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Executives

Jeanne Leonard - IR

Bill Hankowsky - Chairman, President & CEO

George Alburger - EVP & CFO

Mike Hagan - EVP & CIO

Rob Fenza - EVP & COO

Analysts

Blaine Heck - Wells Fargo

Joshua Attie - Citi

Alex Goldfarb - Sandler O'Neill

Jordan Sadler - KeyBanc

Ross Nussbaum - UBS

Gabe Hilmoe - UBS

John Guinee - Stifel Nicolaus

John Stewart - Green Street Advisors

Tom Truxillo - Bank of America

Vincent Chao - Deutsche Bank

Liberty Property Trust (LRY) Q1 2012 Earnings Call April 24, 2012 1:00 PM ET

Operator

Good afternoon. My name is Michelle and I will be your conference operator today. At this time, I would like to welcome everyone to the Liberty Property Trust first quarter 2012 earnings call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions)

I would now like to turn the call over to Jeanne Leonard. Please go ahead.

Jeanne Leonard

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

Liberty issued a press release on our results this morning, you can access this in the corresponding supplemental information package in the Investor section of Liberty’s website at www.libertyproperty.com. In both documents, you will find a reconciliation of non-GAAP financial measures we reference today to GAAP measures.

I will also remind you that some of the statements made during this call will include forward-looking statements within the meaning of the Federal Securities law. Although Liberty believes 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. First quarter represented a good start for Liberty in 2012 and was consistent with our budget and plans for the year. We leased 4.3 million square feet in the quarter, our renewal rate declined from the fourth quarter to 56% consistent with our historical cycles and plan for the year. Occupancy declined as expected for the first half of the year to 90.5%. We continue to improve the company's financial position through the redemption of high dividend preferred securities. These transactions resulted in a one-time gain which has led us to revise our guidance upward to $2.50 to $2.65 a share. George will walk you through the details of that in a moment. Subsequent to quarter's end, we completed our sale of 49 properties for $195 million. We have now exited 5.5 million square feet of suburban office and high-finish flex in the last five quarters, significantly advancing our strategy of increasing Liberty's industrial and metro office product, while decreasing our suburban office product. This transaction also represents an inflection point going forward in Liberty's strategy execution. We will be moving from emphasizing an approach of subtraction i.e. suburban office sales to an approach of addition i.e. through acquisitions and development.

Let me conclude by giving you our sense of where the economy and the real estate markets are. The economy continues a long but frustratingly slow progress back, whereby a couple of good economic reports we get 0:00:43.7 5 like the March numbers appears. Our sense is that there is a very strong level of uncertainty among business decision makers that prevent major employment moves. This has had the greatest impact on office demand as evidenced by the national office vacancy rates remaining at 16% in the first quarter. Industrial demand is stronger as evidenced by the 20 basis point decline in the national vacancy rate to 13.4% in the first quarter.

The net result is that the economic and real estate environments are where we thought they would be for the year, somewhat slightly better than last year. But we feel very good about where Liberty is in this context, on plan for the year with a further strengthening in financial position and with a more valuable and realigned portfolio. And with that let me turn it over to George.

George Alburger

Thank you Bill. FFO for the first quarter was $0.68 per share, the operating results for the quarter include $2.2 million in lease termination fees. Our guidance for the year is that lease termination fees would be in the $0.04 to $0.06 per share range. 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 $3.2 million more G&A expense in the first quarter of 2012 compared to the expected quarterly expense for the remaining three quarters of the year.

On February 14 we redeemed $32.5 million of the 6.65% preferred units for $26 million and on March 27 we redeemed $95 million of the 7.45% preferred units at par. FFO for the quarter includes the $6.5 million redemption discount reduced by the write-off of $2.8 million in origination costs. We are revising our 2012 earnings guidance upwards by $0.05 because of the $3.7 million net discount which was recognized in the first quarter and because of the positive impact this redemption will have on earnings for the balance of the year.

During the quarter, we didn't acquire any properties and we sold two properties for $6.5 million. Subsequent to quarter's end on April 3rd, we closed the large sales transaction that we discussed in the December during the earnings guidance call and that we also discussed in the February yearend earnings call. This sale was for 2.5 million ft.² of properties and it was for $195 million. We are comfortable with the earnings guidance for the year, but the sale will have a dilutive effect on second quarter earnings compared to first-quarter earnings. Mike will provide some additional details on this sale. During the quarter, we started construction of 100% pre-leased industrial building. With this development start, our committed investment in development properties is $294 million and the projected yield on this investment is 9.9%.

