Liberty Property Trust Q2 2008 Earnings Call Transcript

Liberty Property Trust (LRY)

Q2 FY08 Earnings Call

July 22, 2008, 01:00 PM ET

Executives

Jeanne A. Leonard - IR

William P. Hankowsky - Chairman, President and CEO

George J. Alburger, Jr. - EVP and CFO

Robert E. Fenza - EVP and COO

Michael T. Hagan - Sr. VP and Chief Investment Officer

Analysts

Jordan Sadler - Key Bank

Jay Habermann - Goldman Sachs & Co.

John Guinee - Stifel Nicolaus

David Aubuchon - Robert W. Baird

Paul Adornato - BMO Capital Markets

Christopher Haley - Wachovia Securities

Cedrik LaChance - Green Street Advisors, Inc.

Michael Bilerman - Citigroup

Presentation

Operator

Good afternoon. My name is Taylor, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Liberty Property Trust Second Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers remark, there will be a question-and-answer session. [Operator Instructions]. Thank you.

Ms. Leonard you may begin.

Jeanne A. Leonard - Investor Relations

Thank you, Taylor. Thank you everyone for tuning in today. We are here to discuss our second quarter results. You will here prepared remarks from Chief Executive Officer, Bill Hankowsky; Chief Financial Officer, George Alburger; and Chief Operating Officer, Rob Fenza.

Also in the room with us and available to answer any questions you may have is Mike Hagan, our Chief Investment Officer. During this call, management will be referring to our quarterly supplemental information package. You can access this package on the Investor section of Liberty's website at www.libertyproperty.com. In this package you will also find a reconciliation of the referenced non-GAAP financial measures to GAAP measures.

I will also remind you that some of the statements made during this call will include forward-looking statements within the meaning of the Federal Securities Law. Although Liberty believes that the expectations reflected in such forward-looking statements are based on reasonable assumptions, we can get no assurance that these expectations will be achieved. As forward-looking statements these statements involve risks and uncertainties, and other factors that could cause actual results to differ materially from the expected results. These factors include without limitation the ability to enter into new leases, renewal of leases on favorable term, the financial condition of tenants, the uncertainties of real estate development and construction activity, uncertainties of acquisition and disposition activities, the cost and availability of financing, the effects of local economic, and market conditions, regulatory changes, potential liability relative to environmental matters, and other risks and uncertainties detailed from time to time the company's filings with the Securities and Exchange Commission. The company assumes no obligation to update or supplement forward-looking statements that become untrue because of subsequent events.

Bill would you like to begin?

William P. Hankowsky - Chairman, President and Chief Executive Officer

Thank you, Jeanne, and good afternoon, everyone. Welcome to our second quarter call.

I'm very pleased to have a second solid quarter on a row this year and I'm particularly pleased about this performance given the current shaky economic scene. We leased over 5 million square feet this quarter on our portfolio and development pipeline, bringing our leasing production for the year to over 10 million square feet. Our leasing metrics for the quarter were strong across the board. Increases in straight line rent, a strong renewal percentage at 68% another quarter of decline in lease transaction costs.

Occupancy increased 30 basis points to 92.5% and the amount of leased square feet in the portfolio is up over 1.2 million square feet since last quarter. This was a great job by our teams this quarter. The pipeline is down, the $610 million, $140 million decreased from last quarter, consistent with our commentary over the last several quarters that the pipeline would shrink. We projected the pipeline will remain at around $600 billion for the next several quarters. We did 700,000 square feet of leasing in that pipeline this quarter.

With regard to our 2008 capital plan, we still anticipate sales activity between $250 million to $350 million. As we advised in our last call, we'll probably be at the lower end of that range and these sales will be towards the end of the year.

Our acquisition activity will remain limited, as we remain disciplined in the investment arena and we'll probably not exceed $100 billion, the low end of our guidance range. So we reaffirm our guidance of 3.10 to 3.25 for the year.

Let me turn to our perspective on where thing stand with the economy and the real estate markets. Obviously, the economy remains challenged with another 62,000 jobs lost in June, bringing the job losses for the second quarter to over 190,000.

Instability and volatility in the financial markets is seemingly a weekly event. So we have a sluggish economy trying to slowly move forward in fairly choppy seas. The real estate market remains in first gear. There is demand and prospect activity, but it stand and it feels a little bit slower since the 4th of July. This is normal summer slowness, but, we'll be watching closely to see if activity picks up after Labor Day. Supply remains in check with a little new construction activity and market discipline remains is place with markets rent generally remaining flat. We are assuming the economy and the real estate markets will remain in the current state through the rest of 2008 and probably the first half of 2009.

I would like to close these remarks by mentioning three events that have occurred in a last two months. The first is the opening of Comcast Center on June 6th. This is a great project, well executed, and we are very proud that made this contribution to the urban fabric of our home, Philadelphia. The other two events were awards we received. CoreNet Global's 2008 Sustainability Leadership Award in design and development and being named NAIOPs 2008 developer of the year.

We don't run this company to win awards. But, we're extremely honored, to have received these recognitions, especially from our peers in the industry. I think these events show clearly the great potential this company has when the economy improves.

We have tremendous development capabilities, with an industry leading focus on sustainability. We can execute the most complicated and challenging projects, and we can put these capabilities to work in such a way that our customers truly benefit from our collaboration.

With that, let me turn it over to George.

George J. Alburger, Jr. - Executive Vice President and Chief Financial Officer

Thank you, Bill.

FFO for the second quarter of 2008 was $0.80 per share. The operating results for the quarter include lease termination fees of $700,000 or approximately $0.01 per share consistent with our normal quarterly performance and consistent with guidance.

We didn't have a great deal of activity this quarter for acquisitions and dispositions. We didn't buy any properties and we only sold one property and some land with total proceeds of $6.7 million.

During the quarter, we brought into service for development properties with an investment value of $47 million. Leased properties were 100 lease with the current yield of 10.4%. In addition a joint venture in the UK in which we have 50% interest brought into service 55,000 square foot building, which is not leased and a Comcast joint venture in which we have 20% interest brought into service 285,000 square feet with an investment value of $116 million.

There was only one development start this quarter. It was 346,000 square foot build-to-suit for the Tasty Baking Company with a projected investment of $50 million. As of June 30th the committed investment in the development properties is $610 million. For wholly-owned properties it is $453 million, and for these properties the projected yield is 9%.

For the core portfolio, we executed 38 million square feet of renewal and replacement leases, for these leases rents increased by 9.7%. Leasing transaction cost for this quarter and for that matter last quarter also were much improved compared to 2007 levels.

And finally for the same-store group of properties operating income decreased by 0.3% on a straight line basis, an increase by 0.6% on a cash basis second quarter 2007 compared to second quarter 2008.

These results are as expected. In our guidance, we suggested that same-store performance would be flat for the year. Its performance is somewhat affected by the vacancy in the wholesale market.

And with that I will turn it over to Rob.

Robert E. Fenza - Executive Vice President and Chief Operating Officer

Thank you, George. Good afternoon. I would like to start with the leasing for the quarter and then the leasing environment in general.

It was a very robust quarter for leasing, during the second quarter; Liberty executed 237 new and renewal leases, totaling more than 5 million square feet. Our occupancy picked up a bit, no small accomplishment, and our renewal rate was the highest it has been in the past seven quarters.

Rental increases were solid and were achieved without significant increase in TI expenditures. Our performance now withstanding without a doubt the market is facing a slower leasing environment. Some of this is attributable to the usual summer slowdown, but for the most part our tenants are behaving cautiously given the current economic uncertainty.

Three facts of the leasing environment today are; one, lease negotiations continue to be protracted, our corporate customers are exercising extreme caution. Two, there is an occasional, but an increasing occurrence of Corporate Boards and CEOs stepping in the four negotiated deals in the 11th hour and postponing or killing the transaction. And three, tenants have greater interest in renewing in place. This is both positive and negative for our business. In this environment locking into renewals early is good business, but it is a fact some negotiations for expansion space are going backward and becoming renewals with no expansion.

Despite the economic difficulties, we do not see any other warning signs among our tendency that would signal a significant erosion of fundamentals. We are not experiencing enough swing in bankruptcies, our receivables are stable, and our operating expense recovery is consistent with historical norms.

Turning now to development. During the second quarter, we brought four development properties into service for the wholly-owned portfolio. These properties were 100% leased at a yield exceeding 10%. The Home Depot building in Houston came into service early, and moved into the second quarter.

