Liberty Property Trust's (LPT) CEO Bill Hankowsky on Q1 2016 Results - Earnings Call Transcript

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Liberty Property Trust (NYSE:LPT)

Q1 2016 Earnings Conference Call

April 26, 2016 1:00 PM ET

Executives

Jeanne Leonard - Investor Relations

William Hankowsky - Chief Executive Officer

George Alburger - Chief Financial Officer

Mike Hagan - Chief Investment Officer

Analysts

Anthony Hau - SunTrust Robinson Humphrey

Thomas Lesnick - Capital One Securities, Inc.

Manny Korchman - Citigroup

Brad Burke - Goldman Sachs

Eric Frankel - Green Street Advisors

Alexander Goldfarb - Sandler O’Neill & Partners

Craig Mailman - KeyBanc Capital Markets

Gene Nusinzon - JPMorgan

John Guinee - Stifel Nicolaus

Eric Frankel - Green Street Advisors

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 First Quarter 2016 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.

This morning Liberty issued a press release detailing our first quarter results as well as a supplemental financial package 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?

William Hankowsky

Thank you, Jeanne, and good afternoon, everyone. The first quarter proved to be right on track with our views for 2016 and our business plans for the year. Our core portfolio continued its solid performance, reflecting both the current economic environment and the positive effects of our portfolio transformation. We leased 5.4 million square feet in the quarter and drove occupancy to 93.8% up 10 basis points.

Our industrial portfolio led the strong performance with 6.7% same-store growth and over 12% rental growth. The industrial performance is indicative of what we’re seeing in the national industrial markets. Nationally, industrial availability declined 20 basis points to 9.2%, its lowest level in 15 years. This was in part attributable to the continued moderate pace of industrial development.

In our 22 industrial markets, there was 109 million square feet in new construction, representing 1.3% of the stock, and it was 39% preleased. Our pipeline shrank slightly to $1.6 billion, 58% preleased with a continued solid yield of 8.2%. We sold $131 million in wholly-owned assets in the quarter. But I know the big question on everyone’s mind is where do we stand with overall disposition activity for the year.

As we laid out at our December guidance call, our range is $900 million to $1.2 billion in sales for the year. Our goal is to reach the high end of that range and complete this year the disposition of our non-core suburban real estate. The capacity to achieve this goal remains solid in terms of buyers, vendor equity, and debt financing. We have previously acknowledged that we’re in discussions with a potential buyer for a large portfolio of these assets.

Our overall sales process continues to move forward. We’re further along today than we were at our December guidance call and our February’s fourth quarter earnings call. But as we all know, our ability to reach a goal of $1.2 billion isn’t fully known until the deals are closed for those assets. So we’re not done, but we are advancing as we would expect.

Before I turn it over to George and Mike I’d like to comment on the overall economic scene. As we said in December, we thought 2016 would be another year of economic expansion, but at a slower pace than the prior years. Three months into this year, this seems to be the case. The economy is growing at 209,000 jobs per month this year, versus 229,000 jobs per month last year.

So it’s moderating, but we still think 2016 will be a good year for our office and industrial portfolios. With one quarter behind us, it’s too early to make a full-year call, but it’s conceivable our industrial same-store performance and our industrial rent growth will be at the high ends of our guidance.

And with that, let me turn it over to George.

George Alburger

Thanks, Bill. FFO for the first quarter was $0.62 per share, similar to previous years, G&A expense is high for us in the first quarter due to the accelerated vesting of long-term incentive compensation. The accelerated vesting resulted in $6.2 million more G&A expense in the first quarter of 2016 compared to the expected quarterly expense for the remaining three quarters of the year. We acquired a 73,000 square foot industrial asset this quarter, and we sold six office properties and two industrial properties for $131 million.

Our Liberty-Washington joint venture disposed of seven Northern Virginia office buildings this quarter. Mike will provide some color on our acquisition and disposition activity. During the quarter, we brought into service five wholly-owned development properties with an investment of $95 million, and we started two industrial buildings with a projected investment of $24.3 million.

As of March 31, our committed investment in wholly-owned development properties is $604 million and the projected yield on this investment is 8.1%. For the core portfolio during the quarter, we executed 3.4 million square feet of renewal and replacement leases. For these leases, rents increased by 10.2% on a straight-line basis, and increased by 2% on a cash basis.

For the same-store properties, operating income increased 2.2% on a straight-line basis and by 3.4% on a cash basis.

With that, I will turn it over to Mike.

