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Executives

Jeanne Leonard - Investor Relations

Bill Hankowsky - Chairman, President & Chief Executive Officer

George Alburger - Executive Vice President & Chief Financial Officer

Mike Hagan - Executive Vice President and Chief Investment Officer

Rob Fenza - Executive Vice President & Chief Operating Officer

Analysts

Ross Nussbaum - United Bank of Switzerland

Jordan Sadler - KeyBanc Capital Markets

John Guinee

Ki Bin Kim - Macquarie

Brendan Maiorana - Wells Fargo

Joshua Attie - Citi

Alex Goldfarb - Sandler O'Neill

John Stewart - Green Street Advisors

Liberty Property Trust (LRY) Q2 2012 Earnings Call June 24, 2012 1:00 PM ET

Operator

Good afternoon. My name is Shirley, and I will be your conference operator today. At this time, I would like to welcome everyone to the Second Quarter 2012 Earnings Conference Calls. 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).

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

Jeanne Leonard

Thank you, Shirley. Thank you, everyone for tuning in today. You will hear prepared remarks from Chief Executive Officer, 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 that the expectations reflected in such forward-looking statements are based on reasonable assumptions, we can give no assurance that these expectations will be achieved.

As forward-looking statements, these statements involve risks, uncertainties, and other factors that could cause actual results to differ materially from the expected results, risks that were detailed in the issued press release, and from time-to-time in the company's filings with the Securities and Exchange Commission. The company assumes no obligation to update or supplement forward-looking statements that become untrue because of subsequent events.

Bill, would you like to begin?

Bill Hankowsky

Thank you, Jeanne, and good afternoon, everyone. Second quarter was another very strong quarter for Liberty. We leased over 5.4 million square feet, our best quarter in a year-and-a-half, and our third-best quarter in the company's history.

Occupancy increased by 20 basis points overall to 90.7%. Our renewal rate was over 60% and our retention rate was over 92%, the highest ever. We sold $209 million of real estate, which was 2.7 million square feet of predominantly suburban office and high-finish flex, including the large repositioning sale we've discussed over the last several calls.

We acquired over 600,000 square feet of predominantly industrial value-add real estate in Minnesota and Phoenix, and our development pipeline continue to be strong with the addition of three new projects bringing the pipeline to $310 million, a total of 3.3 million square feet.

Finally, a preferred redemption in an unsecured debt transaction further strengthened our already robust balance sheet. George, Mike and Rob will provide further color on all this activity in a moment. So, this was a solid quarter by any measure, but even more so, given the weakening economic landscape.

The second quarter saw monthly job growth average 75,000 per month, down two-thirds from the first quarter with unemployment stuck at 8.2%. Business settlement has softened and business uncertainty pervades whether generated by Europe or by Washington, and yet the real estate markets have a bifurcated character to them.

Small and mid-size local prospects are behaving more defensively given this environment, but larger or corporate customers are one might term these to have are very active, thinking about long-term decisions and in effect playing offensively.

We are currently working with a larger potential built-to-suit pipeline than any time in the last five years. The net result is we are worried about the general economic landscape, but the potential was stall out, and at the same time we are extremely busy and energized by the prospects of organic growth development and increased market share for Liberty.

With that, let me now turn it over to George.

George Alburger

Thank you, Bill. FFO for the second quarter of 2012 was $0.63 per share. The operating results for the quarter include $700,000 in lease termination fees. Our guidance for the year is that lease termination fees will be in the $0.04 to $0.06 per share range.

On April 3rd, we closed the large sales transaction that we originally provided color on during December's earnings guidance call. This sale was for $195 million. In addition to this sale during the quarter, we sold five additional properties for $14 million.

During the quarter, we acquired three industrial properties and one office property for $29 million. The projected stabilized yield on this investment is 8.2%. Mike will provide color on these acquisitions and on the sales.

During the quarter, we brought into service one development property with an investment of $6.6 million and we started three properties which have a projected investment of $23.5 million. As of June 30, our committed investment in development properties is $310 million and the projected yield on this investment is 9.9%.

Our development pipeline was zero at September 30, 2010. We have now built a development pipeline to $310 million. This quarter's delivery of a development property into service is the first delivery from this new development pipeline. The last delivery was in the third quarter of 2010.

As you can see from a review of the development schedule that's in our supplemental package, there are now projected development completions for five of the next six quarters.

In core portfolio, during the quarter we executed 4.8 million square feet of renewal and replacement leases. For these leases, rents decreased by 0.9%. For the same-store group of properties, operating income decreased by 1% on a straight-line basis and decreased by 0.6% on a cash basis for the second quarter 2012, compared to the second quarter of 2011.

During last year's second quarter earnings call, and again during December's earnings guidance call, we mentioned that the second quarter 2011 same-store results were favorably affected by the $1.5 million reduction in the reserve for bad debts that was recorded in the second quarter of 2011. Excluding this item, same-store straight-line results would improve from 1% decrease to a 1.2% increase and cash results would improve from a 0.6% decrease to a 0.6% increase.

On the capital front, we were active this quarter. On May 31st, we regained $100 million of preferred units which had 7.4% dividend rate. And in early June, we issued $400 million of tenure notes. These notes were priced at 4% and 8% interest rates.

The proceeds from this offering were used to fund the $100 million preferred redemption and will be used to satisfy the $230 million of senior notes that mature in August.

With that, I will pass it on to Mike.

Mike Hagan

Thanks, George. I would like to give you an update on our investment activity for the quarter as well as what we expect to accomplish for the balance of the year and add some observations on the state of the investment share market.

During the quarter, we completed three acquisitions totaling approximately $29 million. Two of these acquisitions were in Phoenix, where we acquired in separate transaction, a two-building multi-tenant industrial project totaling 400,000 square feet and a 72,000-square foot vacant office building.

The two-building multi-tenant industrial project was 55% leased with acquisitions and was purchased for approximately $42 per square foot. The office building purchased in Phoenix was vacant at the time of the acquisition.

