Liberty Property Trust's (LPT) CEO Bill Hankowsky on Q4 2015 Results - Earnings Call Transcript

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Liberty Property Trust (NYSE:LPT)

Q4 2015 Earnings Conference Call

February 09, 2016 1:00 PM ET

Executives

Jeanne Leonard – Investor Relations

Bill Hankowsky – Chief Executive Officer

George Alburger – Chief Financial Officer

Mike Hagan – Chief Investment Officer

Analysts

Alexander Goldfarb – Sandler O’Neill

Manny Korchman – Citi

Craig Mailman – KeyBanc

Ki Bin Kim – SunTrust

Eric Frankel – Green Street Advisors

John Guinee – Stifel

Blaine Heck – Wells Fargo

Brad Burke – Goldman Sachs

Tom Lesnick – Capital One Securities

Eric Frankel – Green Street Advisors

Jeremy Metz – UBS

Operator

Good afternoon. My name is Connor and I will be your conference operator today. At this time I would like to welcome everyone to the Fourth Quarter 2015 Results 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. Jeanne Leonard, you may begin your conference.

Jeanne Leonard

Thank you, Connor, 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 our Chief Investment Officer, Mike Hagan.

Liberty issued a press release detailing our results as well as a supplemental financial package this morning and you can access these in the Investors section of Liberty’s website at www.libertyproperty.com. In these documents 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 in the company’s filings with the Securities and Exchange Commission. The company assumes no obligation to update or supplement forward-looking statements that become untrue because of subsequent events.

Bill, would you like to begin?

Bill Hankowsky

Thank you, Jeanne, and good afternoon, everyone. 2015 was a very good year to be in this business and the fourth quarter continued that momentum. FFO for the quarter was $0.65 and for the year, it was $2.69. We increased guidance during the year and ended at the high-end of that revised range. This is reflective of the fact that basically all of the elements of our 2015 business plan performed at or above budget.

As you know, a lot has happened in the financial markets since then. So, I think I’m supposed to talk about what has changed, but actually what I’d rather talk about is what has not changed. We still anticipate selling upwards of $1 billion of suburban non-core office properties this year. And we see no erosion in interest that would suggest otherwise.

Turning to our industrial platform, the industrial markets continue to operate in that rare sweet spot, where demand is solid, supply is in check, and the tenants often have limited options at certain size points about their ability to satisfy their needs. In this environment, having high-quality, actively managed in-service properties coupled with development capabilities such as we have at Liberty is a competitive advantage.

And this is the environment that allowed us to do more than 29 million square feet of leasing last year and 700 plus transactions, to drive occupancy to 93.7%, to increase rents past our budgets, to start $520 million in development, to bring into service nearly 3 million square feet of new development in strong yields, to produce solid positive same store performance while executing our strategic goal of reducing our exposure to non-core office.

It’s been nearly two months since we laid out our business plan for 2016 and this continues to be a very good market in which to do business. We signed 1.4 million square feet of leases in the first month of the year and we’re continuing to experience very good prospect activity. Although we ended the year at what historically might be considered full occupancy and so we prudently forecasted little occupancy growth in the New Year, we’re in fact continuing to grow occupancy.

Industrial occupancy on a signed basis is now higher than it has been at any time in the last 10 years. The supply dynamics in the marketplace continue to allow us to push rents and we’re experiencing strong industrial rent increases within the portfolio so far this year. Liberty’s leasing goal has always been to maintain a healthy tension between occupancy and rent and to create built-in future value by stressing the importance of contractual rent increases.

Even in the depths of the 2008 to 2010 downturn, we maintained this discipline. We did not drop rents to all-time lows, nor did we sacrifice rent bumps to maintain occupancy. This provided a much more stable and sustainable revenue stream during difficult times, something Liberty has rightly been known for during our time as a public company. But it also produces a steady or more muted rent growth trajectory during times of market rent growth. In our opinion, this is how the businesses supposed to work.

We also are continuing to see opportunities for development in 2016. Although we see strong fundamentals and solid opportunities, we understand that many of you view development with increasing scrutiny and so do we. So we remain alert to the needs to be extremely agile in revisiting our development assumptions in such a volatile environment.

In sum, 2015 was a good year to be in the real estate business. And even with the early choppy waters of January, we see 2016 as another good year for our core portfolio, for development activity and for completing our strategic repositioning.

So let me turn it over to George and Mike. George?

George Alburger

Thanks, Bill. FFO for the quarter was $0.65 per share. During the quarter we brought into service five development properties with an investment of $75 million and we started five wholly-owned developments with a projected investment of $108 million. As of December 31, our committed investment in wholly-owned development properties was $672 million and the projected yield on this investment is 8.2%.