Mike Hagan

Thanks, George. Let me start by reviewing our first quarter investment activity. During the quarter we acquired a 73,000 square foot warehouse building in Chicago for $8 million. User demand is increasingly looking for modern buildings closer to major metros. This property is located just 3 miles from the O’Hare Airport with great visibility on Interstate 294. The building was built in 2007, is 30-foot clear, and has ESFR sprinklers. These specs are in limited supply in the O’Hare market. The property was 53% leased at the time of acquisition, and we currently have several proposals out on the balance of the space.

We expect a 6.7% return upon stabilization. Also during the quarter, we delivered five development properties totaling 716,000 square feet, 60% of this square footage are industrial buildings located in Greenville, South Carolina; Richmond, Virginia; and South Florida. These industrial properties were 72% leased at delivery; and subsequent to the quarter end an additional lease for 46,000 square feet was signed in our Richmond building, bringing the occupancy to 82%.

In addition to these buildings we delivered an industrial flex build-to-suit for WuXi AppTec at The Philadelphia Navy Yard. In addition to the industrial deliveries, we delivered a 207,000 square foot office building in Houston. Let me give you a little background on this. We acquired a 50-acre parcel in December of 2012 for industrial development. We felt at the time that the best use for the 20-acre frontage was an office building, and we commenced construction in February of 2014.

We understand the condition of the Houston office market and the amount of sublet space and new construction being put into the market. The building is currently 20% leased, we have a few proposals out on the additional space. The lease-up of this building remains a primary focus of our Houston team. On the disposition side we sold eight operating properties totaling 849,000 square feet, 74% of this square footage was suburban office in Minneapolis and Tampa.

The Tampa transaction was a five-building park totaling 532,000 square feet and sold for $108 million and was 100% leased at the time of sale. In addition, we sold a 92,000 square foot empty building to a Minneapolis user. In addition to our wholly-owned sales, a JV in which Liberty is a 25% owner sold a three-building park totaling 601,000 square feet in Northern Virginia for $81 million. This same JV executed a deed in lieu transaction disposing of 449,000 square feet. This reduced our presence in NoVa by over 1 million square feet.

As Bill mentioned, we continue to see activity on the disposition side and are comfortable with our disposition guidance.

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

William Hankowsky

Thanks, Mike, and thanks, George. With that we’d be pleased to now open it up to questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Anthony Hau with SunTrust. Your line is open.

Anthony Hau

Hi, guys. Thanks for taking my question. Could you guys comment on if there’s been any marginal change in the private markets’ appetite for suburban office in terms of IRR or growth rates? It just seems like they would demand a higher IRR at this point given the volatility in the market?

William Hankowsky

Yes. I’m going to let Mike give you just a sense of sort of something that’s going on real-time now, just give you a sense of market.

Mike Hagan

Yes, I mean I think that market remains still very active. So you have very large funds raising – continuing to raise billions of dollars that they need to place. I mean Lone Star just closed a fund where they raised approximately $6 billion. In addition to that I’ll tell you of a transaction we have on the market, and we listed about 30 days ago. It is listed with a major brokerage firm in DC; and they’re, again, Northern Virginia assets. They are – it’s about 532,000 square feet in eight buildings. The properties are 87% leased. To date, we’ve had 110 confidentiality agreements signed and over 25 tours.

The tours have ranged from folks that are small private equity groups to large pension fund advisors to – there’s even a REIT that has looked at the real estate. So I think that it’s still a very active market for that, and I think the pricing is consistent with where it’s been.

William Hankowsky

Yes. So I think – so we think there is a depth of buyers; there is financing. The financing has bounced around a bit, but I don’t think we’ve seen a whole lot of movement in sort of cap rates. They are where they are. They’re better for the well-leased; better for A than they are for B; better in primary markets than secondary. But pretty consistent from where they were, say, a quarter ago.

Anthony Hau

Okay. Just a housekeeping question. What was the cap rate for the asset sale this quarter?

George Alburger

This is George. The cap rates for the asset sales was 6.8% for the wholly-owned assets we sold this quarter.

Anthony Hau

And how about for the JV?

George Alburger

I can give you the JV. I’m not sure if the JV gives you a sense of the market, understanding that these assets were somewhat under leased, so not necessarily does that NOI reflect what you might consider to be market caps for this real estate. Because based upon – it’s coming in at under 6%, so if you’re modeling from the standpoint of earnings, use that. If you want to – I wouldn’t say that’s a good proxy for what the cap rate is for the real estate in the market.