During an acquisition process, we are working with UPS to lease a portion of the building. Simultaneous with the closing of the property, we executed a five-year lease with UPS for approximately 20% of the building. The lease commenced on July 1.

Third acquisition was 128,000-square foot warehouse in Minneapolis leased to CBRE free. CBRE is a multi-market tenant of Liberty's. The projected stabilized yield on these acquisitions 8.2%.

In addition to what we have closed the second quarter, we currently have under contract or negotiating contracts for an additional $73 million, so with who we have closed and what we have under contract, our acquisitions will total approximately $102 million. Our guidance for the year was $100 million to $300 million, and given what we have closed and what is in the pipeline, we are comfortable with our guidance.

As for dispositions, during the quarter we sold approximately $209 million in five transactions, the largest of which was the sale we have been discussing for last several calls. We completed the sale of approximately 2.5 million square feet of office and high-finish flex products located in Milwaukee, Richmond, Greensboro, Columbia, Maryland and Southern New Jersey. The sales price of this portfolio was $195 million. In addition to this sale, we also closed four additional transactions.

The total square footage is approximately 153,000 square feet and consists of all office and flex place. Two of these sales were to users. With the completion of these sales and our first quarter activity, our sales for the first six months totaled approximately $250 million. The yield on these sales was 9.3%. Our guidance for the year for dispositions was $250 million to $350 million, and we are comfortable with that range.

Let me give you some observations on the investment sales market. When I say industrial properties in top-tier markets like Chicago will trade in the six-cap range while second tier markets will be in the seven-cap range.

With interest rates low, available debt financing and core equity available, there's plenty of capital looking to invest in stabilized properties. In addition, while earlier in the year there were several large portfolios in the market, there is less core industrial property in the market now.

Given the imbalance between available capital and demand versus five available properties, we anticipate cap rates to hold firm. We will continue to evaluate potential acquisitions and we can add value through our leasing, property management, development skills we will be in par with them.

With that, I'll turn it over to Rob.

Rob Fenza

Thank you, Mike. Good afternoon. Q2 was another strong quarter for Liberty with leasing results hitting a high watermark not achieved in the last six quarter.

As Bill mentioned, Liberty leased over 5.4 million square feet in 200 separate lease transactions. 383,000 square feet of this leasing was in the development pipeline and overall occupancy moved higher to 90.7%. The strong leasing and pre-leasing in our development pipeline continues to provide opportunities for strategic growth through both, inventory and built-to-suit development.

During the second quarter, Liberty broadened the service of 128,000-square foot industrial project in Houston, which was 100% leased, and we commenced construction on three additional projects. The first is 100% pre-leased office project in Jacksonville, Florida, and the other two are industrial projects in Houston. One of these is 77% pre-leased, and the other 71% pre-leased.

The other construction development pipeline at the end of Q2 stood at 13 projects for 3.3 million square feet at an investment of $310 million. While the pipeline 31.7% leased overall, 11 of the 13 projects under construction are over 70% leased. Two large industrial book distribution projects in the Lehigh Valley in Central Pennsylvania region are nearing shell completion with no signed leases to-date.

We are currently working with over 5 million square feet of prospects and fully expect to lease both the projects during the budgeted lease-up period.

Shifting to the built-to-suit front, Liberty's strength and deep experience continue to provide us with a competitive advantage in pursuing and securing built-to-suit business. In addition to the seven built-to-suits already under construction, we have signed 139,000 square foot lease with Aetna for our built-to-suit office in Phoenix, which will commence in August.

Reflecting on Bill's comments about the economy and business sentiment, there's a real dichotomy between the activity we are seeing against the economic backdrop. But if you look for example, at the built-to-suit, we recently executed in Phoenix with Aetna.

Four factors played into their decision, which underscore Liberty's value. Our deep experience as a developer of high performance projects, our land inventory of entitled ready-to-go sites, our financial strengths and our access to capital and our strong relationships with national customers.

The resulting impact for Liberty is robust built-to-suit pipeline. Today, we have seven built-to-suits under construction for $174 million. One built-to-suit signed, but not yet started for $30 million and over $500 million of active prospects with proposals in hand in nine of our markets.

The solid performance in our development pipeline and the improved activity we are seeing in several of our markets will provide us the opportunity to commence more development both, built-to-suit and inventory in the coming quarters.

Let me now shift to market color. As Bill mentioned, there are still good deal of uncertainty and caution present in decision making. Most tenants were focused on maximizing value for their dollar and most utilized brokers to shop the market even if they plan to renew.

Industrial activity overall remains better than office in most markets. Industrial prospect activity remained strong in Houston, Lehigh Valley, Central Pennsylvania and continues to improve in Chicago, Arizona and South Florida. Industrial and flex activity continues to improve in Minneapolis, while office prospect activity remained strong in Philadelphia and continues to improve in Minneapolis.

The balance of our markets are flat, but steady. With the exception of Washington D.C. and the surrounding submarkets, the submarkets surrounding the Beltway, where prospect activity has begun to pullback with government cuts and the looming threat of sequestration, but overall we are firing on all cylinders and see opportunities in our markets to increase occupancy and prudently expand our development pipeline in the coming quarters.

With that, I will turn the call back to Bill.

Bill Hankowsky

Thanks, Rob, and Mike and George. As you heard, we had a very good quarter. We're on plan for the year, and therefore we are comfortable reaffirming our guidance of $2.50 to $2.65 per share.

With that, we are happy to open it up to questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from the line of Ross Nussbaum from the United Bank of Switzerland. Your line is now open.

Ross Nussbaum - United Bank of Switzerland

Hi. I like the formal definition of our name. I want to talk about the renewals, in particular your leased terms. I guess in the quarter it looked it was about 2.9 years and that seems to be influenced by a couple of large leases you did in the Northeast that were even shorter than that. Can you talk about why the lease terms were so short this quarter?

Bill Hankowsky

Yeah. Your analysis is very accurate. In particular, there was one very large 1 million square foot-plus lease. We had a customer in a pretty robust dialogue about what they might want to do, and in order to give enough time for that all to happen, we extended them 22 months?