For the core portfolio, we executed 3.8 million ft.² of renewal and replacement pleases. For these leases, rents decreased by 4%. For the same-store group of properties which accounts for 61 million of the 65 million ft.² of wholly-owned properties, operating income decreased by 0.4% on a straight-line basis and increased by 0.5% on a cash basis for the first quarter of 2012 compared to the first quarter of 2011.

During last year's first-quarter earnings call and again during December's earnings guidance call, we mentioned that the first quarter 2011 same-store results were favorably affected by some one-time operating expense items and by the reversal of the Tasty Baking Company bad debt reserve. Excluding one-time items same-store straight-line results would improve from 0.4% decrease to a 1.2% increase and cash results would improve from a 0.5% increase to a 2.1% increase.

One final comment. On our guidance call, we discussed our projected occupancy for 2012, namely that occupancy would dip in the first quarter due to known move-outs and short-term leases and would grow in the second half of the year. This is playing out as we expected. The occupancy, the one-time items in the first quarter and the smaller base portfolio due to the large sale will all impact second-quarter results. And with that I will pass it on to Mike.

Mike Hagan

Thanks George. I will review our investment activity for the quarter, give you our observations on the state of the investment sales market and give a sense of what we expect to accomplish for the balance of the year.

During the quarter we completed no acquisitions and sold two properties totaling approximately 105,000 square feet for $6.5 million. One of these properties was a 60% leased office building located in Greensboro which we sold to a user. The second building was an industrial building which we sold to the tenant.

Subsequent to the quarter-end, specifically on April 3, we completed the sale which we have been talking about on the last few calls. We sold 49 properties totaling approximately 2.5 million square feet for $195 million. This portfolio was made up of office and high-finish flex properties located in Milwaukee, Richmond, Greensboro, Columbia, Maryland and Southern New Jersey. These properties were 83% leased at the time of sale and sold for a cap rate in the mid-9s.

With the completion of this sale, another sale completed in 2011, we have exited the Milwaukee market, exited the Lehigh Valley office market, exited the Richmond office market, exited the office market in the Carolinas and increased our office presence in Southern New Jersey by 50%.

Now let me give you some observations on the steadying investment sales market. There's a great deal of capital on the market today in both the debt and the equity markets. This, coupled with best property available, continues to push pricing. We have seen cap rates on COLI industrial properties trade in to 5.5 cap range, as well as tracking a few portfolios of lesser quality, properties trading at a premium pricing.

We expect the market to continue to be frothy and this will continue to push values. We continue to actively pursue acquisitions and have under-written offered on over 30 million square feet of industrial buildings. And while we did not acquire any assets in the first quarter, in the second quarter we have purchased two properties for approximately $12 million. And we will affirm our guidance for the year of acquisitions between $100 million to $300 million and dispositions between $250 million to $350 million.

And with that, I will turn the call over to Rob.

Rob Fenza

Thank you, Mike. Good afternoon. Liberty began 2012 with first quarter leasing of 4.3 million square feet. This performance was the result of 223 separate lease transactions and was on target with our budget. Overall portfolio occupancy dipped, slightly moving 80 basis points lower to 90.5% lease. This movement was also anticipated in our 2012 budgets.

Development growth continues to be encouraging. Highlighting some of the development activities so far this year, you will see on the development schedule on the supplemental package that 4200 Holster Road in Houston will be delivered earlier than previously anticipated. And will now come into service in the second quarter. This is due to the signing of a single tenant to take the entire building subsequent to quarters end.

We’ve also advanced our leasing on the second Houston development building, 5500 Sam Houston Parkway to 67% from 13% at the end of the fourth quarter. Building on the success of these two projects, we’ve signed an 80,000 square foot tenant for a third building. We will begin construction on that building along with a fourth building for additional inventory later this quarter.

During the first quarter we also added one project to the development pipeline, a fully-leased built-to-suit warehouse containing a 126,000 square feet of space at an investment of $7.8 million in Suffolk, Virginia. Overall, the under construction development pipeline stands at 11 projects for nearly 3.2 million square feet at an investment of over $294 million. Five of these projects are 100% pre-leased built-to-suits and the balance is inventory. Prospect activity for the inventory space remains very good and there will be more to report on pipeline leasing at the end of Q2.