In our joint venture developments, we delivered our first building in Manchester in UK. This building is unleased and although, we have several prospects, the office environment in the UK is currently not conducive to quick leasing. We do not anticipate additional speculative developments starts in the UK for the remainder of the year.

We also delivered the final portion of Comcast Center, the most spectacular new office building in America, and one of the most complex. It is a shining example of development expertise at absolutely the highest level. We're very pleased with how this building is being received and the interest that is generated throughout our markets from our current and future tenants, who can see themselves in a building of this caliber, offering both, an extraordinary environment and the operational efficiencies.

Turning to development stats, in the near term, we expect to see fewer development opportunities that meet our investment hurdles. During the second quarter, we commenced development of only one project, the previously announced 346,000 square foot build-to-suit for Tasty Baking at the Philadelphia Navy Yard.

Liberty's development approval process is very rigorous, and our return holders... hurdles are appropriate for this market. Given both, the slowdown in demand and the significant rise in construction costs, our local officers are not seeing a high volume of new development opportunities at appropriate returns. There does continue to be opportunities to exploit our land bank, and meet customer's logistics needs. And our development capabilities including, our well established leadership and high performance green facilities provides us with a greater number of opportunities than much of our competition.

Since the end of the quarter, we've signed a build-to-suit deal for 500,000 square foot distribution facility in Orlando. Our wholly-owned development pipeline is currently 35% leased, and buildings coming into service in the third quarter are 83.6% leased. The pipeline leasing level is heavily influenced by two speculative distribution buildings in our Lehigh Valley market, on the Pennsylvania I-81 industrial corridor. While industrial activity has slowed with the economy, we're quite comfortable having new product available on the I-81 corridor given it's superior location accessing 65% of the U.S population and 75% of the nations purchasing power within a single days drive.

You'll note that four buildings on our construction have moved from expected delivery in the second quarter of 2009 to the third quarter. All four did not reach shell [ph] completion according to the original projections.

In Florida, we continue to experience slow permitting processes that slowed development schedules. The other three buildings experienced weather related delays. In a more robust market it would be prudent to authorize the additional construction expenditures necessary to maintain a schedule during sour [ph] weather. But, given current conditions, and the lack of tendency, it was more prudent not to compensate.

Moving to market commentary. It would be very repetitive to go through each market. Our earlier commentary on market characteristics is per basis. I will remark on a few markets for the significance. Our largest market, Philadelphia and its suburbs is holding up very nicely. The city of Philadelphia is experiencing low vacancies and upward pressure on rents. This is consistent with the region's historical performance, which tends to avoid highs and lows alike. In the suburbs, Liberty's Western portfolio including Great Valley Corporate Center continues to outperform the market with high occupancies.

Demonstrating this resilience is a new full building lease with Vanguard where we are expanding and redeveloping the existing building along the Route 202 Corridor to accommodate their growth. Vanguard takes occupancy of the entire 84,000 square foot building this fall.

Moving to the Philadelphia eastern portfolio, which has been driven primarily by Horsham, we are pleased to say that we've continued our rather extraordinary leasing pace in Horsham. As you will recall, entering the year we had approximately 500,000 square feet of vacancy to backfill due to the move by two of our tenants into new build-to- suit facilities that we developed for them. In only the first six months of the year, we have leased over 70% for over 350,000 square feet of the space.

The efforts of our Horsham team are worthy of commendation. They have done a tremendous job in mitigating an occupancy risk that was hanging over us. We currently have leases out for Signature for another 9,000 square feet, and we are working with prospects for an additional 50,000 square feet of this space.

I know I'm sounding like a broken [ph] record here. But, I need to caution you again, that although our leasing in Horsham is definitely way ahead of our projections in terms of signed leases. Commencement on these leases is not immediate. So our previous earnings guidance is still appropriate. One of our smaller markets, but one that is on every ones watch list is Phoenix. This is market in we have minimum exposure, but we have made significant progress in firming up our portfolio and are pleased with the activity we are seeing. During the second quarter we reduced our vacancy in Phoenix from 39% to just under 27%.

Since quarters end, we have subsequently leased another 70,000 square feet with commencement on January 1st. We have a leased out for Signature on 38,000 square feet deal. And we are negotiating with one tenant to take additional 100,000 square feet. Our strongest market continues to be Houston where the energy driven economy has created a market that is an exception to the norm. This is the market that has sustained demand supporting new inventory. As you know for the past two years, we've been satisfying our need for inventory through both development and the acquisition of vacant properties.

Since the December of '07, we have pushed vacancy lower from 17% at year end, 14% at the end of Q1, to just 6% today, with over 220,000 square feet of net absorption in Q2 alone. We anticipate several new development starts over the few quarters in Houston. In all of our markets, the Liberty platform continues to provide the means to outperform. We've been through this type of economic environment before, and our teams remain proactive staying well ahead of the challenges that may confront us.

Now with that I'll turn things back to Bill for his closing comments. Thank you.

William P. Hankowsky - Chairman, President and Chief Executive Officer

Thanks Rob, and thanks George. This quarter demonstrates the resilience of the Liberty business model in a down cycle.

Our multi-product, multi-market portfolio of over 2,100 tenants provides great risk diversification. Our seasoned in place local teams have great market presence, strong broker, and tenant relations that allow us to outperform our markets in any cycle. And finally an earning stream based 99% on rent provides great income stability in the down cycle.

On that note, last Friday a member of the analyst community published a research note suggesting that REIT industry is facing scenarios similar to 1998 when credit concerns produced a capital constraint environment, which was followed by an erosion of real estate fundamentals resulting in multiple contraction for REITs. Whether or not you agree with this type [ph] situation. It's clear we are in a situation where solid operations are the key to success and the best offense is a good defense.

There were REITs though that thrived during that timeframe. REITs that experienced significant multiple expansion, and which provided outside returns for their investors. Liberty was one of them. This company was then and we are now uniquely positioned for any headwind we're facing.

And with that I'll open it up for questions.

Question And Answer

Operator

[Operator Instructions]. Your first question comes from Michael Bilerman of Citi.

Unidentified Analyst

Hi, good afternoon. [Indiscernible] as well. Bill, maybe you can provide just a little bit more color, just contrasting your experience relative to the market and your markets expectations. You're talking about leasing activity remaining high, you're getting higher spreads, your CapEx costs are down so it's not like you're buying the occupancy. It seems that its real, but than you contrast that with some of your other comments of spending prospects having a slowdown in terms of decision making CEOs and Boards that are halting deals, and I'm just trying to put those two together to really understand what's really going on in your activity relative to the market.

William P. Hankowsky - Chairman, President and Chief Executive Officer

That's a good question Michael, and your commentary about our performance is in fact it's real. I mean this set of metrics this quarter and those in the first quarter are very solid, but let me try to sort of give you the flavor what's out there. This cycle is not a situation where demand has evaporated. I've often cited 2001 is an example of that phenomenon. In that phenomenon where demand just sort of goes off a cliff, then you'll have market behavior where people what make this word panic and rents get slashed, people buy deals to use that for fragile UTI [ph] etcetera. This scenario is one, where again it's very submarket-to-submarket. But, on the whole there is still demand out their. There has been much better supply constraint, so the markets are not generally over build where... and where market discipline, I think is hanging in their.

So for example people are not slashing rents in the marketplace. I think they feels impart with the fact that the industry is somewhat more mature, so there are institutional players, more REITs to control greater percentage of markets.

People aren't buying deals and... I think one reason is capital is a pretty precious commodity in this environment, so we are not seeing even entrepreneurial private guys necessarily buying the deal, which is kind of a classic phenomenon. I think there is nervous about what is going to be the capital as we all are.

So that's not really happening. I would say that the major market behavior we're seeing is people doubling commission they are creating incentives from brokers, which is generally sort of step one of trying to deal with a softer market. So a layer on that... our business model, so we've got very established people in the markets with great relationships, we've got this 2,100 tenant base that has sort of it's own natural organic growth phenomenon and it wants to stay in place, so you see the renewal percentage.

So we've got a tenant base that's fundamentally pretty oil, reflected in that and if there are going to stay with us, if they're going to just stay put, then probably have a much high potential expand with us. So we have that capability, we're going to see every deal in the market that's sort of our... and we're going to offer people a... I think some comfort in this form too because you are not so worried about... where is the stability of this private item going to. So our betting average is up, I think in terms of where we are in the market place and we've out performed our markets historically and we're doing it again. So I think you can reconcile all performance against this market softness.