22 months, and basically it's up to lease the way it was, and so that did because we do it on a weighted average, Ross, and so we did bring down the average term of the leases and it also brought down that number with bumps in them, escalations because it was a 1 million square feet that for 22 months that doesn't have a bump.

Ross Nussbaum - United Bank of Switzerland

What do you think the ultimate resolution of that, because it's obviously a big space?

Bill Hankowsky

The resolution could be a same place, the resolution could be somewhat of a modification to the existing real estate, and however the resolution could be the need for additional real estate.

Ross Nussbaum - United Bank of Switzerland

Okay. Related question, which is your renewal rate for the quarter of 60%. It was improved from where you were in the first quarter, which is about 55%, but still trailing where you were in the last couple of quarters of 2011, which I think we're all north of 65%. Is that something that that grabs your attention that you've got fewer customers renewing this year versus last?

Bill Hankowsky

Yeah. All these numbers grab our attention tough, but there was another number we look at, and I know you know this, but just for everyone on the line. So, the numbers that are in the supplemental represent customers who stay in exactly the same space and renew with Liberty, so if you stay with Liberty, but move to another building, that's not a renewal. If you shrunk the space that you vacated is shown as not renewed and this is meant to help everyone think about transaction cost and investment etcetera.

Another statistic that we monitor internally from a management perspective is, something we call the renewal rate or the retention rate. The retention rate, and what we look at there is, who is renewable. Meaning, that if somebody had a function that they decided to shutdown. We didn't lose them to our competitors. They just decided not to do this anymore, or we moved them to another space and therefore they stayed in the Liberty family, but somewhere else, so we count that as retained even though it's not renewed in the supplemental definition.

That number for the quarter was 92%. It's the highest since we've been tracking it, so what that leads us to conclude is that customers in Liberty's portfolio, who are staying in operation in the markets they are in, stay with Liberty. And what we do see is some amount of, which I think you've heard others' comment on. Some customers are contracting, so people may be less space than they were before, but it's not like they went to a competitor or some people do have shut down operations, so we do pay close attention to it, but we don't feel we are making any tactical mistakes in terms of we are handling renewals, because we're keeping the people that are available in our portfolio.

Ross Nussbaum - United Bank of Switzerland

Okay. Final question. On the built-to-suits that you are working on, what are the targeted yields on this project?

George Alburger

They run the gamut. I think that's a good question also. We talked about this in the past. Right now, the pipeline is like 99, but obviously that's average of a range, so there are yields that are in their 8s and there's yields that are in their in low-double digits and that candidly the range that that pipeline looks like, so some are decent single-digits and some are low double-digits, because it depends obviously term credit, nature of the asset, that kind of thing.

Ross Nussbaum - United Bank of Switzerland

Okay. Last question for me. On EastGroup's call last week, they talked a little bit about seeing slowdown in the last 30 to 60 days in the leasing activity. Have you experienced any of that?

George Alburger

I don't think so. Not the way I understand it was characterized then, so let me make maybe four comments on that.

One is, obviously, what we report in the quarter is what's commenced, so there is a lag effect to the supplemental, so another number you might want to look at is, what did we sign in the quarter and we signed 5.7 million square feet of leases, which is roughly the same number and it's coincidental. It's that close.

Meaning that these were very active months 2 million square feet a month, so that's okay. Pretty good, we obviously also keep track of prospect activity, so we're looking at. We have fairly nice piece of software who tracks all this for us and we are looking at prospects, we're looking at showings, we are looking at proposals and that kind of thing and if you'd looked at it, it should be a nice step down function. You need so many prospects to create, so many to showings to create, et, cetera. That step function has remained relatively the same.

Rob gave you some commentary on certain markets, so some places feel better than others. There's no question about that, so our Houston field is more robust than our Richmond, so I'd always say it's same in every market, but it think generally portfolio wide feels roughly the same.

Third point, which is, I think the smaller local guys are most skittish than the bigger corporate guys, so there is a little bit of differential behavior by nature of tenant and I think are more, and we are all unfortunately now victim of a worlds, and my fourth comment which is world sort of event risk and headline uncertainty, so a couple of weeks ago we all thought Spain was solved and yesterday the stock market, but Spain wasn't solved

I have been with customers every time I tour. I was just at a roundtable last week with customers and people are skittish that read all this stuff, so there is a kind of heightened sense of angst, but in terms of just walk slow, we don't think it's particularly pulled.

My last comment though it is the summer, so it will slow up July and august that's normal seasonal and in this environment we are worried about they have just come back after Labor Day or does it sit there waiting for the elections, or does it sit there waiting for the election, so that's where is at.

Operator

Your next question comes from the line of Jordan Sadler from KeyBanc Capital Markets. Your line is now open.

Jordan Sadler - KeyBanc Capital Markets

Just wanted to follow-up on one of Rob's comment about the strengthening in Philly and in Minneapolis as it relates to the office sector, are those locales strengthening to the extent that you guys may consider speculative construction of office space in those markets yet?

Rob Fenza

No. I wouldn't say they are that robust. We have got enough vacant space, so we can deal with pretty much what people are talking about. I think these could be markets where, just to be clear. In Minneapolis, we did make a value add decision, so we acquired last quarter, Mike? Or two quarters ago? Three vacant buildings, because we thought there might be deal flow that would be an opportunity. We bottomed in the 40s? So, we think that's a good economic play, so we might look at something like that.

Secondly, the one place where clearly we would consider inventory office product is the product in Navy Yard. We've been very successful there. We're pretty much leased up. There's a little bit of space we are dealing with. I am not saying we're about to announce something, but that is a place where we have obviously considered inventory development and it's worked out well for us, but generally out of the ground new inventory not on our radar right now.

Jordan Sadler - KeyBanc Capital Markets

Okay. Then just circling back to the previous discussion on haves versus maybe just smaller guys? Is there sort of industry or few industries, where you are seeing the strength there or how would characterize and talk little bit about some of the markets, but any consistency among industries?