The 3.2 million square feet of development underway is spread over six of our markets and when stabilized, will continue to enhance the overall quality and value of our portfolio. Build-to-suit activity also remains positive. In addition to the five build-to-suits under construction, a sixth lease is signed but not yet under construction in Jacksonville. Further, our teams are working on 7.6 million square feet of built-to-suit prospects in suspects originating from ten of our markets.

We are also picking off selective acquisitions where it makes sense in our markets and for our strategy. Subsequent to quarter’s end, in Phoenix, where Liberty is now over 96% leased, we were able to purchase an empty 72,000 square foot industrial building. And we signed a lease for half of the space the day we went to closing. Also in April, we grew our industrial inventory in Minnesota by purchasing 128,000 square foot industrial building at an attractive cap rate.

While the activity feels good, businesses remain cautious and methodical about capital investment and it is possible that some percentage of the built-to-suit prospects could postpone or discontinue their expansion plans. We believe this cautious behavior will be with us for some time to come as the economy slowly recovers.

Shifting now to market color. Not a lot has changed since last quarter. Warehousing and industrial activity remain solid while office and flex prospect activity is active but less in industrial with almost no positive absorption.

On the industrial side, Lehigh Valley, Central Pennsylvania, Houston and Phoenix are seeing the most opportunities. And in Chicago, Liberty’s activity has also picked up this quarter. Industrial and flex activity is also beginning to strengthen in Minneapolis. On the office side, Philadelphia and Minneapolis are seeing more action, while prospect activity in Maryland and DC remains somewhat anemic.

Even with an overall pickup in prospect activity on the office side, most of this opportunity has been generated from consolidation, facility upgrading and bargain hunting without much positive absorption to speak of. As Bill said earlier, the economy is improving slowly and we are slugging it out on almost every deal negotiation. The good news is that our strong balance sheet, our portfolio of lead high performance and energy star buildings, coupled with our season’s precisions teams on the ground, continues to provide Liberty with a clear advantage and we continue to win more than our share of the transactions in the market place.

And with that, I will turn the call back to Bill for questions. Thank you.

Bill Hankowsky

Thanks Rob, and Mike and George, and with that we will open it up for questions and answers.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Blaine Heck from Wells Fargo. Your line is open.

Blaine Heck - Wells Fargo

I know you’re talking about it a little bit on the call but just want to make sure, I am thinking about it right. So given the $0.68 of FFO you first did in the first quarter, it looks like you are looking at around $0.63 average for the rest of the year. But 2Q will likely be lower given the disposition. Is that a fair way to look at?

George Alburger

That’s a very fair way to look at it.

Blaine Heck - Wells Fargo

Okay. And then, also last quarter you mentioned that occupancy would likely dipped in the first half and I think you affirmed that earlier. But does that mean we could see more slippage in second quarter or are we looking kind of flat given the disposition at 83% should probably be a positive for you guys?

Bill Hankowsky

You are asking a good question because, all heads up, we already have served two realities so we have the reality as of March 31st which is what's in the supplemental and then you have in reality as of the sale, you are right, we've taken out now 2.5 million square feet. So actually I think you pick up about 20 basis points in occupancy or something like that if you take the sale out, just to sort of give you that order of magnitude effect.

I think you are looking -- we did go down as we said we would when we talked in December. Some of that's about expirations we were well aware of; companies had shutdown operations, etcetera a little bit of a seasonality. And its probably, you know does it stay there, roughly for another quarter and then begin to move up in the second half you know I think that's kind of what you are looking at.

Blaine Heck - Wells Fargo

And then looking at the preferred redemption, how does that affect your capital plan for the rest of the year? I think we had previously talked about you guys having around $700 million of investment capacity; does the redemption change that or are you planning on replacing it with that or preferred, any color you can give on that?

George Alburger

This is George; I can give you some color and that is that we haven't, put it this way, there is a lot of very attractive capital opportunities available to us in today's capital market. We could do preferreds at probably mid-sixes, historically we've looked to do in terms of debt financings, we've looked at 10 year financings and we do have a debt maturity this year. So it would be likely for us to perhaps replace that debt maturity this year with another 10 year senior noting offering and that might be priced at something in you know 4.5% maybe a tad lower.

So we’ve done this redemption; it is around $121 million. It’s on our credit facility; we haven’t come up with replacement permanent capital for that facility yet, if we work to choose to do at debt financing, would that financing be a little bit earlier than it might otherwise have been because we’ve put an extra $120 million under our line of facility perhaps; but we haven’t really. So there is a lot of financing alternatives available to us and I guess we haven’t really and nor do we need to do decide right now which one to choose, but there is some of the options that are available to us.