Unidentified Analyst

And I guess your expectation is, while you're banking good things today, you expect things to probably trip trend probably in line to maybe getting a bit worse through middle of next year?

William P. Hankowsky - Chairman, President and Chief Executive Officer

If I had... our sense of where it's going to play out is roughly what we are seeing today. Thin demand, descent market... because I don't think you're going to see people break out and start buying in deals, don't think they can afford to. I think we are kind of harbor market rent, so I would see little push up but I'm not sure it's going to collapse because again think to discipline there, I think the...the worry we should all have in the one way we are paying close attention to, and like almost day to day, week to week is, is the demand getting any thinner because there is really no, I have talked about this before, the demand was in third year last year, second to the beginning year first net. So it has no where to go except stall out. So if it gets any thinner, it could get rougher.

Unidentified Analyst

And doing more worse for get about...

William P. Hankowsky - Chairman, President and Chief Executive Officer

Yes that's even happened in the past but at the moment I think we just kind of pass along in first year.

Unidentified Analyst

Can you just disclose the yield in the Tasty Baking deal and the deal that you did post quarter?

William P. Hankowsky - Chairman, President and Chief Executive Officer

We tend not to do it... deal by deals for a host of reasons including issues with our clients but let me just say, we have talked to you in the past that we are looking for staff north of nine I can tell you Tasty is north of nine, I can tell you the deal in Orlando is going to be around there.

Unidentified Analyst

And just on the development pipeline overall you mentioned... finding new demands is tough and at the same time sort of convincing tenants to move from once space to another is little more difficult to also experience with hesitating does that give you any pause on the development pipeline in terms of being able to attract tenants the sort of give a space to have an inventory to your, we are sort in a environment where net absorption is kind of flat?

William P. Hankowsky - Chairman, President and Chief Executive Officer

Yes, I think... one obviously, we are concerned about that phenomena you described and that's the reason we've pulled back on some starts we were anticipating in the fourth quarter... we canceled some projects, we have also helped from back in the first quarter, so we are clearly concerned about that. If we go to the pipeline as its sits today... we take a look periodically sort of what is the backlog or potential interest in that pipeline, and where we are right now is, for in that whole pipeline which is about 5.7 million square feet. We've got about 660,000 square feet of people we are talking to inactive discussions i.e. there is lease being balanced around, there is some paper being moved around. There is another 650,000 square feet that are active prospects and that was there in the market, they want to make a decision and we are one of the choices. We are not necessarily now the only choice, but we are in the hunt and there is about 4 million square feet of sort of suspects behind that, but that number by the way is a number that very consistently have a question. So whether all those people actually make decision to do something and then of course whether we're successfully be in the choice they make. But, again get back to may answer Michael's question which is there is demand out their generally across all the product types and across the market, I mean again remember this pipeline, it's 29 projects in 15 markets, we don't... we're not looking for, except for the ones Rob mentioned as couple large industrial ones. Now we don't need big hits to begin piece by piece get this thing sold out.

Unidentified Analyst

Thank you.

William P. Hankowsky - Chairman, President and Chief Executive Officer

Thanks.

Operator

Your next question comes from Jordan Sadler of Key Bank Capital Markets.

Jordan Sadler - Key Bank

Thank you, good afternoon. Just going back to Rob's commentary on the slower leasing environment, Rob I think you said that obviously tenants are staying put and there is no expansion space, last quarter you also mentioned that the tenants were aboard, or CEO killed the deal and now it sounds like its more prevalent. Are you seeing tenants who are renewing looking to give back, space at all or other tenants who are not necessarily renewing starting negotiations to give back space or sublease space?

Robert E. Fenza - Executive Vice President and Chief Operating Officer

Not much, not much. For the most part it's either discussions about an expansion, or discussions about staying put. And even the staying put tenants are... I think some of them... it's just a matter just being a little bit more conservative the businesses are for the most part are okay. But looking out on the horizon everybody has the same uncertainty. So they just sit and type.

William P. Hankowsky - Chairman, President and Chief Executive Officer

I can just augment that, I think maybe only exception, what I think we've already seen this was very direct housing related. So mortgage company, the home builder that might have been leasing 5000 square feet and office building had a field office somewhere I mean those folks are pretty much chunk or gone. And we're not seeing, I mean you see it with we have $0.46 of term fee in that guidance

Jordan Sadler - Key Bank

Yes.

William P. Hankowsky - Chairman, President and Chief Executive Officer

First two quarters it's roughly a penny a quarter. So candidly later than we would have anticipated, so we're not seeing a bunch of people rushing through the door, so let me get out of here. I won't say its anything different than probably this on last year, doesn't feel like it's a stampede of any nature.

Jordan Sadler - Key Bank

Okay. And just going back to the development a little bit, what is your... when you're looking at a perspective new start today what is the current view on speculate development versus to build-to-suit and just sort of maybe, just talk about your appetite prospect here and if that changed?

William P. Hankowsky - Chairman, President and Chief Executive Officer

Well obviously, we have done, couple of build-to-suit on our history. So we very much enjoy that business, we've had great success whether we have great client relation. So we're always open for business on a build-to-suit basis and the Tasty deal you just saw as one the one that Rob mentioned that we just signed his one. So I think you'll see that. You could also see it for example start a significantly prelease building. So you might not be 100% leased to a single player, but if we could lease 50% or something maybe we would start back in the sense that we're comfortable with that, that's enough initial leasing that we could handle the rest of it. In terms of pure respect on a percent empty and going forward, it would have to be, I mean we've been pretty clear about how we think about this. First is we need to know that our team need space and if our teams got enough space in their inventory we're not going to add more capacity to them. If they need the space than the second test is what the situation in the market. And if the market is soft, if the market is seeing increase vacancy, we're not going build into a problem. It's exactly the situation we had in Minneapolis at the beginning in the year. We were a planning a building. Two competitors building we thought we're going to get leased, didn't. There were 300,000 square feet of sublease comes in the market, we made the decision we are not building speck inventory into that situation. Even though our guys are can't handle 100,000 square foot office vacancy that they have to chill up in the market. But, that's okay. We've passed on that business not to have to sit on an empty building. The one exception to this, of course, has been Houston, and I think would remain Houston. We're pretty comfortable with the strength of demand their. And we could start a speck building there, if it... if it make sense to us.

Jordan Sadler - Key Bank

Does that, it's safe to say that that's to one spot, where you left new speck at this point.

William P. Hankowsky - Chairman, President and Chief Executive Officer

That's right.

Jordan Sadler - Key Bank

Okay. And then, I think Craig had a couple of quick ones for you.

Unidentified Analyst

Yes. Hi, can you guys just provide any insight into the 14% sequential jump in taxes?

George J. Alburger, Jr. - Executive Vice President and Chief Financial Officer

This is George, I can do that. To some extent there really isn't a jump in taxes. It has to little bit more to do with how the tax bills are paid. And in some of the prior quarter numbers, we didn't pay the tax bill. They were triple net deals where the tenants were paying those taxes directly. So, you didn't see kind of the... on the re-leasing, what you see now is more of a gross up whereby we're paying the tax bill and the tenant's paying the tax bill. Rob mentioned during his prepared remarks that our recovery ratio is still normal. So, we aren't getting burdened with some types of peculiar tax increases here, little bit more bookie [ph] being behind it.

Unidentified Analyst

Okay. So, the increases are pretty consistent. What you guys have budgeted you're not seeing --

George J. Alburger, Jr. - Executive Vice President and Chief Financial Officer

Again, it's not an increase. It is the tax, in the prior year's comparison; the tax bill was being paid by the tenant. So we didn't show the tax expense or the recovery. That space is now been re-leased. We are leasing, we have leased it to someone else. We get the tax bill, we pay the tax bill, we bill the tenant, the tenant reimburses us. So, you're comparing the situation where it was grossed up... it was netted before, and it's grossed up today.

Unidentified Analyst

Okay. Thank you.

Operator

Your next question comes from Jay Habermann of Goldman Sachs.

Jay Habermann - Goldman Sachs & Co.

Hi guys, good afternoon.

William P. Hankowsky - Chairman, President and Chief Executive Officer

Hi Jay.

Jay Habermann - Goldman Sachs & Co.

Bill, just back to your comments about couple of quarters ago, sort of around third year and now you're think we're in first year. And I know you answered the question, back when Michael asked the question. But, I am just wondering, can you sort of give us a sense of how you just gained confidence that markets will remain flat go looking at 12 months. Especially, when you look at the leasing and the pipeline for '09, I mean, two-thirds of your developmental pipeline really comes online next year?