During the quarter, we sold 45 properties, 3.2 million square feet and 20 acres of land for $300 million. The cap rate on these sales is 8.8%. The biggest part of the fourth quarter sales activity was the sale of the 2.4 million square foot Horsham suburban office and high finished flex portfolio. The cap rate on this sale was 9.2%. Based on our underwriting, the cap rate on an AFFO basis would decrease by approximately 300 basis points.

For the core portfolio, we executed 6.1 million square feet of renewal and replacement leases. For these leases, rents increased by 7.7% on the straight line basis. For the same store properties for the fourth quarter, operating income increased by 2.6% on a straight line basis and by 0.9% on a cash basis. For the year, the straight line increase was 2.4% and the cash increase was 1.6%.

Moving on to capital activity, we prepaid a $60 million, 7.5% mortgage loan and we also satisfied a $16 million, 3.4% unsecured note. We were active with our share buyback program. During the quarter, we purchased 197,000 shares for $6.3 million, an average price of $32.18 per share. And in January, we purchased 797,000 shares for $23.7 million, an average price of $29.74.

I want to take some time here to discuss the effect that Cabot leases have on our cash rental rate increases. As you may recall when we purchased the Cabot portfolio, we mentioned that there were a fair number of leases with above market rents. This affects our cash rent increases. The increase in cash rents for industrial leases executed this quarter was 0.2%. Why so low? Because this quarter, there was an 11.6% cash decrease on an 850,000 square foot renewal with the in-place tenant.

The cash rents on the expiring lease was $5.43. We renewed the tenant for $4.80. There was minimal TVI [ph] for this renewal and $4.80 is a strong rental rate. We’re happy to get $5.43 in rent for the past two years, but the rent was above market. When we bought the property, we adjusted the cash rent to market. The increase in rent on a straight line market adjusted basis for this lease was 6.1%. For the fourth quarter, if you exclude the Cabot leases, the increase in industrial cash rents goes from 0.2% to 7.2%. For the year, it would go from 2.3% to 5.5%.

These Cabot leases also affect straight line performance, but it’s not quite historic. Including the Cabot leases, the increase in straight line rents for industrial leases for 2015 is 9.4%, excluding the Cabot leases, the increase is 11%. So as Bill mentioned, rent bumps, leases out of step with market and other factors can affect calculated rental rate increases.

And one last item, which is a historical pattern for us, is the accelerated vesting of long-term incentive compensation. This will result in $4 million more G&A expense in the first quarter of 2016, compared to the remaining three quarters of the year.

With that, I will pass it on to Mike.

Mike Hagan

Thanks, George. Let me start by recapping our 2015 investment activity. During the year we brought into service 15 development projects totaling 2.7 million square feet. Five of these projects were build-to-suits. The inventory projects we delivered were in seven different markets. They include an office building in Tempe, Arizona, whereas of December 31, our office vacancy is less than 7%.

Flex building at the Philadelphia Navy Yard, where our flex product is 100% leased and eight multi-tenant industrial buildings. These multi-tenant industrial buildings average 174,000 square feet and are located in the South Florida, Chicago, Dallas, BWI corridor and Houston markets. Our average industrial occupancy in these five markets is 95.8%.

The delivered pipeline was 97% leased as of 12/31/2015. We will continue our disciplined approach towards inventory development. We will evaluate market vacancies, market demand and the status of our own portfolio submarket by submarket before commencing any project.

On the acquisition front, we acquired one property during the quarter for $11 million. This property is a 198,000 square foot, 32 foot clear multi-tenant industrial building in Minneapolis. The building was built in 2014 and is located in an industrial park adjacent to other Liberty industrial buildings. The building was empty at acquisition, and subsequent to the acquisition, we executed a lease for 35,000 square feet. Upon stabilization, we anticipate a 7.3% return. This brings our acquisition total to the year for $112 million.

On the disposition side, as George mentioned, we completed the sale of our Horsham properties in the fourth quarter. This brought our 2015 sales to $549 million. As we explained on our last call, we have several dispositions in the pipeline. Subsequent to the year-end, we have closed on $19 million of sales and have several sales totaling $112 million with our deposit money. In addition, a joint venture which Liberty is a 25% owner has approximately $90 million under firm contract. Our expectation is all of these transactions will close by the end of the first quarter. All of this activity will decrease our suburban office portfolio.

Since we announced our sales guidance in December, we have been contacted by a number of investors, mostly private equity groups, interested in acquiring portions of our suburban office portfolio. These discussions are – as well as activity, we were engaged in prior to our December call, give us a large pool of investors to work with for our targeted dispositions. With this activity as well as the expected closings in the fourth quarter, we are making significant progress towards our 2016 guidance of $900 million to $1.2 billion in sales for the year.