Operator

Your next question comes from Joshua Attie from Citi. Your line is open.

Joshua Attie - Citi

Can you talk about what the cash rent spreads were in the quarter?

George Alburger

Sure. This is George it was about 13% down.

Joshua Attie - Citi

And can you give us an update on the land you bought in Miami and the industrial development that you are thinking about doing there. Is that still on track to start later this year?

Bill Hankowsky

Yes. We did acquired, as you could recall, we are in the midst of getting plan approval, permitting, design, engineering design etcetera. We still would anticipate that we could in the fourth quarter start the first multi-tenant building.

Joshua Attie - Citi

And when you look to [flag-row] portfolio that traded and the price you traded at, how did that make you feel about what you think your basis is going to be in this project?

Bill Hankowsky

Good. I mean, feel good.

Joshua Attie - Citi

It’s going to be around $80 a foot in total.

Bill Hankowsky

You are correct, that’s right.

Joshua Attie - Citi

And if I could just ask one more question on preferreds; I know it’s a small number, but it look like there is a new series I too preferred and then could you just explain what that is?

George Alburger

Yeah. That was a modest issuance that facilitated the acquisition of the Washington property that we bought in the fourth quarter of last year, so it had some tax attributes that; you know, REITs could uniquely offer that like I say facilitated us in being able to buying that property.

Operator

Your question comes from Alex Goldfarb [Sandler O'Neill]. Your line is open.

Alex Goldfarb - Sandler O'Neill

Just want to go back to the Miami and Dade County, given where you guys have seen cap rates go in that market and capital tracing, do you think, first of all, is that just for stabilized product or what are you seeing in the competition for development sites? And then, do you think that capital is going with the market or you think it’s gotten pretty far ahead of the market?

Bill Hankowsky

I’ll make a comment and then I’ll ask Mike maybe to turn in too. I think that what’s happening in the investment sales arena is fairly consistent over the last several quarters which is, if you are in that narrow fairway of well leased with term good credit tenants in a historically liquid market with that fluid would absolutely be with good sponsorship, the debt markets are stunningly attractive. You are getting life stuff like in the low 4s.

You start thinking about LPVs in the high 60s, getting that quite touching 70% but can you get 68, 65 that’s pretty attractive packaging that can drive pretty nice cap rates depending on if you are the buyer or the seller. So I think that dynamic remains the case.

If you move off of that and talk about FD stuff, you know a number of people fall away, but I would think it’s the four REITs still get pretty interesting a fair amount of interest, because of the nature of the market, the tightness of the market and candidly the issue you are catching on which is, it’s not like there are acres and acres of developable land, there just aren’t. So it is a very constrained supply situation and heads empty buildings are going to trade there where they wouldn’t trade, pick another one in Phoenix. In Phoenix, the empty buildings are a different story.

So the pricing is pretty aggressive, I think people will have a great interest in anything that becomes available in that market whether it is dirt, vacant or occupied like its empty. Let me have Mike add to it.

Mike Hagan

The only thing I would add to that (inaudible) its capital chasing the market. For me it’s almost like capital is making market. You know there is a lot of folks out there, saying there is a lot of money out there right now, but from the debt and equity side looking for good to invest in the real estate side which is driving prices.

Alex Goldfarb - Sandler O'Neill

But do you get a sense like sort of New York office in ‘06 where things were getting very aggressive or you think that if you use reasonable growth assumptions then maybe you add in some post Panamax trade going forward that what seems like aggressive cap rates today that people are paying in the mid fives actually in the few years could look very smart or you think it requires a lot to go right to make those numbers work.

Mike Hagan

I think actually it all depends on where you think long-term rates are going to be and that if you are comfortable that in fact some reasonable assumptions on run rate growth and interest rates stay constant, you could see your way into making returns and return to expectations stay low relative to interest rates. If there's a spike in interest rates you know that's where it will be tough to make the numbers work as the rental take time to catch up to that.

Bill Hankowsky

Alex I think just to add to Mike’s comment, you sort of have two different questions going on here, one question is spot pricing today versus where it is tomorrow and I think sometimes we look at what people are paying and Mike made a comment earlier in his remarks about you know we put in bids on lots of property and much of it we've been unsuccessful because other people have decided it's worth more than we think it's worth. So and I think in some comment about where we think the world is, but people are betting that rents move faster than interest rates and that certainly came for me about a lot of this.