William P. Hankowsky - Chairman, President and Chief Executive Officer

Well Jay, I look at a variety of things. Let's start with the downturn in the economy. We've lost through the first half of the year 438,000 jobs. If you look at the '01 recession in the first six months, the economy lost 800,000 jobs. If you look at '90 recession, it was 575,000 jobs. So it's a downturn, but it isn't... it doesn't feel as severe across the board. And we both know, there are some really... there are some particular sectors that are just getting hammered, housing and big pieces with the financial service space. So I would... I don't expect them to be helping on the demand side anytime soon. But, I think, generally, and interestingly, I mean, I've been in, I guess, 14 of our markets in the first six months, and I always try to touch a face with the few tenants, and we see tenants who have, otherwise one in Tampa they are a they provide optomological drugs. And they're growing in our portfolio from like 1,500 to 5,000, and now they've taking 23,000 square foot building. And their business is doing, not just okay, it's growing. Rob mentioned Vanguard, that's additional space that leasing in the market.

We have signed a couple of the leases that are, were in, that Rob... the part of that Horsham lease up, two of them are came with financial service companies, who are dealing with products for the elderly, seniors etcetera. And they actually need new more space. So, I see this mixture of companies doing okay. We've had some export driven guys who need more industrial space, I don't want say it's a huge phenomenon, but it's happened. So you have got, and then you've just got sort of in the market, and different than one when we had like all these tech firms as dump sublet. There is no significant spiking in sublet space, kind of goes back to the prior question of are we seeing people shrink their, I mean we're not... in addition to people not shrinking in terms of renewals, we're also not seeing people cut their space in half and trying to sublet the other half. So as leases expire, not just for us, but for others, so there's always kind a natural prospect activity by people being in the market. There seems to be some firms who were growing, and when I kind a look out, I say okay it's rocky, but clearly the financial markets are in more shape I think. I think Wall Street is more shape than mainstream. And that sort of what we've seen in our market and I think it candidly, it's a good thing to be in a lot of market with a lots of products and have a of tenants, because we get through it. We get a evening out effect, so we're not just getting hit by anyone sector or anyone place. That's what we're seeing and that's how we are seeing them [ph].

Jay Habermann - Goldman Sachs & Co.

And just being more of consumer led down turn savers versus '01, or perhaps it was a little more of business led down turn. Is that changed dynamics a little bit. I mean do you think perhaps its more on the industrial side and again weakness in housing and retail?

William P. Hankowsky - Chairman, President and Chief Executive Officer

Yes, I do agree with that comment. I mean that's absolutely true. What is different about this cycle is normally the cycle is driven by businesses first. This is a cycle that is significantly driven by consumers. I totally agree with that. And I do think that could have an impact on consumer products, demand for industrial space. I mean that's sort of where you're going. But, we've said this before, and the issue of industrial space from a logistics perspective is all about solving a logistical supply chain equation. So they may need less of that. I agree with that, but if somebody made a decision that there is a less expensive way to store, and distribute their product in a down cycle, they're going to implement it, because it's cost saving. And they're going to do it whatever they think they need to do it. So, they need 500,000 square feet in Houston, and they want to be in a circle, and that's what they want, and its doesn't matter if there's vacant space in Dallas or if there is cheaper buildings that are foot clearance that are 20 to 24 clearance that are 30 foot clear that are buyer [ph]. So the industrial space I think is a space that remains active. I mean both sectors have seen about 30 to 40 basis point increase in vacancy first to second quarter so its not as if get a lower offer, but there again hasn't evaporated. There is demand and maybe you're right, may be you'll see a little bit of softening on consumer product guys looking for space.

Jay Habermann - Goldman Sachs & Co.

Can you update us also just maybe on...on recently on cap rates and just also just starts on transaction in the market are you seeing the transactions take place obviously given the weakness in the financing side?

William P. Hankowsky - Chairman, President and Chief Executive Officer

I'm going to turn that over to Mike who is following that more closely for us.

Michael T. Hagan - Senior Vice President and Chief Investment Officer

I'd say generally there is not that many transactions in the market place and therefore the resulting pressure on cap rates are moving up. I think you're seeing. What you're seeing is a fanfold of quality building stray [ph] where people can get financing. And I think the debt market is still the key to driving that. And one of the keys to getting financing these days is who the sponsor is. So, I think in total the debt market settle that. You're not going to see a whole heck of a lot [ph].

Jay Habermann - Goldman Sachs & Co.

Okay, Shawn [ph] has a question as well.

William P. Hankowsky - Chairman, President and Chief Executive Officer

Hi there.

Unidentified Analyst

Just a quick one for George. I don't know if I already mentioned it George, but on the development start gains that you kind of laid up last quarter. Are you still looking for $300 million to $400 million for the year? I mean we're coming a little bit under that now?

George J. Alburger, Jr. - Executive Vice President and Chief Financial Officer

I would say probably a tad under that now. Okay I mean we've already served 150 million. Yes, we started for the first half of the year we started about a $135 million.

Unidentified Analyst

Okay.

George J. Alburger, Jr. - Executive Vice President and Chief Financial Officer

We originally you had guidance out there of $400 million to 500 million. We scaled that back to $300 million to $400 million, I think we kind a gave you some headlines that may be it would be towards the low side of that, wouldn't ...it could come in on the low side of that or much the same as acquisitions or we said unlikely to exceed the low end. I would say pretty much the same thing with development unlikely to succeed the low end of the guidance we laid out for that.

Unidentified Analyst

Okay. And given that a tenant unlikely to exceed the low end. Is there an alternative use capital you guys are thinking about and maybe give us an update of where you are on your share repurchase plan?

George J. Alburger, Jr. - Executive Vice President and Chief Financial Officer

I am happy to... just to be clear...as you put the capital plan...its one thing to put all the sources and uses out on the table, the second is look at it chronologically, so I think we have just laid out, okay se we're not going to buy as much as thought we would. Development is going to be somewhat less, what we also said that the sales activity is all going to be back ended so at the moment we are not looking at sort of capital burning a hole in our process. We are not with capital, we are in fine shape everything is fine, but at the moment we don't have to consider alternatives with the capital that we see in front of us for the two quarter is gone pay for the pipeline and that's going to have it all sort of works out. So your specific question on repurchase... share repurchase, we have 50 million remaining and 100 million authorized by the board and that's out their in place.

Unidentified Analyst

Okay. And with regards to business positions are these assets that you are thinking about under contract right now or after market?

William P. Hankowsky - Chairman, President and Chief Executive Officer

I would say half... roughly half is under contract and roughly half is in the market place.

George J. Alburger, Jr. - Executive Vice President and Chief Financial Officer

That's correct.

Unidentified Analyst

Thank you.

William P. Hankowsky - Chairman, President and Chief Executive Officer

Thank you.

Operator

Your next question comes from John Guinee of Stifel.

John Guinee - Stifel Nicolaus

Hi John Guinee, Stifel Nicolaus, how are you?

William P. Hankowsky - Chairman, President and Chief Executive Officer

Hi, John.

John Guinee - Stifel Nicolaus

Good. Bill you out lined a very deceptive story, very conservative at the same time you've got great development people in the field, great leasing teams out there, they all want new product and the biggest mistake one can make is agreeing to do just one more 10% yielding expect development deal. Do you have some sort of macro company wide limits in terms of leverage, exceptive element, land inventory, G&A caps that you work off of in this environment?

William P. Hankowsky - Chairman, President and Chief Executive Officer

I think the most macro, we have is... we're perfectly capable of doing nothing which is to say we could shut the pipeline down if that's what we thought it took. This isn't a business model where we have some capital allocation we are committed to spend we are not in the merchant building business, we're not in the build-to-sell business. So our teams know and we did it 2001, we shuttered down cold. Cause we thought it got was going to get bad it did get bad and we just hit your building nothing. We stored panels, we stored steel, I am glad to say that in both cases, we ended up using but it was years later. So we would do that if that was required there was project one of the projects we cancelled, we were doing some pad work, we stopped at the pad which is fine. So we have an investment in place we can build the building and start where we stopped the next time we see it. Our folks know clearly, as much as they love development and as much as it is in our DNA and is good as we are at it, we only build it to make money, so we need to see a situation where as I said either we have a will... we have significant pre-lease thing or like a Houston where the demand justifies it, but we are under no pressure to start it building and as Rob mentioned in his comments about sort of a rigorous development process trust me our folks will not bring in to that process to try to sell up 10% on paper, expect building, if they can't show us how they get it at least. They won't come to the door.