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

Bill Hankowsky

Thanks, Mike, and thanks, George. And Connor, with that, we are happy to open it up for questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Alexander Goldfarb with Sandler O’Neill. Your line is open.

Alexander Goldfarb

Good morning.

Bill Hankowsky

Good morning.

Alexander Goldfarb

Or I should say good afternoon.

Bill Hankowsky

Yes.

Alexander Goldfarb

It has been an exciting earnings week to say the least. So just a few questions here. On the dispositions, Bill, you said that you affirmed the $1 billion that you are targeting and you guys mentioned that there is a number of activity along the way. So much in the same way as we have asked people with tech exposure, the headlines versus reality we will ask you the same thing.

So given all the headlines in the credit markets and what’s going on in the general capital markets, how do we think about that relative to the fact that it doesn’t seem to have any impact on the product that you are putting to market and presumably the product you are putting on to the market is more B type asset as opposed to trophies. So if you can just walk us through why we wouldn’t see a disconnect and what the buyers see that the public markets don’t see?

Bill Hankowsky

Sure. Well, let me start with what are we working on selling. So when we gave you guidance we were – I think relatively specific in the assets that we were working on this year. So we’re working on disposing of our non-core suburban office product, which we identify as being in our South Florida market, Phoenix, Tampa, Minnesota and a portion of Phoenix, not all over Phoenix, and then some of our – additionally, some more of our suburban Philadelphia product.

So, some of those markets are quite attractive to people to be candid. Some of them, people find as very interesting value propositions. This is the same rough idea that people have had now for the last couple of years, which is, can I acquire these properties – this product at a price point where if I put significant leverage on it, the leverage could be 60%, 70%, 80%. And so I think leverage has moved up a little bit along the continuum.

I can get a very nice current return on my equity given current market rents and current economics. And is there a possibility down the road that things get better? Perhaps so. So I think that – and the fed, they moved the short-term in the fourth quarter, but we’ve actually seen the 10-year go down, I know spreads have widened going the other way, but all-in, there is still relatively inexpensive debt, it still remains available.

So the folks we’re talking to have raised capital. It’s been – these were funds or private equity or whatever. It was targeted at this kind of economics and this proposition and they remain active and we remain active in dialogue with them.

Alexander Goldfarb

So basically the debt markets and the availability has not changed?

Bill Hankowsky

I think that’s right and I think the other part of it is that the raw fundamentals of the market haven’t changed. I mean, in other words, there’s still deal flow in suburban office, people are still doing transactions. People find owning real estate in South Florida or owning real estate in Tampa or owning something in Phoenix. These – I mean people for various different reasons don’t find those necessarily unattractive markets. So, real estate is trading and people are doing transactions.

Alexander Goldfarb

And then on another perspective question, can you just comment on the credit quality and your watch list now versus perhaps six months ago across your whole portfolio?

Bill Hankowsky

Almost no perceptible difference, I mean, I know people are nervous and they should be and we are too, right. So everybody should be paying attention to what’s going on. Look, we might have had none in Houston and we have three today. So it’s a slight tick there, which shouldn’t surprise you. But I can’t think of any other market where there’s anything that’s noteworthy or of concern.

Alexander Goldfarb

Okay. And then just finally on the developments, I think the stuff you delivered in the fourth quarter was a 7.9% yield, your starts that you cited in the release were 8.5%, so is that just mix or perhaps the length of time you have owned the land or why are the new yields higher than the older yields?

Bill Hankowsky

Getting better at it. No, it’s – some of it is mix. So we – some of what is coming in, there is some pre-leasing that was done, one is a build-to-suit. So, it’s a little bit the mix of, and it’s a little bit less inventory-ish in the mix coming in. And though people – and I just want to remind people of this, often people believe that yields on build-to-suits are lower than yields on spec because you get driven down by competition. We have historically done extremely well on build-to-suits, because generally I think people find our ability to create value for them in solving their real estate problems at locations that they are desirous of, we can do good transactions. So it’s basically mix and it’s our history pattern.

Alexander Goldfarb

Okay. Thank you.

Operator

Your next question comes from the line of Manny Korchman with Citi. Your line is open.

Manny Korchman

Hey, good afternoon, guys.

Bill Hankowsky

Hey.

Manny Korchman

Bill, in your press release this morning you made a comment about that you are encouraged by the strengthening office market in a resurgent Philadelphia. Was just hoping you could give us more color on the comment and if that changes anything for the way you are looking to grow the business over the next couple of years?

Bill Hankowsky

No, I just – we just wanted to take note of – we remain very positive on what we are seeing at the Philadelphia Navy Yard. We had, I think three build-to-suits we signed last year. There is a number of firms we’re taking to right now, so that feels very good. That’s part of the Philadelphia market.