Anthony Hau

Okay. Thank you.

Operator

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

Thomas Lesnick

Hi, good morning; thanks for taking my questions. Real quickly, one of your competitors in the industrial space called out Pennsylvania as a potential weak spot. It’s right in your backyard. I was just wondering if you had any commentary on that.

William Hankowsky

Sure, be happy to talk about it. I would call the Pennsylvania situation maybe a tale of two markets. And I think it’s important to understand that dynamic. So in Northeast Pennsylvania – Allentown, Bethlehem, we would call that the Lehigh Valley. That’s a market of about 68 million square feet of space. It’s where we currently have a 1.2 million square foot inventory building under development. It’s also where we have 1.6 million square feet of build-to-suit under construction. You add those two together plus a few other projects and you’ve got about 3.6 million square feet under construction. So it’s about 5% of the market, but it’s about 50% preleased.

So you really don’t have a whole lot of new product coming in. The vacancy in the market is about 5.6%. If one of those buildings gets taken – a million-square-footer gets taken out, you knock 2 percentage points off the vacancy. There are five prospects in the market for over 900,000 square feet. We’re aware of about three leases that are in negotiations for big spaces in the market that total just north of 3 million square feet. So this is a market that is pretty tight, remains tight. Rents are at all-time highs, $4.85, $5.15, depending on the deal; higher if you’ve got more TI in them, and we’re pretty excited about the Lehigh Valley.

You go to Central Pennsylvania and by the way, brokers will sometimes combine these; they separate them, so you get different brokerage statistics on this. Central Pennsylvania is an industrial market of about 160 million square feet. There’s about 5.6 million square feet under construction; so candidly, about the same percent of the stock. The problem is its all spec.

So you’ve got nine buildings out there, we have none of them – that are under construction, and it’s been a little slower in terms of velocity. In one situation, for example, you have a million-square-footer that’s been there for about nine months unleased, and right next door a private merchant guy with some equity is about to start another million-square-footer. That’s not quite where our head is at the moment out there.

So I think, look – and by the way, this goes in spurts. It’s a big-box market. So we love Central Pennsylvania; we’ve got several million square feet there, and there will be demand that will come back and absorb what’s there at the moment. But probably at the moment Lehigh Valley is a tad stronger than Central Pennsylvania.

Thomas Lesnick

Got it; Thank you. That’s very helpful. While we’re on the subject of market commentary, what’s your take on Houston right now?

William Hankowsky

Houston is an interesting place for all the obvious reasons. So I’m happy that we’re I think, on a signed basis about 98% leased that feels pretty good. That’s different than what you see in the supplemental, which is commenced. We’ve got some moving parts in our portfolio. We did a big deal with Foxconn last year and they’re building out the space, and the guy that was in it has moved out.

So over the next couple quarters you’ll see some movement in that occupancy rate, but commenced basis. But on a signed basis we’re in very good shape with little roll. But having said that, it’s clearly the direct firms that are in the oil and gas space have really taken a hit. We read, as you do, continued announcements of layoffs on the direct oil exploration front.

Having said that, we also see a situation where, for example, in the port area, along the canal and the channel, where you’ve got big petrochemical kinds of users, the last number was $10 billion of potential future projects, where people do resins and petrochemical products and that kind of thing are looking to do more, given that they have a low cost feedstock called low called low oil prices, low gas prices.

So it’s also a more robust economy than it has been historically. I think – and Mike touched on it when he mentioned we delivered an 80% empty office building. That doesn’t feel very good, and that’s the toughest piece – in my mind at the moment, the toughest piece of that market is office.

I think the industrial has slowed up clearly from it’s toward pace a couple years ago, but we’re big believers in that market and in terms of its long-term fundamentals, and at the moment we’re glad we have the ship buttoned down and we can kind of sale through these choppy waters of the next several quarters.

Thomas Lesnick

Great; appreciate that color. Just one last quick one from me. You guys obviously ramped up your share buyback activity and executed weighted average under $30 last quarter. But the stock price has obviously rallied significantly since then. I guess how do you think about the threshold at which you decide to pull that trigger or not?

William Hankowsky

I’ll George going to comment on that.