John Guinee - Stifel Nicolaus

Great. Thank you.

Operator

Your next question comes from David Aubuchon of Baird.

David Aubuchon - Robert W. Baird

Yes thanks, your leasing activity and leasing cost year-to-date is that above or below your expectations at the end of the year?

William P. Hankowsky - Chairman, President and Chief Executive Officer

That is well, one is above and one is below. Activity is above and costs are below. TI transaction costs are below, and I think we gave guidance that we thought that rents would increase on a straight line basis of 0% to 2% for the first after the year its up 5%. So in that regard the rent sort of been realized on a straight line basis or improved over expectations.

Unidentified Company Representative

And I just want to again augment On the TI side, we're very conscious at the moment of TI expenditure just as an issue on in and itself. And there's capital at the door and we've been paid attention to Rob had initiative underway, several quarters ago. And I think in addition to... so I think we're seeing some of the fruit of that in terms of sort of the discipline of our underwriting of our deals. As well as quiet candidly the renewal percentage, I mean obviously renewals require less TIs so that's a great thing too. So I think our combination of tenant behavior and our own focus discipline is yielding, I mean we were running I mean last year... TIs will run in like $16 million a quarter and this year they run like $11 million a quarter. So that's significant improvement.

David Aubuchon - Robert W. Baird

Right. And then given your comments about this thing a very shaky market, I mean that strikes me, do you think were too conservative at the end of year in given the environment then and I guess we're still obviously in a uncertain environment. We just think you're too conservative on the leasing side?

Unidentified Company Representative

No I don't. I think in this situation where somebody asked the question earlier about sort of reconciling our behavior with the market reality. Look, nothing about Liberty keeps me up in that, this economy keeps me up in that, it could get worse, I mean all we have... you could have any kind of situation that disrupts oil supply and gets oil out 160 not 140, they look at consumer behavior. So you could have the FAS and the SEC not say the financial institution and we could see credit markets really crunch up on this. So with that kind of landscape, I think you need to be very thoughtful and deliberate and discipline when you think about what can you achieve and then work your buts off to succeed it, that's what we're doing.

David Aubuchon - Robert W. Baird

What about your ability to push through annual increases in rents. What has been the response from tenants on that?

Unidentified Company Representative

Look at the supplemental, there is a column about, how many of our deals have bumps and I'm not opening the page but it's like in the 80s, I think both for the renewal number and for the new in replacement. It is basically from our perspective almost the precondition of signing a new deal.

Unidentified Company Representative

74 and 82.

David Aubuchon - Robert W. Baird

Okay, so.

Unidentified Company Representative

And Dave by the way those numbers are much higher on the office side.

David Aubuchon - Robert W. Baird

Right. Okay. Can you talk a little bit about the flex product in your portfolio it's the one that has the weaker occupancy but your main specific commentary about that...

Unidentified Company Representative

Yes, we keep looking at it quarter-to-quarter because of that quite candidly. Its sort of... it's an example of one area where normally it runs kind right between office and industrial has in past cycles and in this one its not. You're right, it's sort of trailing. As from the standpoint of looking at it, it seems today I've said idiosyncratic larger flex building where lease expired, people left and it is created a higher vacancy in that product type for us and it has a clearly dampened what we thought was gone happen on... we haven't got that stuff released. And there is a couple of deals but if they happen we're working on them, you could see that number move because there are exact 163,000 square... 153,000 square foot flex building. So there are some bigger ones that are sort of moving out a little bit more. But you're right as an overall situation it's little softer than our two product types right now.

David Aubuchon - Robert W. Baird

Final question, there's relative to guidance, it still seems pretty wide, I mean you have two quarters left. What sort of things would be considering?

Unidentified Company Representative

Well, our history is quite carefree. We generally, we'll adjust if think it's appropriate in terms of something significantly happening and we tightened up for you on the third quarter. But, I think we've... we had a strong first half, we've done a lot renewals, if I had to guess we probably have deals [ph] no percentage going forward, because I don't think behaviors was going to dramatically change. I think, hopefully, we can control where we are in TIs, not worry about market rent. Because where does it go, but net-net we're comfortable with the range we've got, and we're leaving it there.

David Aubuchon - Robert W. Baird

Okay. Thank you.

Operator

Your next question comes from the line of Paul Adornato of BMO Capital Markets.

Paul Adornato - BMO Capital Markets

Hi, good afternoon. You touched on... you mentioned that there is not a significant increased in the amount of subleased space, but what is the level of sublease space in your portfolio right now?

Unidentified Company Representative

It's subleased... I am going to make a stab, Paul, because I don't know it's top of my head, but it's just a few percent.

Paul Adornato - BMO Capital Markets

Okay. And that's space, is subleased or available for sublease?

Unidentified Company Representative

I would say both.

Paul Adornato - BMO Capital Markets

Okay. And you also talked a little bit about retailers that might be in trouble. You have a couple of deals out with Home Depot. I was wondering if you could give us some historical perspective on the behavior of troubled retailers, as it relates to their distribution space. Do they... are they as quick to give up that space, as they are to shut stores?

Unidentified Company Representative

Well, it can vary. We've had one troubled retailer, who went bankrupt and just shut it all down, stores and distribution space. So, that's obviously one under the spectrum. I think that it will vary Paul. It's really the function of what is the piece these guys are doing. So if they are shutting stores they probably need less space to support them, so they might come back, and look to cut a warehouse in half, and use half of it. They might look to go into a smaller building. It will depend on what the operation is. So some of these folks, and again, I think, it's important to remember these warehouses are in some instances, all they are is wracking and stuffing story. In other instances, there is a value proposition, which is to say something's being done to product in the warehouse. It might be being tagged, it might be being bagged, it might be put in security tags on it. So, some warehouses where there are hundreds of people that work there. And so, they need to be doing that even if they doing it for half the stores. So, the behavior is kind of all over the place, serious in credit what the retailers, how they operate or what are they doing.

Paul Adornato - BMO Capital Markets

Okay. Thank you.

Operator

Your next question comes from Chris Haley of Wachovia.

Christopher Haley - Wachovia Securities

Bill?

William P. Hankowsky - Chairman, President and Chief Executive Officer

Yes, Chris?

Christopher Haley - Wachovia Securities

Your comments about perfectly capable of doing nothing, I thought that was a result for self side research. Either way, I wanted to back to your comments about what we levers you might have in a slowing environment. And maybe I'd appreciate your views and Rob as well. I see with the amount of credit contraction that has occurred, and the product competition you have, my guess is that probably you see less capital concessions offered. But a quicker break in rent, over the next 12 months that we would in terms of capital inducements offered by your competition?

William P. Hankowsky - Chairman, President and Chief Executive Officer

Can I cut in, Chris...

Christopher Haley - Wachovia Securities

Yes.

William P. Hankowsky - Chairman, President and Chief Executive Officer

I'm sorry, I actually... I think there's one intermediate tool that I think is, what happened first. So, and I totally agree. I think here's the play. First is incentivising brokers, and that's clearly happening today. It's not all over the place, everybody isn't doing it, but people doubled commissions, sliding [ph] sale commissions, the classic, thousand, five thousand just hot check for... we have even heard of being paid for showings, and just to create traffic. So, that's happening today. Not everywhere but it has started. The next one will be free rent. Because of... sort of... it's the cheapest thing that you can do. So, it doesn't require capital, and particularly, remember everybody is just coming off a scenario here of stunning real estate transaction volumes. And I think there is a mindset of keeping the value of the asset up, and looking for face rent. So, and we've heard it more, and I agree with you, by the way on the private side, some sitting there and built the building, I was in this capital recycling mode, and now kind of got caught up. While, I am still sitting there and going, you know what I'll give three months, I'll give six months, I mean, it could get worse. In a year on a seven year deal or something just to get a face rent on the theory that if I wait, let that free rent burn off, I will be selling this building when capital market is better in late '09, and I have the great face wrecked [ph]. And you are absolutely right, I think, the absolute last tool is TIs, conceiving on the capital. But, I think, do free rent before they cut rent.

Christopher Haley - Wachovia Securities

All right. Okay. Related to your renewal numbers, we understand that it, obviously, tenants are obvious, are more higher [indiscernible] to stay. Therefore, and also looking to do shorter term renewals, not full extensions. Are you able to pass through a higher rent level on that, because that you're accepting lesser term, less term?