We continue to have good progress on our efforts in Camden. I know that’s across the river, but that’s part of the Philadelphia metropolitan area. So that project, we have good dialogue with people who conceivably could take most if not all of that space that we would develop for them, they would own it, but we would produce that product for them.

We have made progress in moving ahead with our rezoning in the Malvern Route 29 corridor. So last November, December we got both planning commission and then subsequently township supervisor approval for the potential project there that would involve a mix use, residential done by a residential developer, not us, we’d sell pads. But we’re encouraged by some of the interest that some office users have come forward who might have some interest in product there.

So it just feels – I there is interest by people in new product to house, today’s employee in a very productive way, it plays very strongly to our development skills, and so we just see it kind of happening across the metro.

Manny Korchman

Thanks for that. And, George, if we think about the combination of significant asset sales, an appetite for share repurchases which you have shown and your leverage ratios, how do we sort of think about those three concepts together and what is your long-term leverage goal?

George Alburger

Yes, Manny. I think we were clear when we announced the share buyback program but let me – but let’s answer that question right now which is we plan to do that on a leverage neutral basis. And if you look on that ratio page that we have for the longest period of time, debt to gross assets is around 40% and net debt to EBITDA 5.9 times, 5.7 times, 6.1 times so it hovers around there. It will bounce that net debt to EBITDA is going to bounce around during the course of this year until we in fact execute and have the whole $1 billion of funds coming in, but there would be – a meaningful portion of that would be applied to paying down debt in order to maintain our ratios at kind of that 6 times area.

Manny Korchman

Thanks guys.

Bill Hankowsky

Thanks.

Operator

Your next question comes from the line of Craig Mailman with KeyBanc. Your line is open.

Craig Mailman

Hey guys. Bill, maybe just a follow-up on the development there. In your prepared comments you had mentioned that the market is getting a little bit more worried and you guys are reevaluating some stuff. And just curious how maybe a little bit of additional color there when you kind of look at where your cost of equity has gone which is kind of in line with the development starts that you guys started this quarter and just on a risk-adjusted basis, the appetite there versus deploying more of the sale proceeds to share repurchase and just deleveraging and maybe coming in under that 6 times range?

Bill Hankowsky

Yes. So, you’re right, these are all avenues that we have to look at. So let me just start with development for a minute. So, the first piece about development I think is, does it make sense to do these projects in a kind of market sense? Is there demand for them? Will we get them leased? How do we feel about all of that? And as Mike indicated, I mean, we’ve got a pipeline now that’s about 9 million square feet or so. It’s about 53% I think leased. We have about another 800,000 square feet or so of leases that are in negotiation route for signatures. So the pipeline is probably more or like in the getting close to be around 60 plus percent, 65% leased. We’ve got another 4 million to 5 million square feet of proposals and prospects out there. So there’s still very good activity against the in-place pipeline.

And then as Mike mentioned, how does our own portfolio look and out of the 19 segments we report on, in the supplemental market – industrial markets, we’re over 95% leased in 14 of them. So we have a very strong portfolio that is on assigned basis. So we’re – we have to think about the issue of, do we have product in the market to satisfy our customers’ needs? That’s both in-place customers and new customers. Then of course you look at the market to make sure that there isn’t overbuilding and you want to be careful about not putting product in a place, there were even though we don’t have anything on the shelf, there’s too much – other people have too much product on the shelf. So, we go through that analysis.

And then we have to make sure that all that demand-supply side, both our own dynamic and the market dynamic whether we can get a return that justifies the use of our capital. And as the prior question noted, I mean the development pipeline still is getting – what was it 8.2% for the whole pipeline I think for the quarter and the stuff we brought it was an 8.5%. We think that is still an attractive use of capital or having met those dynamics because that’s going to get leased at good rising market rents.

At the same time, we put in place the buyback program and we’ve been using the buyback program up through as George reported, through last month, January. So we’re not – we’re going to keep track of share price and we are going to keep track of where rents are, and we are going to keep track of yields and think about how we allocate the capital we have as we proceed. So we’re very alert to balancing all of that.

Craig Mailman

Is there a threshold or kind of a trigger on your IRRs of where your cost of equity goes to when you guys really just even though you may have market demand you just take a step back and say, maybe we just take the foot off of the gas here?

Bill Hankowsky

There is definitely a place where we would say we’re not doing that. And that could be an acquisition, that could be a development and we’re constantly alert to that. I mean, if you were in the weekly investment committee, you would realize that there have been transactions over the last couple of months, that where we have said we’re just not doing that right now. That doesn’t make sense for us.