George Alburger

Sure. You’re correct; we have a share buyback program that was originally authorized for about $250 million, and we spent about $113 million it was on average slightly over $30 a share for the 3.7 million shares we bought back; so we have about $137 million of availability, at that $30 share price, shares look pretty attractive to us, and we spent with respect to our buyback program. We’re not – given today’s stock price, I don’t think we’re in buyback mode. So that’s kind of where we are and then just final footnote, which is I think we have to be a little bit careful about this given we haven’t yet realized the proceeds on our asset disposition plan.

Thomas Lesnick

Got it. That makes sense. Thank you.

William Hankowsky

Thank you.

Operator

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

Manny Korchman

Hey, guys. Just going back to maybe that last comment that George just made on the proceeds of all the dispositions? Does it entice you at all to go out there and do additional acquisitions even if they sort of don’t fit completely into your underwriting requirements today?

William Hankowsky

No. That’s the simple answer, Manny. The proceeds if we’re successful – and everyday it feels a little like the probability of successful gets higher, which is good – we would end up with a lot of cash. We talked on this call about the pipeline we need to pay for that; so you pay down the line, which is paying for right now. And at that point I mean and George commented on the stock price, that doesn’t seem as interesting.

But on the other hand, we’ve got a maturity – I think, what is it, $300 million, George? And we’ve got other maturities. So you might decide to lower your debt levels and do that, because that might be the best thing to do. But we will not be changing our underwriting because suddenly there is some cash in our pockets. George, do you want to comment on the – side?

George Alburger

No, I think we commented a little bit when we gave our earnings guidance, that we would have available proceeds and we did have a share buyback program, but that with a debt maturity in December and then other debt maturities further out, with delevering and poising the Company for growth in the future be a better use of the proceeds.

Manny Korchman

Thanks for that. If we do think about the hitting that $1.2 billion of dispositions, how many large transactions are going to be in that? And how much of it is going to be one-off sales, if things went according to your plans? Is it a matter of hitting three big buyers or three big portfolios, and the rest goes to individuals? Or just help us think about the volume and breaking that up into bite-size pieces, if you well.

William Hankowsky

Sure. I’m going to tell you what I feel comfortable telling you, Manny; then I’m going to tell you what I’m not - then I’ll stop. Because we’ve been very careful here about characterizing where we are. We have, as we’ve indicated, we’re talking to somebody about a large transaction. So let me just say there is one large one. And you know our history.

Our history is, as we have done sales over the last couple of years, we’ve tended to sell at a minimum by market. So if we were going to exit office in Richmond, we would sell all the Richmond stuff; or if we were going to exit Milwaukee, we would sell all the Milwaukee. Occasionally we’ve had people who said: You know what? I’d be happy to take several markets, and that has been bulkier sales, the largest of which I think was north of $700 million a couple years ago.

We also have people - Mike mentioned one, a buyer comes in, a user comes in and says: Can I have that building? So you can see that we can have single assets here and there - I’ll use that; and you might have somebody take a market – or somebody took the Renaissance properties. That was that Tampa portfolio, so that was a five-building cluster; that’s a fairly large single transaction.

And then we have this large transaction. So I’m not going to put a number on how many of them there are, but I will simply go back to the fact that when we thought about this in December and as we have proceeded forward, things are moving in the direction we anticipate. It’s a lot of real estate, so it requires a lot of work. And even if we look somebody in the eye and say it’s a handshake, surveys and environmental and due diligence and estoppels and them lining up their debt, all that’s a lot of stuff. So it takes what it takes timewise, but we’re all progressing well.

Manny Korchman

Thanks, Bill.

Operator

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

Brad Burke

Hey, good afternoon, guys. Question on the industrial rental growth guidance. You said you now expect to be at the high end of the range, which would be 7%; but that’s still below the 12% you did in the first quarter. So should we read that as you being conservative at this point? Or is there anything that you’re looking at for the remainder of the year that would cause some deceleration?

William Hankowsky

Let me put it this way. We’ve had a very nice quarter and as you point out, better than we thought in terms of - outside our guidance range. We have some clarity looking forward, but we don’t have complete clarity looking forward. So could you break through the range? I guess you could. Maybe another quarter under our belt and we’ll feel comfortable talking about that. At this point I think we’re comfortable saying that at a minimum we could probably get to the high end; and let’s see what happens in another quarter. Maybe we do better than that. But it’s not because necessarily there’s something out there that’s - I mean, we’ll see how it all plays.

Brad Burke

Okay. And then on the office side, I know that you had expected flattish occupancy within the portfolio for the year. It took another step down sequentially in the first quarter. So I was just wondering: As you look at your expirations versus your leasing pipeline, does it seem reasonable to think that you’re going to see the downward trend in occupancy begin to stabilize?