William P. Hankowsky - Chairman, President and Chief Executive Officer

In some instances, yes. But, I'll be honest Chris this is clearly environment, where we're balancing tenant relations economics and so if somebody comes in and say's I just don't know what I wanted to do. But we are willing to stay other year. I would prefer that to guys be in my portfolio a year from now talking about what he is going do. Then for me trying to get him back as I'll let him go. So I don't want to see wrinkle back but I am not sure in a mode of trying to little bit taken out of their height for that. Because I don't think that's going serve me well than the road. I don't want him going out looking for new space as well, that's asking lot may be I should just move. So I think you are generally at or just trying to get little a bit above. If you would pick up what would be in the bump that's probably good enough.

Christopher Haley - Wachovia Securities

And are those bumps, probably there is a contractual bumps, have you go and debate it what to do in terms of contractual versus CPI?

William P. Hankowsky - Chairman, President and Chief Executive Officer

We have always gone with contractual numbers what I want to be in CPI business, I want to pick up that are the index is, and they run generally 2% to 3.5%.

Christopher Haley - Wachovia Securities

On the going last quarter we discussed the change in rate of return on your development pipeline as certain projects came off at x rate of return and the residual development pipeline had a higher rate of return therefore the additions to the pipeline were seeing improved development returns which appears to have been the case for this quarter as well. Maybe that against to your higher rental rate activity on your renewals. Could you give us some color whether you believe your rate of returns are going up because the numerators, you're able to drive the numerator or your denominator, your cost structure coming down?

William P. Hankowsky - Chairman, President and Chief Executive Officer

Well I don't think the cost structure is coming down, particularly Chris, I mean this is a very tough environment on the construction cost side. For everything that going on and even though the amount of new construction activity is down the material side of its pretty rough, feels they're going up a lot this year. Anything that's got a petroleum based component is seeing increases. So, it's I think it's hard to move down costs. I think holding costs is an accomplishment and I think you generally get that out of the contractor side who are clearly start for business so their margins are clearly going to get compressed here. I mean sub's might a get a job just to pay their workers to keep in business. So there's a lot of aggressive bidding amongst sub's so that's I think that's flat. I think the return side is basically it's about trying to rents that make sense and of course you bet just opposite with way the market is.

Christopher Haley - Wachovia Securities

I'll come back on, last question is for Mike. Mike could you give us a sense where you think pricing has been either on a rate of return expectation price compound basis change over the last 90 days or 180 days a year-to-date instead of versus last year, just trying to look at what the change that you guys have seen or how you've underwritten over the last one or two quarters?

Michael T. Hagan - Senior Vice President and Chief Investment Officer

Well I'll tell you Chris. I think in the marketplace its not enough going on to give you definitive answer on that. I think it's the handful of transactions we've watched I would tell you its somewhere probably between 50 to 100 basis points of price movements there has been deals that, I've found more deals have fallen out of days because they can't come to agreement on terms that they have made trying to do a price adjustment. So that's 50 to 100 is probably just a guess online got to continue where we've been recently what we are underwriting I think we've looked a lot of transactions. I don't know that we've found enough that makes any sense to us to try to pursue at this point in time and that's where we are I think.

Christopher Haley - Wachovia Securities

And can you give you lot of transactions, lot of listings ready to be brought to market for the second half of the year?

Michael T. Hagan - Senior Vice President and Chief Investment Officer

Every investment broker that you have talked to, they'll tell you their business is down anywhere from 40 to 75%.

Christopher Haley - Wachovia Securities

Right.

Michael T. Hagan - Senior Vice President and Chief Investment Officer

And so I think that's... executive what... obviously the transaction point being lay down. And I think there is a general evidence here trying to take the force of transaction into the marketplace where you are unsure where the pricing is going to be, of course you can create a negative image on that piece of real estate if it doesn't sell properly.

Christopher Haley - Wachovia Securities

But you don't see a push or... you don't see a push in the brokers to bring products at market by year end?

Michael T. Hagan - Senior Vice President and Chief Investment Officer

No I don't think so, no I haven't seen till date no.

Christopher Haley - Wachovia Securities

Okay, thank you.

Unidentified Company Representative

Thanks Chris.

Operator

Your next question comes from Mitch Germain of BOA.

Unidentified Analyst

[Indiscernible] how are you?

Unidentified Company Representative

Hi.

Unidentified Analyst

I may have miss this Bill, what sort of your sale average? What sort of product is there a specific product type that's for sale or is it just across the board?

William P. Hankowsky - Chairman, President and Chief Executive Officer

No, we are primarily trying to sell suburban office. I mean in this even with everything going on we believe that we should have a robust and discipline asset management program in this company on an annual basis. So we take a look which we did in the fall about real estate that we did that's already we want to have long-term in the portfolio that's all you say that's there's anything... along with it is just product we would prefer not to have long-term. And that is the preponderance what is in that sales bucket.

Unidentified Analyst

Okay, great. And the remaining 30% add on portion is that both office flex or is there a higher percentage of one or the other?

William P. Hankowsky - Chairman, President and Chief Executive Officer

We fill the cup... we fill three of the office buildings and two of the flats. I think it's probably.

Unidentified Company Representative

Things were like somewhat like proportionally.

Unidentified Analyst

Okay. And last question, it seems to be I guess based on build of about build-to- suits. Just regarding your thoughts on demand, and trying to factor that in with regards to, the amount of competition obviously many of your peers have adopted a very similar strategy?

William P. Hankowsky - Chairman, President and Chief Executive Officer

Yes. I think the amount of build-to-suit activity is down. I mean it's consistent with people we are knowing. And I've heard people who are generally staying good as a general factor, so I think the pipeline of build-to-suit to last. They tend to break into one or two camps. It's pretty interesting. They are either pretty much relationship driven limited... limited competitive environment. We've been very successful in that space either because of great tenant relationships, because of our now fairly significant lead in sustainable development. So if people want to talk to somebody who can build them a lead certified building and there's kind of nobody better to talk than Liberty. And we get enquires because of that. So that's kind of one bucket. The second bucket is the classic on the street, it's competitive and it's going to be generally numbers driven. There maybe a reason we would look at that, but much of that we tend to pass on. And the one that Rob mentioned that we just sign since quarter end is to make classic example. It's a scenario where we own a significant amount of industrial real estate in the center own... actually to a JV structure with a great partner in the center of Orlando. If you want to build a significantly sized building in the middle of that market. Quite can be at the moment is only one party that talk to and that's us. So I have an good land in the right place, development expertise, we get a fair amount of that. But don't be less going forward in these economy.

Unidentified Analyst

Thanks, guys.

William P. Hankowsky - Chairman, President and Chief Executive Officer

Yes, thank you.

Operator

Your next question comes from the line of Tom Bowen [ph] Naples Capital.

Unidentified Analyst

Hi, guys. Thanks for staying on so long for this. A quick question on the cost side lot of comments about the revenue side being rapid. Do you see any risks to the cost side and lot of talk there about property taxes nearing this should up market?

William P. Hankowsky - Chairman, President and Chief Executive Officer

Yes. I think let me start with answering the question and then provide some color. The bottom line for us is there is very little risk to Liberty on the cost side because fundamentally all of our leases are net leases. And so they become cost to our clients. So we are not particularly exposed, the recovery ratio is like 97%, George 98%.

George J. Alburger, Jr. - Executive Vice President and Chief Financial Officer

Yes, and we did see some pick ups in taxes in Florida especially.

William P. Hankowsky - Chairman, President and Chief Executive Officer

Yes. There are two areas where I think there are cost increases, but there again for us that will more towards customers. One is property taxes because you have got this wonderful cycle, economy slows up, housing market in the tank. Mike's commentary about transaction cost. So if your government that leaves off a real estate taxes if your government that leaves off transfer taxes. You are seeing big hits so what you do. Increase the rate, the second thing is the energy cost and it's not just about cost of the raw material i.e. oil, there is a... there are series that I'll recall and come back to that. When there was a lot of deregulation, a number of state put in place programs that basically cap the wire, the transmission component of that whole business. Those are burning off. So you're seeing pretty market spikes in the electric costs in a number of markets. Maryland has had it recently. It's coming soon to Pennsylvania. And there're other states that are in this situation. So the two big moves that are happening is taxes and energy costs, but again passed on to our customers via our net leases.

Unidentified Analyst

Okay. Then just a little more blunt question. Suppose we're talking a year from now, occupancy ratios are down a little bit and your revenues are down. What kind of... you're taking on more of the cost of properties. And what kind of flexibility do you have on your internal cost structure? I mean how much of your SG&A is discretionary and how much of your total costs might you be able to control?