Having said that though, I think we also do believe that cap rates on real estate generally will be at lower, at levels going forward than they have been in the past. It is just a much more accepted asset class. There's much more capital looking at it. I mean the private equity guys that have raised billions are, they are going after it. The sovereign I mean I don’t mean that –you know we get phone calls from all kinds of capital sources about could we be your partner. People are trying to figure out how to get into real estate. So I think that will keep that demand for the product will keep the pricing higher than we have experienced historically. Now whether it stays at 5.5 or bounces up because interest rates move, but it's not going to bounce back to where it was 10 years ago in our opinion.

Alex Goldfarb - Sandler O'Neill

Okay. No that's helpful, I mean definitely the spread investing seems to be big. I'd say more so you know in the suburban stuff. But it's surprise, it sounds like you guys sold a fair amount to owner occupiers, is that fair, there is because before it seemed like Blackstones of the world seem to be the buyers for all this higher cap rate suburban stuff, but your comment has indicated that it maybe some more tenant owners who are coming into that market.

Mike Hagan

Alex, the activity that we completed in the first quarter were two sales, the two buildings totaled together 100,000 square feet or 105,000 square feet. It was two more opportunistic sales where we took advantage of the user, they wanted to own a building and a tenant that wanted to own a building.

Bill Hankowsky

The big sale was to investors.

Mike Hagan

Yeah. It was again a private equity group that bough the big sale.

Operator

The next question comes from Jordan Sadler from KeyBanc. Your line is open.

Jordan Sadler - KeyBanc

Just first on the build-to-suit pipeline I know it seems like you came in a little bit relative to the prospects and suspects you were looking at last quarter. I think you said 9 million last quarter. I know you are capturing some of it for certain, but it seems maybe that the backfill is not as easy. Is there something to take away from that, is it a little bit softer.

Bill Hankowsky

I’ll be careful to take in two data points and start to draw a trend line. You know these are snapshots we take at quarter's end of what we are aware of that our people working on. I mean it could be back to nine in the next quarter, I don’t see it as a softening trend per se.

Jordan Sadler - KeyBanc

Okay. In the stuff, would you characterize it as basically just capturing the stuff that was in the pipeline in terms of that reduction?

Bill Hankowsky

No. Reduction can happen because we signed one. It can happen because the competitors signed one and it can happen because somebody just withdrew their interest for the moment.

So what we talk about is what we believe are live active, not dormant. So if somebody is off the screen for a while, we will take them off.

Jordan Sadler - KeyBanc

Okay. Just following up a little bit on Alex’s question on the sales, so you have done 200 year-to-date, I think the guidance was 250 to 350, but given the commentary surrounding capital and what’s happened with pricing, are you inclined to hit the high end of that guidance range or may be go through it, is there more stuff to be opportunistically sold?

Bill Hankowsky

I think as Mike said in his comments, we have affirmed our range for the year. So your math is kind of right. We could do about another 150 and stay within "within the range" and we've also, I think that’s the way you should think about it at the moment. We have also been very clear I think, almost every call we make and we will do it again in this one, that if there is a great opportunity to buy something at scale, we would be happy to breakthrough our acquisition range and if there is some interesting opportunity to sell, we might work through our disposition range, but at the moment, as I said in my comments, we are more inclined to be growing the portfolio by development or by acquisitions than we are inclined to decrease the portfolio by sales.

Jordan Sadler - KeyBanc

Is there any non-core industrial that might go for you know what you deem to be premium pricing that you might look to blow out or not really?

Bill Hankowsky

I would not say there is any non-core industrial. I do think it is conceivable that there could be an asset or two that we disposed off that have all the characteristics I described you earlier. Term, credit, great sponsor, great customer and it might attract great price.

Jordan Sadler - KeyBanc

[Great] number okay. Last one just George I wasn’t sure on the preferred, it sounds like you are looking at it, is that I mean you've obviously taken out some longer-term capital sort of kicking this around a little bit. Do you like that market, I mean is it of interest to you in terms of being a piece of the capital structure, may be you don’t have a publicly traded [group] yet.

George Alburger

We have no publicly trade preferred and you know we do have some modest amount of preferred that's at the OP unit level, you know we consider preferreds to be a good element of capital structure. Like I said there is a lot of you know good sourcing of capital for REITS out there now running all the way from term debt from the banks to you know the senior notes markets to you know preferred and common equity.