William Hankowsky

Yes, so we got a little bit of timing. We sold some office that was somewhat better leased than our office average, a little bit of that. We brought in that Houston building, which is a vacancy that’s now inside that number. So you have a little bit of timing this quarter that affected the occupancy, but I think overall we’re comfortable with our guidance on occupancy for the office portfolio over the course of the rest of the year.

Brad Burke

Okay. I appreciate it. Thank you, guys.

William Hankowsky

Thank you.

Operator

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

Eric Frankel

Thank you. Just a couple questions on the operating side. You had some pretty impressive re-leasing spreads for new leases signed. Can you disclose the locations of those leases? What markets are seeing what seems to be the best market rent growth?

William Hankowsky

I don’t mean it’s – I think it’s kind of across-the-board. I don’t think it was in any particular pocket that sort of jumped out one versus the other. I don’t know…

George Alburger

Yes, Eric, I’ll wing it here a little bit. I mean what we – in the Maryland market, the Baltimore/Washington corridor, we saw some pretty nice increases there; and also in Florida South, some pretty nice increases and Chicago.

Eric Frankel

That’s helpful. Do you have a sense, if you think you’re going to be in the high end of guidance, whether the rents that are – the leases that are rolling over were just more trough-level leases, or leases signed, let’s say, between 2009 and 2012? Or whether its market rents have really grown a lot more quickly more recently? Do you have a sense of what’s impacting that?

William Hankowsky

Yes. The last time I looked at this, out of what’s expiring in 2016, it was not driven by the fact that there was a preponderance of leases that had been done in the trough. There were some, so I don’t want to – but it was actually pretty – there was some from the trough. There were some that were three years ago, because it was a logistics guy that did a three-year deal, so it wasn’t that long ago. So some of what is expiring is a function of two significant transactions we’ve done.

One is Foxconn; so they’re moving in. That stuff is expiring as they move out. The other one is the Uline build-to-suit, and that’s a piece of what’s further to expire for the year. So those actually are kind of in the procurer sense of – they’re like one-year renewals because they kind of – okay, we signed up the build-to-suit, but you have to stay in your space till we get it done, and so they got extended. They actually represent a pretty big number I think it’s like 18% or 20% of the roll that’s still out there when you look at the numbers in the supplemental.

But I don’t think it’s a – in the question of there was a peculiar mix of timing on the expirations. I think it’s a function of kind of everything coming together, right? So the markets are tighter. We are – as we have consistently said to ourselves: Let’s try to get the best market rent that we can get that is out there. We get very – we get a lot of bumps. I think the bumps this quarter was like 97%, 98%. So this is, like, a great time to be in the business. You can get higher rents; you can get bumps for all the rent deals you do; and you can actually turn down bad credit tenants. So kind of lots of factors are coming together and it’s playing itself out.

Eric Frankel

That’s helpful; thanks. On the operating expense side, obviously in your same-store set that certainly showed some pretty big declines from last year. Perhaps that’s more attributable to weather. But is there anything funky going on this quarter that we might not expect going forward the next couple quarters?

George Alburger

This is George, Eric. No, I don’t think so. I think you are on target with what your observation was. Nothing funky.

Eric Frankel

Okay. Thanks; yes, that’s a technical term. Thank you.

William Hankowsky

Yes, I notice all the time.

Operator

Your next question comes from the line of Alexander Goldfarb with Sandler O’Neill. Your line is open.

Alexander Goldfarb

Yes, hi. Good afternoon, and always nice for Lehigh Valley to get a nice plug there. First question is, just going back to the large portfolio; I think you had commented that it just takes time to do the estoppels, due diligence, and all that. So hopefully I had that correct. But just want a bit more color as far as you guys are – you’ve been talking about this for some time. Was there capital markets, like a capital markets pause, where the buyers suspended their due diligence? Or the length of time that it’s taking too close is just normal course for how long it takes a multi-asset, presumably in several possibly states, to close?

William Hankowsky

Yes. So again, we’re trying to be as thoughtful as we can here and respect where we are in the process. It was not some capital market hiccup, so I can take that one off the table. Again, regardless of whether it’s, quote, the large transaction or any transaction, they each – they all have characteristics. They take – the buyer might have different ways they operate, how they want to go through things, what pace they want to go through them. But it can take 90 days to 120 days to get a lot of stuff done and make everything happen. So I don’t think there’s anything particularly peculiar one way or the other from a timing perspective.