Rob Fenza

Yeah. That's a good question. I think it's more the characteristic of the companies than it is the industry. I mean it's people and healthcare or financial services or dealing with others, but the larger guys I think feel there's going to be lots of time to do in the future and they need to make decisions to do it.

There's large consumer product logistics kind of folks whose names you would know, who say I need to put a building or I need a space of a certain characteristic in a market, because I have made a decision that's part of my logistics solution and I am going to create efficiency and savings today doing that, so I'm going to do it, sign a long lease to make that happen.

I think the one place where I would put the softness even with big guys is defense and folks as Ross sort of folks related to that space obviously all are anxious about where government spending is going, so we've seen clearly a softening there, but that's probably the only industry-specific I think I could cite right now into soft side, so that's why I think about the characteristics of the companies than it is by industry.

Jordan Sadler - KeyBanc Capital Markets

That's helpful. To be clear, you haven't really seen a lengthening in the leasing cycle or the sales cycle on just more broadly or generically at all?

Rob Fenza

Well, I want to be careful what timeframe you are asking the question. If you are asking has it changed in the 30 or 60 days, my answer would be no. I haven't seen a change in last 30 or 60 days.

If you are asking me is it different today than it was 2006 and 2007. There's no question. The answer is it's different, so today I think is a more deliberative environment, generally. I think the cycles were just generally longer. They are not done till they are done, so you can have worked very hard on something and it's going to the board or it's going to CFO or that kind of phraseology that back in '06 and '07 you looked at as a rubber as a rubber stamp.

Today, it is conceivable that it gets postponed, turned down, modified, so it is a generally different environment, but there's nothing that's happened real recently difference. It's generally different.

Craig Mailman - KeyBanc Capital Markets

Hi, guys. It's Craig Mailman here with Jordan. Just curious, just given the talk you guys have with built-to-suit pipeline. Just wanted sense maybe how big you think the development pipeline can get in next to three quarters and maybe for George. And I know bond I saw on the deal, you guys have a good amount of liquidity here and basically for access of line, so how do you think about where your cost of capital is today versus or as maybe per-funding some of this?

Mike Hagan

I'll do it this way. Why don't I respond on the pipeline and I'll you talk a little bit about capital thinking. The answer is it could vary considerably, so you could run the gamut from the pipeline $310 million with a couple coming next quarter. Rob talked about the Aetna built-to-suit that we did sign, but we'll physically start this quarter, so maybe you pick up $20 million, $30 million, $40 million, $50 million. George also talked about, we'll be delivering every quarter, so it's a gradual uptick kind of add a net adding, but there are transactions we are looking at that are very big to be candid, so if one of them happen you could have suddenly you could be adding 50 million, $60 million, $80 million or $100 million to the pipeline versus so kind of double this gradual pace and it could sort of jump on you to go from 300 to 400.

Now, in the current environment, with all this even risk and uncertainty and people being the pipeline that Rob described, it might now happen. I'm probably less worried than our competitor gets it. I am probably more worried that somebody makes decision, now is not the time.

Craig Mailman - KeyBanc Capital Markets

Why I assume people want to proceed, then I think you could have a range for the pipeline from nice gradual uptick to kind of a step function where it kind of moves up one quarter, gradual for couple of more and maybe you are in the 400-ish kind of number on a run rate basis going into 13 or something like that. Now, if that latter happens, George?

George Alburge

Yeah. Craig, let me answer that. If that latter happens, understand that it's an initiated development project. It takes a while for the spend to catch up with what's initiated but there is a lot of moving pieces on our capital plan as it is. I mean, Mike held forth on what our range is for acquisition and what our range is for dispositions and we could be on the high side of one of those elements on the low side of other or vice-versa, so that can dictate a little bit of what capital needs are and we have a very good balance sheet, so we are in pretty facile right now in dealing with a lot of those needs.

If we did have to go to the capital markets, it's a terrific capital markets environment. I mean, we did a tenure deal in the beginning of this month and since that time tenure treasuries probably tightened 20 plus basis points. I mean, we could probably be below 4% now, right? 4% if you will.

We of course have our maturity in august, but we are in good situation to deal with that. We've redeemed $230 million worth of preferreds this year, so clearly our balance sheet has more capacity for preferreds, and you've seen some of the dividend rates that are out there into preferreds and we could be at the 6% area, so that's a capital source that's available to us. Like I say, there's more moving pieces than just the development pipeline, but I think we are in pretty good shape to be able to tap capital markets if we need to.

Bill Hankowsky

I just want to pick up one point George made just to tie it in. If one of these bigger projects happen the one I talked that are lumpy, they will have a development cycle that George mentioned, so it will take months to sign it, and so the spend is a couple of quarters away in term of the real spend, so have the opportunity to think through how you want to fund it going forward. They have signed the lease doesn't mean that you need the dollars.

Craig Mailman - KeyBanc Capital Markets

That make sense. Thanks, guys.

Bill Hankowsky

Thank you.

Operator

Your next question comes from the line of John Guinee. Sorry. Just for a moment. Your line is now open.

John Guinee

Good fundamentals all round with the exception of the CapEx numbers. If you look at page five, you are a running TI plus LC package of about $18 million a quarter, which is a 2010 number, very similar to 2010, which was about $18.3 million per quarter versus 2011, which was about $13.4 million per quarter, and this is despite a better leasing environment and despite shifting your portfolio more to industrial from office. Can you sort of add any color as to that level of CapEx and what we should expect over the next two or three years?

George Alburger

John, this is George. Let me put some color on that. I know you are referring to our supplemental package, but I don't know if you have it at your finger tips, but if you do or don't regardless I'll refer to something on that supplemental package and it's on page 11 of that supplemental package and it's on the Northeast office and there is big CapEx there for some square footage for Northeast office and it has to do a lot with one particular lease.