So we have a long history of being very disciplined about how we think about development and how we think about when we will go and when we won’t go. And it has been successful and we’re very conscious of it. Yes, there is – there are thresholds.

Craig Mailman

Okay. That is helpful. And then just a quick one on the disposition. I know you said that the debt markets are still open for potential buyers. Are you hearing any rumblings though about the upcoming CMBS risk retention changes that maybe guys are pushing to get deals done sooner rather than later and does it give you an opportunity to accelerate the dispositions to be more front half maybe through 3Q?

Bill Hankowsky

So, let me say it this way. We would like to get it done as quick as possible and there might be buyers that would like to get it done as quick as possible and we are happy to accommodate. I will just leave it like that.

Craig Mailman

Great. Thank you, guys.

Bill Hankowsky

Thank you.

Operator

Your next question comes from the line of Ki Bin Kim with SunTrust. Your line is open.

Ki Bin Kim

Thank you. Just a couple of quick questions on your development pipeline. You have an office asset in Houston that is supposed to come online next quarter or I guess first quarter, this quarter and a couple more assets in the second quarter, which are still I would say under leased or not leased. Is any of the – like I said, what are your thoughts on those specific assets and specifically what is embedded in your guidance for lease up on those assets?

Bill Hankowsky

So, in terms of next quarter, the building in the Carolinas on Caliber Ridge, we are working on a lease to get that to 100% hopefully that gets signed and done. We also have a lease out for the one in Richmond that would bring that to north of 80%. I’m sorry, that would bring that more to 70%. Again, it has to get done, but there is a party we’re negotiating a lease with. We have about 150,000 square feet of prospects for the Houston building, but I have to tell you, Houston is a slug, we’re nowhere near going to get all those guys. I’d be happy if we can get some of them.

So, I’m not worried about the industrial buildings in the two other markets. I will tell you the Houston building will not come in where we planned it to come in, and it’s going to take longer to get it leased than we expected. And that’s just sort of the fact of what’s happened in that market. But that was – we understood all of that when we produced guidance. So yes, we weren’t assuming something different than that. Where we do – I think you’re pretty aware, we do a very granular budget for the year, we got space-by-space, product-by-product, when we think it’s going to get leased.

And there are leasing assumptions about all those – the buildings I just delineated including the one in Houston and it assumes that in the Houston buildings, it’s a longer lease up than we had originally hoped.

Ki Bin Kim

Okay. And just, second quick question and I know you already answered part of this but when you are negotiating with tenants, I guess we will focus on the industrial segment, any financial pushback or asking for concessions or leases have taken longer to sign given what is going on in the world?

Bill Hankowsky

No. no, I know that is what one would think would be happening. But I have to tell you, when you go out in the market and you’re in the Lehigh Valley and when we are 99% leased and some market is 97% leased. And you’re coming up for renewal and you really don’t have an option, like if you don’t renew, I don’t know where you’re going or you have a requirement and it’s – and there’s only two spaces to put it in and you don’t know where to – so, I don’t see that. No. We don’t see it.

Ki Bin Kim

Okay. Okay, thanks Bill.

Bill Hankowsky

Yes.

Operator

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

Eric Frankel

Thank you, thank you. I was hoping you could comment on a cap rate environment for industrial. I think some of your peers have mentioned that buyers were a little bit more selective for industrial assets today and perhaps they are a little bit more selective about lower quality industrial. So I was hoping you could comment on that?

Bill Hankowsky

Well, Eric, I will give you my thoughts and Mike might want to chime in. I think there is still a fairly strong appetite for industrial real estate across – kind of across the spectrum. There is no question that in what I will call the core markets, the primary markets, the first tier markets, it doesn’t feel like cap rates have moved up, but they still remain fairly aggressive if somebody is trying to buy something in those markets. We’re – we have a fairly low – I think, what is it, zero to $100 million or something expectation for acquisitions this year. So, we are out there seeing if there is anything around, but I have to be honest with you at the moment I haven’t seen enough movement in pricing to feel that somehow it has opened up and there is stuff to buy at prices that make some kind of sense. Has it changed a little bit in some of the markets? I am not sure. Mike, what is your thought?

Mike Hagan

Yes, I would tend to agree with you, Bill. I don’t think there is much movement out there. I think that Eric’s comment about selectivity, that may enter into it a little bit but there is still plenty of capital trying to chase this stuff so that to the extent somebody loses out on the deal they are going to get aggressive on the next one.

Bill Hankowsky

So, a B asset might be get less bids, but it is not getting no bids. But a tenant is getting 7% to 5%.

Eric Frankel

Okay, that is helpful commentary, thank you. I just have one more follow-up and then I will jump back in the queue. I just noticed that your occupancy in your Southeast PA and Northern Virginia office portfolios dipped down a little bit, so I was just wondering if there is any additional color you could share?