I mean they are all good sources of capital available to us now, with the $195 million that we just brought in from the disposition, you know we paid down the credit facility to re-manageable level, so we don’t have to deal with this right now, but something will happen this year, but the timing isn’t immediate.

Operator

Your next question comes from Ross Nussbaum with UBS.

Ross Nussbaum - UBS

Here with Gabe Hilmoe; a couple of different questions. First, on market rent trends, where are you guys pushing rent and where are you really a price taker?

Bill Hankowsky

I would say that in the markets, I mean Rob gave a nice list you know Lehigh Valley/Central Pennsylvania, Houston, our markets where I think you might be able to push. This is all on the industrial side. These are markets that have high velocity, vacancies come down and space by space you might find opportunities where you or our competitor are the only two guys that have a space of certain configuration. Thanks Rob, to tell you, Navy Yard’s being help the task; I think on the price taker side, I think we think about responding to the market in places like Northern Virginia, the softness in that market probably Maryland, Southern New Jersey or places where I would say we are price takers.

Ross Nussbaum - UBS

And is that solely on the industrial side or was that kind of material so….?

Bill Hankowsky

No that would be office flex side there.

Ross Nussbaum - UBS

Next question, when you are all set and done with the moving pieces this year in terms of dispositions, acquisitions and development, in the guidance that you have provided you had a breakout of where you thought the square footage by asset classes going to end up this year; how does it shake out by NOI? So for instance you had guided towards 62% of the square footage being industrial by the end of the year; how much of the NOI is there?

Bill Hankowsky

I don’t have that number right in front of me. I think on a red basis you get close to 50-ish, and it might a tad over 50.

George Alburger

This is George.

Bill Hankowsky

I don’t have right now; it’s 52 in my head or something like.

George Alburger

I don’t have it in front of me either, but it’s a tad short of north of 50-50 in terms of a little bit more office.

Ross Nussbaum - UBS

And is it fair to say I think about internal growth going forward now that the industrial is, what are you about 94% occupied or so that your like-for-like growth from industrials is going to have to start coming from rent growth whereas on the office side it needs to be occupancy driven, is that a fair way to think about it?

Bill Hankowsky

Well, I think a couple of things; you could pick up a point or two more of occupancies in the industrial, I think you right on the industrial rent is a place. I think also though our plans, hopefully the market allows us to do this, would be to grow the industrial portfolio. So, Rob gave you the examples, we could acquire industrial call it vacant building; we clearly have a development pipeline that’s going to be on a square footage basis, heavily focused on industrial. So that’s where the industrial growth comes. But you were correct, on the office side, the biggest opportunities is simple occupancy.

Ross Nussbaum - UBS

Last question from me; can you talk about, I hope I pronounce this correctly, via Blythe Valley joint venture. If I am looking at it correctly you’ve got negative cash flow after debt service of $1 million a quarter and you got $190 million loan maturing in September. Why are you continuing to lead on that one, why don’t you just hand it back?

George Alburger

This is George. That loan matures in September and that the interest rate is pretty high on that loan. It’s a 6.7 for 5% interest rate when that loan gets adjusted to a market interest grade I am not sure whether we will still be bleeding on that project. Plus, there is a fair amount of development opportunities available to us on that site. There is 97 acres of ground that is available for business development and it also presents an opportunity to change it’s use which could make that land even more valuable.

Ross Nussbaum - UBS

Is there going to be sizeable pay down of that loan needed to achieve a market interest rate?

George Alburger

No.

Ross Nussbaum - UBS

No. So you think the….

George Alburger

Not so far. I mean, like I say it’s maturing in September and we’re having conversations with the vendor; it’s not everything. It’s fully baked at this time. But that as paying down the loan has not been part of the conversation so far, but we’re months away from finalizing it.

Ross Nussbaum - UBS

Okay. And I think Gabe had one final question?

Gabe Hilmoe - UBS

Yeah hey, guys. Can you talk a little bit about the newly signed in a Central region, I think it was for 230,000 square feet; it looks like the term amount was one month, just looking further more color on what exactly that was?

Bill Hankowsky

Is that the JV?

Rob Fenza

No, no, no, no. There was a new lease signed for one month. It was signed at no rental rates. It was the tenant I guess is essentially taking up some occupancy on a month-to-month basis. So we only reflect it as a month, but it’s a month-to-month and they are basically…..

Operator

Your next question comes from John Guinee from Stifel Nicolaus. Your line is open.

John Guinee - Stifel Nicolaus

I am on an open line and I am going to hang up and let Aaron ask the question. Thank you.