Alexander Goldfarb

Okay. Then, if that’s the case, should we expect something with the second quarter call? Or if it doesn’t close then we still shouldn’t be concerned?

William Hankowsky

So Alex, we got ready for this call, we knew somebody would try to get us to say when it was going to happen. And my answer is I’m not giving you a date. We gave you guidance, we gave you a range. The range was a function of – it’s an unusually large range for Liberty because of the amount were talking about. If it slips a month it has a big impact. I don’t know – we are not comfortable today giving you a date. Everything is proceeding. That’s all I’m happy to say.

Alexander Goldfarb

Okay. On the acquisition side, you mentioned the Chicago infill property, new-ish asset, 30-foot clear. Just sort of curious given a lot of the talk is on same-day fulfillment and people trying to own distribution closer to their urban markets, does this filter in as far as you guys would put a preference on infill versus age of the product or classification meaning if you can get more infill you’d be happy buying a B or A and all the modern bells and whistles still takes precedence?

William Hankowsky

That’s a great question, and I think it is market dependent. So if you look at the Meadowlands, North Jersey, if you look around the airport in Chicago, if you’re in the Miami market – I might even put BWI in there, Mike, these are very completely built-out markets where if you have any interest in being you know kind of I’ll use the term next, same day, or right in the middle, you’re going to have to think about – and we did it actually in Chicago we bought a building and knocked it down to build the brand new one.

So that was a combination of, to your point, taking an older asset, but in that case we thought the best scenario was to actually put in state-of-the-art. But it conceivably could be a scenario where you buy older, to use that phrase, or B and you say I’m happy to have it just where it is, the way it is, and operate it. But on the other hand, I would say that there’s lots of markets where we would not necessarily have an interest in B assets.

We’d rather have the newest assets. That’s in part why we like the fact that developments – it’s a good time to be a developer and it’s a good time to build new product. But there clearly are markets where the location is so important that you would be interested in a wider array of asset quality then you might in other submarkets.

Alexander Goldfarb

So we shouldn’t be surprised if we see you guys buying more infill B assets and just operate them as-is? Or that’s not a fair takeaway?

William Hankowsky

We could do that. That is – we could do that. We could buy them and not come down put in new ones. We like concentration of assets, that because it allows us to move customers around. But I think – and I think you’ve hit on it – we are as interested in what is available in urban core industrial markets as we are what’s available in classic sort of logistic submarkets.

Alexander Goldfarb

Okay. And then just final question. The Houston spec office project, just remind me. Obviously you guys are still developing at The Navy Yard and Center City Philly area. Was that the only spec office project that you contemplated, or are there others that are out there in the portfolio? And if that’s the case, does the experience with what happened in Houston give you pause on next time you have an excess piece of land, of developing as office away from maybe Yards and Center City Philly?

William Hankowsky

Yes, so this is a couple things. So this was an absolute one-off vis-a-vis Houston. So we have no interest of being an office developer in Houston, assembling office assets in Houston. It’s not one of our core office markets, so was a one off in that regard. That we as Mike indicated in his comments – we acquired a parcel that really wanted to be an office building.

Number two is – and you’ve hit on it - in the markets where we now view as office markets we want to operate in, we do see Philadelphia and The Navy Yard as kind of the perfect example where having an inventory building can make sense and we’ve done that with great success to previous times and we have 100 development now 1200 Intrepid.

We’ve had great success with inventory buildings in the Tempe project in Arizona. And that’s been a situation where literally we have a building under construction; a company comes in and takes 50%, 75% of it. But again it’s one building at a time. We don’t want to get ahead of ourselves.

We want to be very careful. And at the moment, those are probably the only two places, I can think of where we would consider what I’d call inventory product. Other than that we’re very open, obviously, to build-to-suit office product. But those are the only two where we would do inventory.

Alexander Goldfarb

Okay, okay. Thank you.

William Hankowsky

Thank you.

Operator

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

Craig Mailman

Hi, guys. Just a question on the dispositions you completed in the quarter. What type of financing, if you know, have people generally been lining up? Is it more CMBS, lifeco, local debt?

Mike Hagan

The transaction we completed down in Tampa, it was bank debt that they used on that.

Craig Mailman

And I know you guys said you haven’t seen too much dislocation from the financing markets. But as you guys continue to put product out in the market and talk to people, are you seeing any more buyers looking for financing contingencies to put in some of these contracts, or any of that kind of language?