William P. Hankowsky - Chairman, President and Chief Executive Officer

Well let me... I mean you asked one question, which I answered, but now you're asking a slight, which is okay a slightly different question.

Unidentified Analyst

Yes.

William P. Hankowsky - Chairman, President and Chief Executive Officer

We have a continuous program to try to provide the most efficiently run portfolio that we can. So we are aggressive about bidding the operation of the portfolio and about what the costs are to operate that portfolio and obviously there was cost going to your customers but to degree their vacant space they come to us, obviously if its vacant with a beneficiary to keeping those costs under control. We are looking very hard at the moment as for example the energy cost of our building. We think this is an issue that it's not just passing problem, but it will be long term trend. So we're looking at ways to make more efficient our portfolio. So we are in a cost control mode on the operations of this portfolio. Kind of independent from the fact with your questions apart [ph] that we are...we might have more of it vacant, therefore passing through to us. We're on that mission any how. And so we would hope to be able to not just control, but actually lower some of the cost of the operations portfolio overtime and that's our goal.

Unidentified Analyst

Okay. And just kind of a side note. Do you maintain any kind of a list of at risk tenants or do you have any kind of guidance as to how much space you might loose at any given?

William P. Hankowsky - Chairman, President and Chief Executive Officer

I'll answer it, but this is Rob's one of Rob's special. We do have a tenant watch list. We're...and it has sort of two components; one is just classic tenants who might be having problem and need to be watched. But depending on the cycle we will also look at industry's spaces. We had a very aggressive program in 2001-2002 that were tech firms, because that was the space that was getting hit. Currently, we're looking at mortgage companies, home builders, people in that space so we can directly relate to the housing industry. And we've widen even a bit to sort of financial service folks because we want to know what they're up to, we want to visit their space, see if they are.... we want to be talking them about their problems, seeing if they can stay in the portfolio, if where the space they can consolidate into versus competitor and making sure that we don't have a receivables right up on the, as Rob said that's really happening. So we do have watched it, they are by market so each of our team leaders know whose on their watch first. But it is not significantly increasing right now and so it runs maybe a handful rub to a dozen of market, stuff like that and it can run from somebody in 2000 square feet to somebody in 15000 square feet [ph]. But it's not particularly... again getting out of control right now.

Unidentified Analyst

Okay, great. That's very assuring. Thank you.

William P. Hankowsky - Chairman, President and Chief Executive Officer

Yes.

Operator

Your next question comes from Cedrik LaChance of Green Street Advisors.

Cedrik LaChance - Green Street Advisors, Inc.

Thanks. George, can you give us a sense of the cash rental that you experienced this quarter just as the GAAP that you published?

George J. Alburger, Jr. - Executive Vice President and Chief Financial Officer

The cash rental didn't grow up, it rolled down 2.2% and Cedrik I think that guidance for the year for the cash rent was that it would roll down anywhere from 6% to 8%. So albeit, it's a roll down, it's certainly not a roll down of what we gave guidance on. And Bill alluded to the rent pumps that are pretty consistent in our lease. Understand if we have 2.5% rent pumps in our lease over a standard five year lease term, that's going to increase the cash phase rent by 10%. Now I would like at the end of that five year period that we still got a cash increase, but you would need a 10% increase in your market rents to post the cash increase. So what we have is a little bit of our rent pumps outpacing what's going on in the market.

Cedrik LaChance - Green Street Advisors, Inc.

Okay.From the same trend, can you give us a sense of the cash yield you are expecting on your development pipeline?

George J. Alburger, Jr. - Executive Vice President and Chief Financial Officer

It's historically runs about 100 basis points less.

Cedrik LaChance - Green Street Advisors, Inc.

Okay. If land was mark-to-market and your development base, what would be your expected yield right now?

Unidentified Company Representative

I don't think it varies greatly. I mean I would turn that over to Rob; but Rob, I don't think it moves meaningfully. Mike, you can...

Michael T. Hagan - Senior Vice President and Chief Investment Officer

Yes,I think...

Unidentified Company Representative

first of all it's not the most significant component of what's the cost of building the building. And I don't think or land bank is markedly under market.

Unidentified Company Representative

That's right. It's not a significant factor.

Cedrik LaChance - Green Street Advisors, Inc.

But what would be your best guess as to your current land bank outside of the development pipeline versus book value to the valid book if it's slightly below.

Unidentified Company Representative

I think it's probably about market.

Cedrik LaChance - Green Street Advisors, Inc.

Yes,okay. Mike, you made a comment about cap rates or investor expectations having moved by 50 to 100 basis points. Can you qualify the timeframe around that, and whether not you're talking about gap rates are expected by hours?

Michael T. Hagan - Senior Vice President and Chief Investment Officer

Well, I think it's cap rates that are... definitely cap rates that I'm talking about, now it's sort of the timeframe according to last six to nine months.

Cedrik LaChance - Green Street Advisors, Inc.

Okay,great. Thank you very much.

Unidentified Company Representative

Okay, thanks.

Operator

Your next question comes from Jordan Sadler of KeyBanc Capital Markets.

Jordan Sadler - Key Bank

Sorry, just a quick follow up, George. Line of credit; can you just give us the current availability versus borrowing capacity?

George J. Alburger, Jr. - Executive Vice President and Chief Financial Officer

Well the... it's a $600 million line and I think we have what 365 outstanding on it versus 375. So we've got 225 available on it.

Jordan Sadler - Key Bank

Thanks.And the upcoming... can you maybe just give us left to spend on the development pipeline that's in place as well as upcoming maturities and then maybe how you plan to be there or right over the course to the next let's say 6 to 12 months?

Unidentified Company Representative

Okay. I mean I don't have my... they're kind of all laid down on the package. The development pipeline and the percent complete as well as the maturities and the maturities for the balance of the year are under $1 million. So we don't have --

Jordan Sadler - Key Bank

But through the first quarter, April of next year I think --

Unidentified Company Representative

Okay, fine. I think what we're dealing with is the... through April of next year, I mean we have very little on the way of maturities until April of 2009, and then April of 2009, we have a $250 million that notes that's maturing that we need to address. So understand we're still looking to sell around a couple of $100 million of real estate between now and the end of the year. We've had a paddling over the last several years to execute a senior notes transaction or a capital transaction somewhere in the $250 million to $300 million range.

We executed one already this year, which was the $300 and some million we did that related to the permanent financing for Comcast center. We have a maturity of $250 million in April 2009; we need to address that maturity. In all likelihood, we will not wait until the first quarter of 2009 to address that maturity. It's had an interest rate of 7.75%.

The senior unsecured market is open now, but pricy now. If we were to try and do a ten-year deal today, we would be at 7.75%, 8%. We have a... if you look on our latter debt maturity, you'll see that we have a gap five years out, we could do a five year senior note, we could probably do a five senior note probably 7.75% plus or minus. So we are keeping an eye on that market, and if that market kind opens up with little bit maybe we might execute something before the end of the year.

Jordan Sadler - Key Bank

So you are leaning toward unsecured?

Unidentified Company Representative

We historically have done on secure to understand. If it's a $250 million transaction we're looking to do... you'd have to put... you've seen the nature of our real estate. We'd have to encumber a lot of real estate to do a secured financing. Clearly the secured financing market is available, but that's not necessarily how we run our business model or secured financing takes away some of your flexibility with your real estate or active sellers of real estate. We don't want to have to go back handle or lend it to substitute collateral periodically we moved tenants from building A to building B, we don't want to have to go back to a lender to move a tenant from building A to building B.

Jordan Sadler - Key Bank

But if you look like term loan is an options?

Unidentified Company Representative

Terms loans are an option. A lot of that is relationships with your lenders, clearly we have good relationships. Term loans would be more economically attractive to us. You can't... you are not going to get ten years, I think you are really stretching your bank relationship if we ask them to go five years, you are looking at something more like three year if you want to do a bank loan.

Jordan Sadler - Key Bank

Right, okay. That's helpful. Thank you.

Operator

Your next question comes from Michael Bilerman of Citi.

Michael Bilerman - Citigroup

Just had a couple of follow up, just on methodology, the development that you brought online is brought at a 10.4 [ph] yield. Were those on your schedule last quarter a 10.4 yield or on a different number?

Unidentified Company Representative

You have it, Rob?

Robert E. Fenza - Executive Vice President and Chief Operating Officer

My guess is so probably the same. What we do is we refresh the yields on the development pipeline every quarter. In other words, when we, so when people are trying to see what's delivered and what's initiated and then kind of back into what the yield is on what's initiated based up on the change over the overall development pipeline yields, if they don't have all the factors, we change the yields, Michael, every quarter on every property in the pipeline.

