff we got and see how its overtime gets leased up. We are going to be measured in it, so your question was appetite, we’ve had a good helping this past year, good helping of spec buildings and vacant buildings, I am not sure we’re going back for seconds in every market we’re in, we need to digest that first, and then we’ll go back. So I don’t think you’ll see a second spec thing, and we have – to deal with first building. But if we get that one under – something good happening, maybe we do another one. So it’s going to be measured thoughtful, but it’s an opportunity that we think we can take advantage of – because of balance sheet, market knowledge, development expertise, and would want all that to bear, and now is the best time in the segment to it, just as it begins to move.

John Steward – Green Street Advisor

Thank you.

William P. Hankowsky

Thanks.

Operator

Your next question comes from the line of Ki Bin Kim from Macquarie. Your line is now open.

Ki Bin Kim – Macquarie Research Equities

Just a quick follow-up. In your balance sheet assets held for sale, what is the NOI associated with that?

George J. Alburger, Jr.

I think it’s – this is George. Assets held for sale, I think it’s about $4.8 million.

Ki Bin Kim – Macquarie Research Equities

Is that a first quarter event most of it?

George J. Alburger, Jr.

Yes.

Operator

There are no further questions at this time.

William P. Hankowsky

That was great. I want to thank everyone for listening in. I appreciate it. We're very – as we said, 2011 was and we're very excited about 2012. So, look forward to talking to you at the end of the first quarter. Thanks.

Operator

Ladies and gentlemen, this concludes today's conference call. You may now disconnect.

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