Mike Hagan

I think you usually flush that out through the marketing process. And to the extent that you can get a much stronger buyer that has the ability to get financing, that’s where you’re going to lean in that regard. As to somebody that might be thinly capitalized and has a heavy dependence on over-levering the asset, and I’d tell you where our preference would be and where we think we can be right now is folks that just aren’t in that latter category.

Craig Mailman

Okay, that’s helpful. Keep going, sorry.

William Hankowsky

The other thing is - and I think George talked about this maybe on the last call, I’m trying to remember. I lose track sometimes. In order to be a smart seller we’re also ourselves talking to these lenders to understand what the lending environment looks like. As Mike said, the banks are open for business; the life companies are open for business; and there’s even been a couple CMBS deals. Is that fair, George?

George Alburger

Yes. We do keep on top of the debt market and - I’ll just repeat - Bill was correct. The bank market is still very strong. The life company market is strong. Our concern was with the CMBS marketing struggling as much as it was, what type of continued pressure would this put on the other capital sources, being the bank and the life company market. And we still try and do keep an eye on that. Certainly the CMBS market has come back somewhat, but it’s not what you would characterize at this point in time as robust. But it feels better than it did in January when it was on life support.

Craig Mailman

Okay. Then just lastly, looking at the press release, the 5.4 million square feet of leasing in the quarter - I know you guys changed your disclosure in the supplemental. How much of the leasing that you guys did in the quarter or of that 5.4 million was less than the 12 months that’s not being included in the stats anymore?

George Alburger

I think its - this is George. I think it’s around 800,000.

Craig Mailman

Okay. Perfect; thank you.

George Alburger

You know what it is. Its short-term leases; and sometimes you get an unusually high or unusually low short-term lease. Now you get the flip side of it when you come out of it the other end.

William Hankowsky

Yes. And sometimes - I mentioned this earlier - sometimes we have people on month-to-month as we’re finishing a development, build-to-suit for them to move into. So it can spike for that.

Craig Mailman

I guess - why change the disclosure, though? What’s the rationale there?

William Hankowsky

I think you can get some funky statistics when you use less than 12 months. Because you put somebody in for the holidays, and its one rent; and then the next thing you know you’ve brought somebody else in and it’s a more typical customer. And comparing that three-month lease with a now five-year new lease just can create aberrant numbers. So we just thought it would be a cleaner way to do it.

Craig Mailman

Okay. As you guys put the spread numbers in there and all the other things, is that - are the short-term leases - would that have skewed that at all?

George Alburger

No, not this quarter; I know that. I don’t know if we will continue to keep track of it that way. But not this quarter and certainly not over a one year period or an extended period. Again, if you have an unusually short-term lease that’s distortive when it goes in, you get the flip side of it when it expires.

Craig Mailman

Got it. Thanks guys.

Operator

Your next question comes from the line of Gene Nusinzon with JPMorgan. Your line is open.

Gene Nusinzon

Hey, guys. Thanks for taking my question. It seems like most of your development starts are second-half loaded with deliveries in 2017. How do you size up the late-cycle development risk in starting those?

William Hankowsky

Yes. That’s a good question. We - the dates you see are the dates when construction’s done and there’s been a 12-month lease up period, so number of these projects actually have commenced a while back, or at least a couple quarters back, to then be delivering then.

But let me just may be talk a little bit about our mentality about development at the moment and where the cycle is. A very frequent question is: What inning are we in? People will give different answers, but all of us agree we’re somewhere in the later innings. So that’s clearly a point in the cycle where you would want to be very thoughtful about any new development starts.

And even though we’ve given you guidance on it and we did that in the December call, it’s no way do we feel bound by that guidance. We’ve never been a top-down company. We’ve never said we have to put $500 million to work this year in development no matter what. So we are very bottom-up. That, the list was created by looking at every market. Where do we have product or where don’t we have product?

Where do we need more supply? Where does it make sense where the market is itself in terms of it not being overdeveloped? When you look at, for example, the Carolinas, where we have several buildings there, we’re like 98% on a signed basis leased in the Carolinas. We literally have no product.

So that gives us the first step in saying: Should we consider doing additional development there? We tend to do one building at a time to make sure we can get it leased. So we’re never way in front of ourselves from that respect. And I have to be honest with you. Right now we had a $400 million or $600 million wholly-owned target number for the year, and I think about a $100 million is JVs.