Operator

Your next question comes from [Aaron Aslakson] from Stifel. Your line is open.

Unidentified Analyst

Well, hearing from a number of leasing agents that the flex products is often simply – it’s functionally obsolete and can’t list any price; is this true or is it piece like this or what are your thoughts on that matter?

Bill Hankowsky

I am sorry, just missed the beginning of the question.

Unidentified Analyst

We are hearing from a number of leasing agents that the flex product that reflect assets?

Bill Hankowsky

Gated flex?

Unidentified Analyst

Yeah, gated flex.

Bill Hankowsky

Its okay, I got it okay thank you.

Unidentified Analyst

Is it functionally obsolete or un-leasable?

Bill Hankowsky

Well, let me first just, you know in terms of flex products that Liberty has I think it’s helpful to understand the nature of our portfolio, so our average flex building is about 50,000 square feet; our average flex tenant is about 16,000 to 17,000 square feet. So our products tends to be concentrated in parts the kinds of product that a medical instruments person is Minneapolis would use, a lab person in Philadelphia would use, somebody who supports downtown office buildings or support industries would use in a variety of markets. We don’t have showroom flex, we don't have the kind of flex that's filled with 1500, 2500 square foot kind of tenants which is the kind of flex, you know but that's not what we have. So our product has I think behaved you know and operated fairly well, I mean through recession, its downturn, it has small companies in it, where it has particularly had pressure is in markets where there is, where home building was a big piece of the market and maybe there were people in there that did cabinetry or stuff that was really at the home building and that was a problem.

There is clearly product I think in any asset class whether it's office, whether it's industrial or whether it's flex that can get obsolete. It's the wrong ceiling height, it's the wrong configuration, it’s the wrong sub market, it's just old. It doesn't have enough, one of the things with flex is it doesn't have enough parking, because people are putting more people per square foot, so there is obsolete product out there, but I think it would have to be, I would be careful about throwing a characterization across an entire class or even by age. We think it's very market vocational, configuration centric.

Operator

The next question comes from John Stewart with Green Street Advisors. Your line is open.

John Stewart - Green Street Advisors

George, can you remind us which month the $230 million unsecured notes mature?

George

That's in August.

John Stewart - Green Street Advisors

It's in August. And likewise should we assume that you will take out the Series H in August?

George

I am not sure if you can assume that. The series that we took out at par which was at 7.45, that was originally, I think it was a 1999 preferred units and we were able to re-price those units and they were again at you know outstanding until we redeemed them in March. So initial conversations might be, do we reprice them and can we reprice them and if we can, if we can reprice them to a market instrument that would remain in place, if not then the possibility exists that they could redeemed.

John Stewart - Green Street Advisors

Okay. And Bill could you come back to your comment about the inflection point that you are approaching in terms of portfolio management, more focused on addition and subtraction. You're obviously reiterating your guidance for acquisitions for the year, but haven’t done anything for the quarter and you know the capital environment you're describing you know doesn’t make it seem like you’ll be able to raise out and put money to work, are you talking more about field pursuits or can you help us the understand the process there?

Bill Hankowsky

Sure. I am going to ask Mike, I mean there is somewhat of a pipeline on acquisitions, right, do you want to give a little color on that?

Mike Hagan

John actually what we’ve closed today is about 12 million and there is approximately another $50 million worth of acquisitions that we have, that our work we either have under contract and in due diligence are working on a contract and there is a handful of deals behind that, that give us some comfort that the guidance range that we reaffirmed.

Bill Hankowsky

So I think John, so we think there is a pipeline and we think we’ll get you know the low-end, middle of the range on the buy side, maybe you know if we find some big, it will help us get to the upper ranger, but we’re comfortable being in the range. You know Rob talked about you know we’ve signed one another build-to-suit hasn’t commenced. We got a pipeline, we’ve talked a little bit about I mean Rob talked about two Houston buildings, we’re going to start now, one of which we've signed significant pre-leasing and one of which will be as companion building. We talked about a building that we would start in South Florida. So I think you know, I think at the beginning of the year we talked about 200 million to 300 million in development starts, that still feels like a decent range.

So my point is that when you look going forward, from this point forward, I mean we are putting the sale that just happened behind us. I think you will have more development starts and acquisitions than you have sales, but by just, still by a bit. I mean, every year we continue to sale. But we are going to sale 2 million next year. I don’t know. That will help to keep the portfolio fresh or whatever, but we think we’ve been doing more development in buys than we will be doing sales. So we will be a net grower of the portfolio, and that’s kind of the point I am trying to make with the inflexion cover.