We had one lease that is a, 80,000-square foot lease. It's a 10-year lease and we spent $4.8 million for that one 10-year lease and got an increase in rental rates for that space of about 75%, so particularly to this quarter, a lot of that increase is again due to that one lease of $4.8 million. And let me just give you one other sidebar, and that is when we originally laid out the guidance for the year, we suggested that our shortfall on retained capital, because of covering the divided would be anywhere from $15 million to $25 million range.

Based on the year-to-date experience and some of the dispositions, we've done of the office piece of the portfolio, we think that number is now compressed to be more $5 million kind of plus or minus shortfall range, so we feel pretty good about where that's going.

John Guinee

So, essentially what you are saying is 3Q and 4Q should be much lower than 1Q and 2Q?

George Alburger

I don't think. I think we are okay with 1Q?

Bill Hankowsky

John, obviously, there are series of variables. One variable is the amount of leasing, so if we have another quarter of 5, 5.5. It's just going to be a bigger number, right? And, we had two pretty strong quarters of leasing. You are right. If you look on kind of a portfolio profile to George's point about the certainly the cash requirements here, it is going down as the amount of suburban office high-finish flex has gone out the door.

Now, I'll give you another fact. If we look at our average lease size, it's getting bigger which should happy as we get them lot of smaller tenants in suburbs and have a more industrial profile, so it will tend to go down, but I don't want to sit here and predict third and fourth, because the amount of leasing might have an impact on it, but I think on average the first square foot, per lease a year going down.

John Guinee

Perfect. On that same subject. If I look at your portfolio of about 77 million square feet, this is the total portfolio including the JVs, your turnover a year is maybe 9 million or 10 million, but because of bankruptcies early terminations all that sort of thing, you tend to be running a greater leasing, which is good. Should we look at annual run rate of maybe 15 million, 16 million square feet, which is the run rate for the first half of this year which is roughly about 20% of the portfolio, annually?

Bill Hankowsky

That's a good question, John. I just want to slightly modify your characterization. You're on it, but you're just slightly up. What generally creates the additional leasing in a year isn't bankruptcies, but what it is, it's doing renewals that are good in another calendar year. So what will happen is? We had a question about this at the beginning of the call.

Somebody asked lease size and we talked about a single transaction of 1 million square foot with an industrial tenant. That tenant wasn't due to expire until calendar '13, but in order to give us and them more time we extended them. Now, it shows up there's a lease in '12. It will come out of '13, but it will add to leasing activity in '12. So what happens? And we actually pay pretty close attention to this, but John, you are right. What will happen is, you have about 9 million, 10 million expiring and you should do another 3 million or 4 million of anticipatory leasing going into the next year and it's sort of a growing average? Right? And the years go up and down, so a year that will have higher expirations it will be more into '15, '16, and a year with less expirations will be more at '13, '14.

John Guinee

Wonderful. Okay. Thank you very much.

Operator

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

Ki Bin Kim - Macquarie

Thanks. If you go back to the single large tenant you referred to earlier in the call. Are there chances that there just looking at to stay with you after the 22 months, or are they at risk of going dark? I was wondering if you could provide little more color and if there are any other large leases like that on the horizon?

Rob Fenza

Well, there are large leases in the portfolio. I mean, when you have a portfolio that runs the gamut for 1 million square foot large boxes to 60,000 square foot of corporate office buildings. We have tenant sizes of all and they will come up when lease is expiring, so every year there's somebody out there that 500,000 square feet and there's somebody out there that's 10,000 square feet, but there is nobody at the moment as I look into '13, where you say, "Wow. That's a big problem coming at us.", so it's big size.

In terms of that particular customer, as I indicated when we referenced out a moment ago. It's somebody who we're working with. They are in this space. One option is that they stay in the space another option is that maybe we could. Maybe there are some things that they would like modified with that space that would make their operation more efficient, more effective. That might work or we might decide, it will be simpler if you were in different space, in which case we accommodate them in a different space that deals with the functionality they need and we have a space available to us like we have space available to us all the time. There's no alert on the space that we're worried about.

Ki Bin Kim - Macquarie

Okay. That's helpful. In terms of your same-store performance. It looks like your same-store occupancy was up 110 basis point quarter-over-quarter, and your renewal rates weren't pretty much flat, and I know you may comment about the one-time item last year that I help, I heard it, but why the negative or why the weak growth? I would expect a little bit better and is it just timing of the leases?

Rob Fenza

The weak growth in same-store?

Ki Bin Kim - Macquarie

Yes.

Rob Fenza

Well, I am going to think fundamentally the most overarching…

Ki Bin Kim - Macquarie

Same-store revenue.

George Alburger

Yeah. Same-store is rental rates, so its rent rolled down. The good news is, as I said earlier, Liberty customers who are going to stay in business in the market tend to stay in Liberty space. They may move around, but they stay at Liberty space, but when that event happens, as I think it was Rob mentioned. People who use brokers they go out and the see where the market is and they are going to come back to us and say, "Hey, guys." I mean the good news in our portfolio as you see that so many of our leases have bumps in them, but what happen in this kind of an environment is you take or rent, you signed it. Over five years you had 3% bumps, it's now expiring. It's over market, so the rent comes down, okay? When reset it at market and that's kind of one of the factors that affect same-store. That I think the overarching thing that affects same-store is rental rate decline.

Ki Bin Kim - Macquarie

Okay, and just last question. I know you guys have done this several times in the past, but with the habit of leasing space that you don't own and then buying it and then leasing it quickly, so could you just talk a little bit more about the 2.9 current yield versus the 8.2 projected yield, how much of that is accounted for UPS and other leases? Okay. Take care.

George Alburger

In the transaction, Mike was describing?

Mike Hagan

…for the quarter.

George Alburger

Yeah. Right. There were four buildings and Mike you are going to jump in here if I get this wrong. Four buildings. One was leased, so that's already in the 29. One was empty and that's the one where we and I can't say enough. Rob said in his comments. This is about having teams in the field that see deal flow and are able to connect two dots.