At the moment I’d say we are more probable we’ll be at the low end of the start range than at the high end, just as we look out and consider certain situations where we want to be cautions, want to be careful, maybe take a pause and not develop that project right away and see how thing play out. So we are in a much more alert mode. Having said that, I still do think there’s a fair amount of development activity that can be executed this year.

Gene Nusinzon

Great. Just on the large portfolio, not timing, but is that being dual tracked? And what happens if it doesn’t close in a big portfolio transaction?

William Hankowsky

Let’s just leave it that we’re talking to a potential buyer about a large transaction. We’ve had more progress today than we had the last time we talked about it and we feel fine; but until it’s done, it’s not done. I’ll just kind of leave it like that.

Gene Nusinzon

Okay, great. And just final question on The Navy Yards. Can you size up the opportunity there in terms of spec or build-to-suit?

William Hankowsky

Sure. We’ve down about 1.6 million square feet in 16 buildings since we’ve been there. We’ve got several under development right now, several very interesting Build-to-suits. Axalta, which is a DuPont spinoff; Adaptimmune, which is very interesting biotech company that’s – it’s this building we’re building for them and then they’re in Oxford in the UK. So that’s pretty interesting. We can do about another 2 million square feet, it’s a little bit depends on how you laid it out, 1.8 million to 2 million square feel of additional development.

And that – we’ve been very pleased with the amount of build-to-suit activity we have seen and I would think we can continue to see that and that will probably be kind of the majority of that number. On the other hand, I think as I think was mentioned in an earlier question, it is one place where we will consider inventory product. We never have more than one inventory building under development at a time. But we conceivably – 1200 Intrepid gets done and we think about – should we start another building, depending on where the market is?

Part of that is, candidly, organic growth of the customers that are there. So we need enough products that if somebody is in a 10,000 square foot suite and says I need 20,000 that we can kind of deal with it, but I would think the majority of the future will be build-to-suit, but it will be not an insignificant amount of inventory also out of that $1.8 million, $2 million.

Gene Nusinzon

Got it. Thank you so much.

William Hankowsky

Thank you.

Operator

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

John Guinee

Great; thank you. Just a couple minor questions. First, George, on unconsolidated JVs, even after carving out a gain you had, seemed like you had a relatively strong quarter there. Was there any one-time items in your unconsolidated investments?

George Alburger

Yes, you are saying even after carving out what John.

John Guinee

Even after carving out the $$1.84 million of gains on dispositions, you had a pretty strong $4.9 million of equity and earnings of unconsolidated JV?

George Alburger

Yes, that is where that $900,000 resides. In other words, if you look – okay?

John Guinee

Okay. That’s your $900,000 in…

George Alburger

That’s a $900,000 on the debt forgiveness was at the JV level.

John Guinee

Got you; okay, thank you. And then I guess, George or Bill, with this much-discussed mega disposition, are you going to be able to do this without a special dividend assuming you have a minimal appetite for acquisitions?

William Hankowsky

I’ll let George deal with that one. He’s the one burning the midnight oil trying to figure this out.

George Alburger

Yes, my brain is ready to explode on figuring out some of these tax – this thing entirely from a tax standpoint. So I am spending sometime on it I don’t have an answer I mean we haven’t sold these assets yet and we spend a fair amount of time talking about it on this call. I would to avoid a special dividend, I would like to retain capital, but not all this is up to me. Some of if it is dedicate is we have to obviously comply with tax rules and we also have a Board of Directors who have thoughts on this. But it’s getting a lot of attention.

John Guinee

All right. That was a good non-answer, but it sounds like you might have enough of a gain to have a nice problem to have.

William Hankowsky

You’re right.

John Guinee

Good. Congratulations.

William Hankowsky

Thank you, John.

Operator

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

Eric Frankel

Thank you; just a housekeeping item. Can you just remind me the $900 million to $1.2 billion disposition guidance, is that a pro rata number, or that’s just a growth amount of JVs?

William Hankowsky

Pro rata.

George Alburger

It’s $900,000. [Multiple Speakers]

William Hankowsky

It’s a pro rata number Eric. So and there would be a piece of that Washington or Northern Virginia stuff Mike talked about earlier in the call, but it would be at our 25% share.

Eric Frankel

Okay, very helpful. Thank you. That’s it.

William Hankowsky

Thank you.

George Alburger

Okay.

End of Q&A

Operator

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

William Hankowsky

Thank you and thanks everybody for listening in. We appreciate it and we look forward to talking you next quarter. Thanks.

Operator

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

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