John Stewart - Green Street Advisors

Okay. And the yields on what you have been buying, have they been in the 6 to 8 range that you gave in your guidance range?

Bill Hankowsky

Yeah. We would still stick with that guidance, John, yes.

John Stewart - Green Street Advisors

Okay. And then lastly, Bill if you could, so the yield in core on the development pipeline of 9.9% stabilized GAAP yield, if you are to sort of mark-that-to-market, how would the GAAP rents compare to current market across the pipeline?

Bill Hankowsky

GAAP rents compared to current cost of pipeline. Well, I think probably, I kept it at the back of my head. I think probably on the built-to-suits, the rents are probably -- could be -- the rents could be little higher than market. I mean that tends to be the nature of that situation. When we do the, in the core product, we are basically assuming we’re going to get market rent. I mean, we are going to get the high end of market rent because it’s the newest guy in town. But we are not assuming that an inventory building in Houston, Rob, or Lehigh Valley is getting more than, you know,

Bill Hankowsky

In today’s market, you know, it’s getting a quarter or more something. But we don’t rent models assuming we’re going to get, you know, 10%, 20% or more, we assume we’re getting somewhat better than the market.

Operator

Your next question comes from the line of Tom Truxillo from Bank of America. Your line is open.

Tom Truxillo - Bank of America

Thanks for taking the call guys. I appreciate your comments about the sources of capital and I understand you have plenty of options, and over to the prior comments just yet on how are you going to refinance the redemption of the preferreds or the debt maturity coming due. But given your comments about shifting from emphasizing subtraction to addition, can you talk about how you plan to finance a growth. I am talking about big picture here. Are you comfortable about the amount of leverage in your balance sheet, you see that increase and decrease in the design?

Bill Hankowsky

I am making a comment earlier on we have been very clear that historically you know in terms of rating agencies, on leverage levels, we were 40% to 45% and we now have a 36% to 38%.

George Alburger

I mean, I guess -- it is George. You know, that’s correct Bill. And we have been pretty clear that when we recently got our upgrade from Moody’s that you know don’t give us an upgrade today, based on what you see as these low leverage levels. We plan to operate in what has been our historical leverage levels and if you look at that, you know, it could suggest that we have, you know, north of $500 million of dry powder if you will, to fuel acquisition or development opportunities on the present balance sheet.

Operator

Your final question today comes from the line of Vincent Chao from Deutsche Bank. Your line is open.

Vincent Chao - Deutsche Bank

Hi everyone. Just a question on the in-progress developments here. It looks, Houston, there was some pretty good activity in terms of leasing. The commentary about Philadelphia and Central PA also sounded pretty positive in general, but just wondered if you can provide some color on the activity specifically at those projects; it didn't look like there was any leases signed this quarter?

Bill Hankowsky

You are talking Bethlehem and…

Vincent Chao - Deutsche Bank

You are right, Bethlehem, Carlisle and also the 40-20?

Bill Hankowsky

What I will say is we are actively working with prospects for more than the space that we have under development and some of those prospects have timing that will work for us and some of them are prospects that don't need the space until ’13. So we have -- our teams are working on a number of deals and I alluded to maybe I would have more to talk about in the next quarter, we will see if we can get any of those leases signed and some of those negotiations a little further along.

But there are good prospects in the market for the space that we are building. And the buildings in Lehigh and Central Pennsylvania just went vertical. They are about halfway through construction, but they really just went vertical and that's when you start seeing the prospect activity pick-up and the customers believing that you will make some deadlines that they are looking at; so we will see some pickup.

Vincent Chao - Deutsche Bank

And then just a follow-up question, I think earlier you had mentioned the impact of the portfolio sale on the occupancy numbers. I thought it was – was it pro-forma plus 20 basis points versus what you reported this quarter.

George Alburger

I think that's right, yeah.

Vincent Chao - Deutsche Bank

Do you have the breakdown between what the flex and what the office would look like on a pro-forma?

George Alburger

This is George, I think I do. Let me see if I get this right. And let’s just go to the wholly owned, I think flex would come in at 88.3 and the office 88.2.

Operator

I have no further questions. I’ll turn the call back to presenters for closing remarks

Bill Hankowsky

Well, thank you very much. I appreciate everybody listening in. We had a great quarter and we look forward to talking everybody in about 90 days. Thank you.

Operator

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

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