George Alburger

The Horsham sales had something – this is George – the Horsham sale had something to do with the drop-down in occupancy in Southeastern Pennsylvania.

Bill Hankowsky

That’s right. And the other part of Southeastern Pennsylvania just to remember is, we’ve got that 280,000 square feet of mothballs effectively self-imposed vacancy that is inside there that is part of that percentage. Sorry, what was the other one?

George Alburger

Northern Virginia.

Bill Hankowsky

Northern Virginia is just a rugged market and we have been very – to be candid, we are very – we are being very selective about leasing activity versus PI costs an investment in the real estate just given where that market is going.

Eric Frankel

Okay. Thank you very much.

Bill Hankowsky

Thanks.

Operator

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

John Guinee

Great. Thank you very much. I guess probably for George, when I look at your guidance for 2016, refresh my memory, did you give some AFFO or FAD guidance for 2016?

George Alburger

Kind of, John. Basically when I gave the – or when we gave the guidance for 2016 and we’ve talked about the – what the reduction would be on our FFO as a result of the sales. I said that, that’s the FFO reduction. On an AFFO basis it was different than that. And I think, I can’t remember of the top of my head, I think it was something like $0.16 different than that, $0.16 less dilution, if you will, from the sales.

John Guinee

Okay. Then…

George Alburger

If I could find my old notes, I would tell you.

John Guinee

Okay. Taking that as a base, it kind of gets your fad right about your dividend levels. So I guess, Bill or George, two questions. Will the $900 million to $1.2 billion necessitate a special dividend sometime in late 2016 or 2017? And second, would you reset your dividend in 2017 to what appears to me, if you wanted to be in line with your peer group given various FFO and AFFO ratios, you would probably reset your dividend down to about $1.40 or $1.50?

George Alburger

John, I’ll do the first part of your question, and I’ll turn the second one over to Bill, which is I guess a little bit more of a board decision. But we should be able to handle the tax impact on – with respect to the gain on sales without a special dividend, that’s where our head is now. We’re – we can – these are big portfolios, without getting into extraordinary levels of details, when you sell a big portfolio you can be – you can do – the allocation of the purchase price has some impact on wherein resides some of your gain or loss. So, all done on that front.

Bill Hankowsky

And then John, to the resetting of the dividend, I think, the only answer I can give you today is, as you know that is something the board thinks about. And I think that’s the kind of thing we would look at later in the year, make sure we get all these sales done the way we want them done. See where it leaves us vis-a-vis our earnings projections – now candidly, not just for 2017 though, probably at that point you’re looking at 2017 and 2018. Because, I’m not sure you necessarily would want to, I use the term, drop it to then very soon after have to raise it back, because you’ve taken a dip because of sending out the earnings from the dispositions and bringing back earnings vis-a-vis the pipeline.

So I think it’s a – it will be a – I think it is partially a question of duration, as well as extent. You’ve raised the extent part. I think the other factor, the other access is the duration access.

John Guinee

Great. Thank you very much.

Bill Hankowsky

Thank you.

Operator

Your next question comes from the line of Blaine Heck with Wells Fargo. Your line is open.

Blaine Heck

Great, thanks. Bill or Mike, can you just elaborate a little bit more on the interaction that you guys have had with the private equity groups? And maybe the possible size of any portfolio deals that might come out of those discussions?

Bill Hankowsky

You mean in terms of us selling our stuff?

Blaine Heck

Right.

Bill Hankowsky

Yes. So, I think the best we can do for you today is, as Mike indicated in his comments and I’ll let him jump in a bit. We were talking to various groups pre our guidance call. So we had some sense of where we thought the market might be before we put forward our decision to dispose of all of the non-core assets this year as a goal. And subsequent to that, I think we’ve actually been pleasantly, we’ve been pleasantly surprised with the amount of incoming inquiries of people who have said hey, if that’s what you’re up to, we might have an interest in talking to you.

I think, when you think about – so that’s one X – one piece of it. The other piece of this, is the way we have handled our dispositions historically. And as you know from our perspective, we have found an effective way to do it is to exit an entire market. So, what I mean by that is, if we have decided let’s get out of suburban office in Richmond, let’s try to take all those assets together, and see if there’s a logical buyer. That allows us to simply move on. We’re no longer on that product type in the market to right size the team with regard to that. And we think, to some extent it kind of works with the buyer.

So we have tended not to sort of break these up and sell five buildings in the market, and three over here four over there, they tend to be the whole market or whole submarket. So going back to the fact that we’ve indicated where we’re directing our efforts you shouldn’t be surprised, if you would see this happen in at least a series of buckets that would be, whether it’s one market or two markets together or three markets together. So I would describe our general approach at this point being portfolio sales not asset by asset. Is that fair Mike?