Building for sale, customer need space that space solve his problem. If I can get that guy lined up with this space, we can win. That's what happened, so we were able to sign a lease within a day or two buying the building. The lease hasn't commenced, because we are doing some TI work, but it will shortly. That will get you. That will help move you from the 29 to the 82 and the rest of the 82 is assuming that the industrial buildings that were roughly 50%, 40%?

Mike Hagan

55%.

George Alburger

55%. Thanks, Mike. Get up to stabilized 90%, 92%. Those leases we don't have in our pocket yet. Some we had in our pocket, those we don't, so those we have to deliver work on, but that's better. We got a good price.

Ki Bin Kim - Macquarie

Okay. All right. thank you.

Operator

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

Brendan Maiorana - Wells Fargo

Thanks. Good afternoon. I want to follow-up, I guess probably with George on the same-store question a little bit. I think you mentioned the expense item or the item that was reversed in Q2 '11, which provided a nice positive benefit in that quarter. Was that on the expense line or did that impact the revenue line?

George Alburger

It impacts. I think it resides in the expense line. It's a credit and the expense line.

Brendan Maiorana - Wells Fargo

Okay, so that's why your recoveries I guess were pretty high last period.

George Alburger

That's correct.

Brendan Maiorana - Wells Fargo

It looks like, if I look year-over-year, your occupancy overall is up 150 basis points on that same-store page that you provided in the supplemental, but I think that doesn't back out some of the dispositions that you've done over the past 12 months.

When I kind of do that and I have sort of the back-of-the-envelope math, it looks like maybe you are about a 100 basis point occupancy year-over-year. Is the reason why the revenue is not up and Bill I heard your comments about the rent declines, but is part of that reason just because you've got an increase on the industrial side, but it looks like offices actually down fairly substantially year-on-year on an occupancy basis.

George Alburger

You are correct, Brendan. That is what's going on. It's a change in the mix, albeit the occupancy is not moving quite as dramatically as its elements might suggest. The office occupancy is down. I think down 1.8% and the distribution is up over 3%. So, you are losing occupancy of a higher rent paying segment of the portfolio on picking up occupancy on. They pay less for distribution space than they do for office space.

Brendan Maiorana - Wells Fargo

Sure. I know that you guys, as you moved your occupancy up of the office portfolio, sequentially from the end of the first quarter. It was about 100 basis points. I think maybe half of that was attributable to the disposition of the portfolio. Where do you guys think you can move occupancy in your office portfolio as it stands now if you are at 88%, 89% today, where do you think you can get that number to?

George Alburger

I think that's a very interesting question, so a couple of factors to contribute. I want to give you an answer, but I just want to kind of give you the factors that contribute to it. One is that's going to help us, is having sold real estate that we in markets that we think are softer, the Milwaukee, the Richmond, places that we decided to be out of. As Rob indicated, markets where we saw office space, which we're seeing a little bit more activity that feels good, so that should help.

A negative is the fact that sort of net absorption is pretty anemic, right? And actually it was actually not a bad office quarter in the sense that it went 30 bps, but still 15.7% is national office vacancy. That's a big number, so this is about market share. It's not really about the pie getting bigger. It's about getting market share, so I think we can continue to do a good job, get more than our fair share, which is what we do quarter-after-quarter, but we are doing it against a pie that isn't getting any bigger. In fact the pie may be getting smaller to the readers contraction among customers.

Does it continue to tick up? Yes. Historically, it had gotten into the mid-90s, back in the day. I don't see that right around the corner, but can you go from 88 to 89? Can you go from 90 to 89 to 90? Can you go from 90 to 91? Yes, so I think there is clearly capacity there to move that occupancy up, but it's going to be a nice gradual kind of event. That's how it's going to happen.

Brendan Maiorana - Wells Fargo

Yeah. And it sounds like and we maybe just related to John's question earlier. From a CapEx spend, where you guys are today and you have the big lease in the Northeast that there was $5 million in the quarter, but as we think about CapEx levels and getting to low 90s on office should we expect and kind of where you guys are? You have been running now is about where it will likely be until you get to that sort of stabilized level and you only have to steal share.

George Alburger

Not exactly. A little bit right, but not exactly. As you agree, we have changed the portfolio profile and the percentage of offices less than it used to be and the percentage of industrials higher than it used to be, the result is that if the average TI should be going down? Assuming everything is just averaged, right? In other words, you are dealing with both of them.

I don't think we have to "throw TI and office to make the office occupancy go up", because that's sort of not the nature of the market at the moment. People aren't buying deals, so I think gradually the TI number will be less on a per square foot basis, partially driven by profile of the portfolio, but yeah. Still there'll be a number necessary to get off this occupancy up.

Brendan Maiorana - Wells Fargo

Sure. Then I just wanted to switch to the guidance for a second. I guess you guys are leaving your guidance unchanged, I think at the midpoint if you look at that on a quarterly basis it suggests $0.63 a quarter for the back of the year. As we think about the progression, I would think that the fourth quarter would be higher than the third quarter. Is that a fair way to characterize it or can you provide any more color on the guidance level, which I guess would be at relatively high range from the low end to the high end at this point in the year?

George Alburger

Good try, but we're not going to do the quarter-by-quarter guidance, but I'll give you some color and George can jump whenever he wants, so we affirmed the guidance to where the guidance is. Your math is right, so the midpoint is 257. We did do debt, we also did preferred redemption, so maybe it's a little bit more interest expense in the third quarter than the fourth when the other unsecured is redeemed.

Brendan Maiorana - Wells Fargo

Correct.

George Alburger

I think there's a little bit of waiting, but I'd leave that to you in your models.

Brendan Maiorana - Wells Fargo

Well, I had to try.

George Alburger

Fair enough.

Brendan Maiorana - Wells Fargo

Last one. Just kind of a [question], but Houston, it looked like on the industrial side, occupancy ticked down a little bit. I think maybe there was 50,000 square feet that moved out. Is there any change to the positive outlook in that market, or was it just something anomalous that happened in the quarter in your portfolio?

George Alburger

I don't need to, but if we were paying attention to Rob's commentary, we started two buildings right about this year, so beginning of the year we put those two to bid. They are now into 70s. We put those two to bid, now we started two new buildings that are already 70% lease one building.