Unidentified Company Representative

If it requires.

Robert E. Fenza - Executive Vice President and Chief Operating Officer

If it requires. So, highly likely that by in March, we should have had pretty good notion of what the deliveries were going to be on a 100% lease buildings that were going to come into service in the second quarter. So, I don't have it in front of me, I am guessing it's 10.4.

Michael Bilerman - Citigroup

And were there any changes as you talk about as you refresh thing, I know some of the projects up for that one quarter; was there any changes in the forecasted yields on existing development pipeline quarter-to-quarter?

Unidentified Company Representative

I am sure lots of them had changes; modest changes. I mean, there is nothing dramatic that happened.

Michael Bilerman - Citigroup

Right, I guess if you... We know the deals came off and we know there is only deal added. So I guess if you just do the math, the taste still works out to north of an 11. Unless the existing deals went in there, 10.4 or other changes occurred in other developments.

Unidentified Company Representative

As we said we said earlier, someone asked us about that yield. We don't kind of have a specific deal, but I did tell you that was well above our 9%.

Unidentified Company Representative

Yes, obviously you're looking at the yield over the entire pipeline is 9%, clearly somewhere below that and somewhere above was, Bill was frank enough to say that one is clearly above it. We don't give that yields for obvious reasons on single-tenant buildings, but the yields changed on a variety of the buildings, but nothing dramatic.

Michael Bilerman - Citigroup

The taste was driven by your land basis and if land was at market, would that have an impact on the yield?

Unidentified Company Representative

It's a transaction at the Naval Business Center was a Brownfield site. It was a transaction that public was very actively involved with to keep the company in Philadelphia et cetera. So there is variety of factors, but --

Michael Bilerman - Citigroup

Just on the development and going back to your comment that you can sort of shut everything off. Is there a certain amount development that's been capitalize overhead?

Unidentified Company Representative

Yes.

Unidentified Company Representative

Yes.

Michael Bilerman - Citigroup

And what sort of levels would that be at?

Unidentified Company Representative

That is not at al level that disproportion to the level that... if you are looking our 10-K, we say the capitalized development is between 1% and 2%, and it's still at that level.

Michael Bilerman - Citigroup

and I assume if you are going to...

Unidentified Company Representative

We haven't loaded up here with a lot of development overhead. If you've got a shrinking development pipeline, you need to keep an eye on it and we will.

Michael Bilerman - Citigroup

And here is the land sell, you didn't book any of that gain into FFO?

Unidentified Company Representative

We don't have much in the way of land sell gains into FFO. We did have... it's not... we do take land sales gains that happened in the UK that are sales to home builders and FFO. We booked 330,000 of gain this period into FFO for what happened in the UK.

Michael Bilerman - Citigroup

And that's going to be in your equity and income line.

Unidentified Company Representative

No, we... that's a... this is one of Kingfield project that is not part of the JV. It's outside the JVs.

Michael Bilerman - Citigroup

Okay. And where did the 330,000 show up in terms of --

Unidentified Company Representative

If you look at the... if you look at gain on sale, you'll see a big number there.

Michael Bilerman - Citigroup

Yes.

Unidentified Company Representative

835 not all that 835,000 is the UK, a proportion of that is what happened in the UK about... I'll give you some precise numbers here to... 577,000 is the UK, and there is about 247,000 in tax in the tax number for that.

Michael Bilerman - Citigroup

Okay.

Unidentified Company Representative

So, I give you a 330,000.

Michael Bilerman - Citigroup

And then, is there any update on 1129 20th Street in terms of the leasing progress?

Unidentified Company Representative

Yes. We are proceeding, obviously with the development, and it's moving forward pretty quickly now. The building is the curtain wall is up, and it's sort of coming together. We've had... we're actually pretty encouraged by the deal flow that's gone through, the prospects we've talked to. There are two that we're in some descent conversations with, but we have... we're on the lease side. But it's... the activity has been pretty decent.

Michael Bilerman - Citigroup

Okay. And then just following up on Jordan's question; if you were to do a three year or five year most likely the five year, ten year deal, is that dilution, because I've seen, you don't payback the line at least in the interim, and prior to buy payoff bond. Is that dilution in... are your numbers in the back half and is that --

Unidentified Company Representative

It's... I would say it's in the guidance for the year.

Michael Bilerman - Citigroup

Okay. Thank you.

Unidentified Company Representative

Thanks.

Operator

Your next question comes from John Guinee of Stifel.

John Guinee - Stifel Nicolaus

One quick follow up question and one comment. George, you might want to call KeyBank about a term loan.

George J. Alburger, Jr. - Executive Vice President and Chief Financial Officer

We know your number, John.

John Guinee - Stifel Nicolaus

Jordan, call Jordan.

George J. Alburger, Jr. - Executive Vice President and Chief Financial Officer

Jordan, I'm sorry.

Unidentified Company Representative

I know you are Jordan.

John Guinee - Stifel Nicolaus

Second, my back of the envelope has you capitalizing about $4 million a quarter in development interest expense --

George J. Alburger, Jr. - Executive Vice President and Chief Financial Officer

I think it was a little higher. There is also some other capitalization on some land projects that are underway. It's a little closer to $5.5 million.

John Guinee - Stifel Nicolaus

So, your total capitalization for interest and land is about $5.5 million?

George J. Alburger, Jr. - Executive Vice President and Chief Financial Officer

I think that.

Unidentified Company Representative

Yes.

John Guinee - Stifel Nicolaus

Development interest land is about $5.5 million, and then how much more in terms of capitalizing personnel?

George J. Alburger, Jr. - Executive Vice President and Chief Financial Officer

Again, I didn't give an exact number, but I said it's... it will be consistent with that development pipeline running about 1% to 2%.

John Guinee - Stifel Nicolaus

Got you. All right, thank you.

Operator

Your next question comes from Chris Haley of Wachovia.

Christopher Haley - Wachovia Securities

Thanks for sticking around. Bill, the KOIZ, KOEZ incentives offered by the State of Pennsylvania benefited downtown and certainly are plus some of your project of South of the City. Has there been extensions... a broad extension of the earliest explorations of these KOIZ zones past 2015? And is that an issue for some of the prospects to come into the city, the state from a lease term perspective?

William P. Hankowsky - Chairman, President and Chief Executive Officer

Yes let me... first I... you used a word... you said that 30th Street Station site could --

Christopher Haley - Wachovia Securities

The new site too sounds that you have --

William P. Hankowsky - Chairman, President and Chief Executive Officer

Yes, but I think that sites in the center of Philadelphia, the two sites are the... along the intra-quarter 30th Street and then the Navy Yard. There is no quote downtown.

Christopher Haley - Wachovia Securities

Got it.

William P. Hankowsky - Chairman, President and Chief Executive Officer

Just for clarity. Yes, there was a bill that was just passed in the Pennsylvania legislature in the session that just ended 4th of July weekend. And there was a bill passed to extend the provisions, and there is a variety of terminologies in Pennsylvania, which I won't bore you with. There is KOZs, KOIZs, KEZs.

Christopher Haley - Wachovia Securities

Right.

William P. Hankowsky - Chairman, President and Chief Executive Officer

But it's basically for all of those. Basically what happened was if you are... if you've built a building and you are in the building, you're not getting any more benefit, but if you have a lay end and haven't put a building on it yet and you put something on it and somebody moves into it, then they would enjoy an additional seven years on top of the expiration date that would have been the date for the zone.

Christopher Haley - Wachovia Securities

15 or 18.

William P. Hankowsky - Chairman, President and Chief Executive Officer

Yes, you're right, because you have these different that will build the rounds of awards, I think you're pretty familiar with this, Chris. There were rounds of awards. Hang on, what round you were in is when it's getting added to, but yes, there was a bill to extend it.

Christopher Haley - Wachovia Securities

Okay.That's applicable for new structures.

William P. Hankowsky - Chairman, President and Chief Executive Officer

It's applicable; yes, that's basically right; yes, new development.

Christopher Haley - Wachovia Securities

Okay, thank you.

William P. Hankowsky - Chairman, President and Chief Executive Officer

Thanks.

Operator

There are no further questions.

George J. Alburger, Jr. - Executive Vice President and Chief Financial Officer

Well, thanks everybody and I appreciate everybody staying on. And we'll hopefully have another great call 90 days from now. Thanks.

Operator

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

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