Mike Hagan

Yes, I think, Blaine, the only thing I would add to it is, it is sort of a matching process where you’re going to get the right buyer with the right piece of real estate to maximize the sale price for our shareholders.

Blaine Heck

Yes.

Mike Hagan

How fast you can execute that and that’s – those are the transactions that you put together.

Blaine Heck

Great, that’s really helpful. And so, have any of those discussions had any impact on kind of your expected cap rate range of 7.5% to 9%? Is there any early indication we should expect them to come in at maybe one end of the range or the other?

Bill Hankowsky

We are leaving the range where it is for today.

Blaine Heck

Fair enough.

Bill Hankowsky

That is the best we can tell you.

Blaine Heck

Okay. And then last one probably for George, can you just talk about what the impairment you took during the quarter was related to?

George Alburger

It was related to a – I think it was modest. And it was in a JV, no, I’m sorry, it was – it had to do with an asset that is – an asset that has a bargain purchase option.

Blaine Heck

Okay, great. Thanks.

George Alburger

Just the possibilities of the buyer exercising that purchase option.

Blaine Heck

Sure. Thanks.

Operator

Your next question comes from the line of Brad Burke with Goldman Sachs. Your line is open.

Brad Burke

Hey, good afternoon, guys. Just a follow-up question about market sentiment on suburban office sales. And I know you already touched on this but I just want to make sure that we are thinking about it correctly since it that sounds like there is a pretty big disconnect between the public and the private markets. You are not seeing any change in the depth of the better pulls, there is no change in the composition of potential buyers and no real change in cap rates and no change in the time that you think it will take for property sales to close, is that right?

Bill Hankowsky

Look, again, there are a whole bunch of people out there who have an interest in doing this. We have an expectation about how we want it to happen. Some of those people share that expectation, some don’t. So we’ve talked to some people and it was good conversation and it didn’t go anywhere. But they are off looking to buy something else. In other words, they still have capital, they still want to place it maybe not at the price we would like to sell it for or they don’t like the market as Mike said, there is just not a match.

But it is not as if we have seen people say we are not doing this anymore. We are shutting up the shop and we are not buying suburban office so I think there are still people out there buying suburban office, there are still people looking in these markets, there are still people who see the leverage and putting the leverage on it and making some economic sense for them and their investors. Everybody is rate conscious so that is not new but clearly with volatility people are aware of it and people are aware of the availability of that capital.

So I tend to think it makes people a little more – if there is something they want to get done, they probably want to get it done sooner than later because they probably share the same concern. We want to get it done because we want to move on. They perhaps want to get it done because they want to make sure they can close it before market volatility affects their ability to execute. I think in that since we get to the same place for different reasons.

Brad Burke

Okay, that’s helpful. And then just another one on dispositions. It looks like you sold about $300 million in the fourth quarter and I think you had previously anticipated selling between $350 million and $450 million. So just some color around what would be driving that whether any of it slipped into the first quarter?

Bill Hankowsky

Yes. It did. Mike, you commented on how much you have got in the pipeline.

Mike Hagan

On a wholly-owned basis, we have closed $19 million after the first of the year, there is probably another $112 million worth that we have under firm contracts. We have real hard deposit money up. We expect to close here first quarter – that there’s a couple of transactions at a joint venture that we own a 25% interest in, has about $90 million under contract. Some of that stuff we thought could get done by the end of the year and just for one reason or another it moved into the first quarter.

Brad Burke

Okay, thank you.

Mike Hagan

Thank you.

Operator

Your next question comes from the line of Tom Lesnick with Capital One Securities. Your line is open.

Tom Lesnick

Hey, guys good afternoon. My first question has to do with the UK land sales. I was just wondering if you could provide an update on where that stands and remind us again how we should expect the cadence of that to flow through 2016?

George Alburger

Yes, this is George. It was about $760,000 for the quarter from UK land sales and it kind of resides in a couple of spots on the income statement. There is around $950,000 that’s in other income and there is around $200,000 that’s in tax. I think when we gave guidance on this, we kind of lumped it in with a variety of other items kind of miscellaneous items but I think we were clear that it would be less robust than it was in 2015 both what was going on in Cambridge and what was going on in Hill for UK land sales.

What we have done in Kings Hill which is where we had a fair amount of sales to homebuilders over the years, we have run through the entirety of virtually the entirety of the Phase II planning approval so we have to wrap up Phase III planning approval and that will get it done. But there is a little bit of a pause if you will. So for the first half of the year it should slow down somewhat and then pick up a little during the second half of the year.