Rob Fenza

They are not even vertical and they are already 70-some percent leased.

Bill Hankowsky

We're very keen on Houston.

Operator

Your next question comes from the line of Josh Attie from Citi. Your line is now open.

Joshua Attie - Citi

Bill, the $500 million potential built-to-suit pipeline you mentioned, how much of those discussions are with existing Liberty tenants versus new tenants?

Bill Hankowsky

I would say the majority are existing kind of three-quarters, two-thirds are existing.

Joshua Attie - Citi

In terms of size or how much on average would those talents be downsizing if at all?

Bill Hankowsky

Well, you got a mix. I mean it's about two-thirds of the square footage is industrial and third is office. So, I just want to give you sort of flavor right? Obviously the office is more expensive space, so kind of on the investment side it's almost a flip in terms of that $500 million.

Assuming these happen, again they might not happen, but these tend to be the office ones really reflect growth for several of the companies. This isn't necessarily consolidation-contraction. There is some amount of growth. I mean some of them are rationalizing space or concentrating in a market, but there is some amount of growth in some of this.

Joshua Attie - Citi

Thanks. George, on the rent spreads. It looks like the GAAP rent spreads were down about 1%. Can you tell us what the cash rent spreads were in the quarter?

George Alburger

Cash was down 5.2%.

Joshua Attie - Citi

Okay. Thanks. One more question. It seems like listening to the call that a lot of and I we knew a lot of this that the suburban office portfolio is really weighing on the growth of your total portfolio and I know you've been aggressive selling some of the office to-date, but would you consider doing something even more aggressive, either selling down more of suburban office or even really separating suburban office from industrial.

One, because fundamentally it's much softer; and two, because it's difficult for diversified REITs sometimes to get full value for all the pieces. Is that something that you would consider doing?

Bill Hankowsky

Well, Josh, I assume the expertise you and your peers on the call have will help people understand the value of this diversified portfolio, but I think at the moment in terms of additional sales activity, we gave the guidance for the year. As Mike said, we're pretty comfortable where we're going to be for the year, so at the moment we don't contemplate huge additional big sales. What is it, Mike? It's $350 million to…

Mike Hagan

250 million to 350 million.

Bill Hankowsky

$250 million to $350 million. Excuse me, so there were two-something now so there's another $100 million, $150 million, you could be doing for the year if you went to the high end of the range. Josh, we always are thinking about where we want to be long-term and so we consider our strategic options over time. I don't think there is anything right in front of us, but we do look at the questions you posed. Should we do more; should we think about other portfolios organized, but there is nothing that's right in front of us.

Joshua Attie - Citi

From an operating perspective are there operating synergies of having office and industrial together?

Bill Hankowsky

A couple of comments. One is, from a skill set perspective it's not a huge challenge to be doing both. That is to say the folks who work for Liberty, who do leasing the folks who work for Liberty, who do property management the folks who work for Liberty that are involved in our construction projects can generally handle both product types and actually a wide variety within those product types, so there is kind of an operating synergy from an internal perspective. It's not as if we have to have two groups of people in order to make this work.

From the standpoint of the customer side, It's not as if we are doing office space for the same guy were doing, industrial we're doing, but it does happen occasionally and that's great and we are able to do it, but it's probably more the exception than a rule.

Joshua Attie - Citi

Okay. Thank you very much.

Operator

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

Alex Goldfarb - Sandler O'Neill

Just some quick questions here. Remind us what your portfolio split is between what you define as corporate tenants versus the local, or small mom-and-pop tenants?

George Alburger

I'm not sure I can do that right off the top of my head. I can tell you this. I think our top 100 to 150 customers represent about 40% of revenue, so there is an aspect to which the bigger guy, as you would think, right? So they occupy some space, either they're multi-market tenants. I can think of one customer that's in 11 separate leases in nine markets and others like that, so they could be pretty impactful.

We have about 1,800 tenants, so it's probably one of those scenarios where other 60% of the rent is coming from the other 1,700, 1,600 tenants, so there is bit but I don't have a better metric right off the top of my head.

Alex Goldfarb - Sandler O'Neill

Okay. Yes. Because what I'm trying to do is get at, you had mentioned the corporates was stronger, so just obviously trying to figure out what the spilt is. Along those lines, if you talk about renewal conversation, if you’re not seeing what EastGroup was seeing in their portfolio and which is also a little interesting just because there is a bit of overlap between the two portfolios.

Are you seeing any change in the nature of the renewal conversations, either people saying, don’t call me now, call me next month, call me in three months? Are you seeing any signs that tenants are taking a more relaxed view towards renewals, because they don't feel the pressure to start-up the conversation today?

Bill Hankowsky

Yeah. Let me make one comment about your comparison of the EastGroup and the Liberty portfolio just to be clear. I did make the comment. We did make the comment that the smaller local guys are more uncertain and skittish, and so I think in that sense they are somewhat, the commentary is not inconsistent, right?

For us the larger corporates and where we have big boxes and we have office and we have some bigger office buildings, there is some overlap, but we also have a piece of tenant portfolio profile of our portfolio that's different, right? So I'm not sure it's that inconsistent.

On the renewal question, no, I wouldn't say tenants are like pushing back in some way. I don't feel like we're seeing any particularly different behavior. I think people are nervous and there is uncertainty and so sometimes they want to wait a bit, so I'll go back to something we said earlier on this call.

This isn't 2006 and 2007. This isn't where people are like yup decision, move, got it, give it to me, I'll get the lease signed. This is a world of much more take their time, consider it, pace it. It's a world where that last approval could be a no in a way that you did use to feel it could be a no. And occasionally people come back and they surprise us and we thought it was done. We thought we had an understanding and no, we're not prepared to do it or we're not prepared to do it now, so there's a bit more of that, but I wouldn't say it's particularly different again in the last 30 days than it's been just generally in this cycle.

Alex Goldfarb - Sandler O'Neill

Basically since the '09 trough, the pace of the renewal conversations and leasing conversations has been pretty much the same. It's not like you were speeding up and then suddenly at some point in the past whatever six months or something like that, it suddenly slowed down. It's been the same pace overall?

Bill Hankowsky

I would say that's generally right. Now, Alex, one of the things that all company are careful today is when you hear about a month and it's stronger a month and its weak and you have a dot and we want to make a graph out of it, so we have monthly leasing calls by region. They're pretty intense. They are pretty granular and if you go city-by-city and that city will say boy it's really softened up in the last two weeks.

In the next call, you know what? It's picked up, so we always want to be careful of sort of looking a little bit through what single dot and try to get a feel for it. I think the feel for it is that as Rob said, the industrial in Houston or Lehigh Valley or whatever is pretty robust. Chicago is better. South Florida it's still soft in those housing-driven markets. The Tampas, the Orlandos, the Jacksonvilles.

Phoenix is better, more active. I mean that's sort of a little different than it was six months ago for sure. Our team there is much more active than they were six months ago.

Minneapolis is more active. Richmond is still a little bit slow, so it will vary by market. It will vary by month, but overall the world today is a world of caution, uncertainty, thoughtfulness and it's not done till it's done and that I think is consistent.

Alex Goldfarb - Sandler O'Neill

Okay. Just the final question is, Lehigh Valley, Central Pennsylvania is now 25% of your portfolio. Obviously, it's great to hear of positive things coming out of Lehigh Valley. Is it relocation from New Jersey or that market has been strong for years, so what's really the drivers, is tenants relocating from New Jersey? Is it just more tenants opening up Northeast to Mid-Atlantic presence and therefore wanting the confluence of highways there? What's causing the continued strength?

Bill Hankowsky

Right. I would not say it's a New Jersey relocation. I mean, that has happened. I mean, it has happened and can continue to happen, but it feels a lot more like that companies have one or two things. They have a presence there today and they find it attractive and they have decided they want to enlarge their presence, so they need to grow from 60,000 square feet to 1 million, and I think of a couple of examples of that kind of decision making.

This works work out really well, boy, let's do more of it here. There is also scenarios where companies. I don't know if you've ever seen these maps where people say, if I'm going to have one [square], I'm going to put it in Chicago. If I'm going to have two, I'm going to be in the Inland Empire and I'm going to be in North Jersey.

Well, now, that two might be, I'm going to be in the Inland Empire and I'm going to be in Central Pennsylvania, so I think that some of this is new requirements in the sense that peoples having a somewhat different logistical paradigm that they are out implementing and that involves making a decision that, hey, that's a great place. It's somewhat of itself is (Inaudible). It is proven successful; therefore it's gotten on the radar screen. That it's on the radar screen, logistical model guys always have to think about, "Hey, would that be an answer for me?" Now, it wasn't what they were doing 15 years ago, 20 years ago. Now they do.

Operator

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

John Stewart - Green Street Advisors

Thank you. Bill, was there anything unusual about the Houston deal that you placed in service during the quarter? Like, was it on written-down land? I'm just curious how you got a 12% yield on a Houston project in this environment?

Bill Hankowsky

Well, first John, before I answer your question, I just want to congratulate you and your wife, (Inaudible). John, Junior. Great news. It's not a written-down land. No. This was land in one of our past sites. This is having an opportunity in front of you, building the building fast and quickly and efficiently, and being able to solve the customers' problem and they're willing to pay what required us to make it happen, so nothing special here.

John Stewart - Green Street Advisors George

Okay. thank you. George, Who were the preferred unit holders? Are those Rouse family members, the institutions, just a collection of individuals?

George Alburger

No. The preferred unit holders are primarily funds, so they are at a unit level. I can talk to the people that run those funds, so in some cases historically these preferred units maybe haven't been redeemed, but have been re-priced, because again I can have a conversation with one person who is making decision on that investment, but they are funds.

John Stewart - Green Street Advisors George

Okay. Just quickly on the same-store guidance, which I think going back to the original call have been down $0.03 to $0.07 with zero to down 4 mark-to-market rent roll down. When you are reiterating guidance overall, is that your same-store projection still hold?

Bill Hankowsky

Yes. We've been doing somewhat better on the rent roll downs in the first half, George, was that right?

George Alburger

Yeah. Well, let me add a couple. With the lower end of the range, we are going to leaves those ranges where they are. Yeah.

George Alburger

Again, some of that timing and some of that roll down was reflective of the benefits that 2011 same-store portfolio got from the rollback of a Tasty Baking Company bad debt reserve, a general rollback of a bad debt reserve and some other one-time items.

John Stewart - Green Street Advisors George

Okay. Mike, not to pass your words too finally, but when you said with given the $73 million that you've got under contract. You are comfortable with the $100 million to $300 million of acquisition guidance. Do you mean sort of the low end of the range or you are comfortable with the midpoint? Comfortable you'll get within the range or close to the midpoint?

Bill Hankowsky

Well, I think we'll be certainly within the range, John, between the 29 we closed and the 73 we have in our contract in case that's the low end of the range and I'm comfortable with the range.

John Stewart - Green Street Advisors George

Okay. Then lastly for you, just curious if you are seeing in-place debt having an impact on the deals you're looking at in the acquisition market?

Bill Hankowsky

I think there is activity out there right now, where folks are trying to sell properties subject to debt. I think there is more of it than it has been in the past. I think it's a situation where you had debt that's maturing three or four years out there, so I think it can affect the pricing, but it also can affect the tradability assets.

George Alburger

Got it. Which can be an opportunity for us?

Bill Hankowsky

Exactly correct.

John Stewart - Green Street Advisors George

Bill, thanks for the kind words hopefully. I think probably everybody has dropped off the call by now, so I'm not too embarrassed.

Bill Hankowsky

John. We were hoping you were earlier John, so we could really embarrass you. Good for you.

Operator

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

Bill Hankowsky

Thanks, everyone. I appreciate it and look forward to talking to everybody in another 90 days.

Operator

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

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