Tom Lesnick

Got it. Appreciate the insight and then very quickly, I know you mentioned there was about a 300 basis point spread between your nominal cap rate this quarter and your economic cap rate net of CapEx. How should we expect that for 2016? Is that a relative ballpark number we can use for 2016?

George Alburger

I’m not sure if it is exactly relative. I think – I couldn’t recall off the top of my head and I think when John Guinee asked it, I said I couldn’t recall but I think it was something like $0.16. It was a range, it was $0.10 to $0.15 which was the range of the adjustment if you will from FFO to AFFO. I think it is probably pretty reasonably in that range if you will.

Tom Lesnick

Okay. Thanks, guys. Appreciate it.

Bill Hankowsky

Thank you.

Operator

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

Eric Frankel

Thanks for taking my follow-up question. I have two quick ones. First, I was hoping you could talk about the Eastern and Central Pennsylvania industrial market? Just want to get a sense of supply there and obviously that is a thick component of your industrial portfolio. I just want to get a sense of where rents are trending, market rents?

Bill Hankowsky

So let’s do it in two segments, Eric. Let’s do Lehigh Valley and then let’s do Central Pennsylvania. Lehigh Valley, there is very little new supply so one of our peers has 1 million square footer on the side of a market, a private guy has a 500,000 square footer. These are inventory products. We have under construction of 1.2 million square footer and we also have under construction two buildings which are build-to-suits. So we have three buildings actually under construction up there. But there is only really sort of three new one sort of happening.

Other people have talked about other stuff. There is a building just down to the west of Bethel that just I think just got taken I am told. I won’t name the customer in case they haven’t but I don’t want to name customers. But I think somebody has taken that entire building so I think that is effectively off the market. So the market is relatively tight. People are talking will they start something else or not.

Somebody asked the question earlier about the markets and this is an example of a market where depending on what I need, I may not be able to find it very easily and there are – when I think about the number of proposals we have responded to or people who are looking for large blocks, that amount of inventory may get spoken for this year. So rents are moving up. People are five, 525, 530 – by the way I am talking best stuff, A, not a B building on average so where’s the spot rent. So it feels pretty decent. You go to Central Pennsylvania a little bit more product sort of in Carlisle and down there is people building.

But again, not a ton of it. It is a bigger submarket and again depending on what you are looking for, it might be hard to find it. The rents are not quite where Lehigh Valley is but they are also going up. And there is good activity so there is a lot of proposals, people prospecting. And then what is the very, very early sign is when brokers are doing surveys, so brokers go out and do surveys to prime up then to do a proposal like who is going to get the proposal and there has been a fair number of those happening. So at least again what is it six weeks into the year, it feels like activity is pretty decent and I think you are going to see rent growth in both markets this year.

Operator

Your next question comes from the line of Jeremy Metz with UBS. Your line is open.

Jeremy Metz

Hey, guys. One, Bill, that was a lot of good color on Pennsylvania but I was just going back to something you said earlier, you kind of mentioned seeing some strength in the industrial rents yet we are seeing inventory climb increasingly higher. There’s a lot of talk about more caution entering the market. So I’m just wondering what on the ground is really giving you confidence that rents can continue to move higher here? And then maybe as a follow-up to that, which markets do you think will lead or lag this year?

Bill Hankowsky

So when we gave guidance in December, we thought – I think we said that we thought market rents would go up in 2016 but at a lower level than they have been going up the last couple of years. So in other words, we still see some rent growth but it is 2016, it is not 2015 anymore. It depends on where you are at. So if you are in Raleigh, it is tight. If you are in Charlotte, there is a lot of demand, rents are moving. If you are in Houston, you’ve got an oil problem and rents have flattened out. If you are in South Dallas where there is a lot of big boxes, the big box rent may not be moving a whole lot.

But if you are in – if you are looking for a multi-tenant space in the DFW or Great Southwest markets in Dallas, those rents are moving up. So are they moving up 3%, 4%, 5%? Markets rents, in the market but I go back to this quarter. No one has asked me this question, so I will give it out since you may be the last question. 170 million square feet under construction in our markets, 24 markets this quarter represents 1.4% of inventory, it’s 40% pre-leased.

That’s like almost exact same number from the last three quarters. So what is happening is there is this discipline of supply with still decent solid demand coming together creating positive absorption equals lower vacancy, down 20 basis points nationally, 90 basis points year-over-year in the fourth quarter, rents are going up. That is what happens. That is sort of where we are at. That is where the market is right now. It hasn’t pulled back.

Jeremy Metz

Thanks. Appreciate the color.

Bill Hankowsky

Okay.

Operator

There are no further questions at this time. I will turn the call back over to the presenters.

Bill Hankowsky

Thank you everyone for listening and appreciate it. We will talk to everybody at the end of the first quarter.

Operator

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

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