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Executives

Jeanne Leonard – VP -Investor Relations

Bill Hankowsky – Chairman, President & CEO

George Alburger – EVP & CFO

Mike Hagan – EVP & Chief Investment Officer

Rob Fenza – COO & EVP

Analysts

John Guinee – Stifel Nicolaus

Jordan Sadler – KeyBanc Capital

Craig Mailman – KeyBanc Capital

Alex Goldfarb – Sandler O’Neill

Joshua Attie – Citigroup

Brendan Maiorana – Wells Fargo

John Stewart – Green Street Advisors

Liberty Property Trust (LRY) Q3 2012 Earnings Conference Call October 23, 2012 1:00 PM ET

Operator

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

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

Jeanne Leonard

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

Liberty issued a press release detailing our third quarter results this morning as well as a supplemental information package and you can access these in the Investors section of Liberty’s website at libertyproperty.com. In both documents, you will find a reconciliation of non-GAAP financial measures we reference today to GAAP measures.

I’ll 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. We had another solid performance in the third quarter. FFO was $0.64. We leased 3.8 million square feet bringing year-to-date leasing to 13.7 million square feet. This consistent leasing productivity brought occupancy to 91.8%, up 110 basis points from last quarter.

Though we only acquired one asset in the quarter, our acquisition pipeline is strong for the remainder of the year. Our development pipeline grew to $350 million, 3.6 million square feet of space. Again this quarter what is impressive is the consistency of Liberty’s performance in this uncertain economic environment. There are still 6 million less full-time workers than there were four years ago.

This economy has a long way to go to move from tepid to robust. We have sensed in the last 30 to 45 days an uptick in uncertainty and hence a slowdown in leasing volumes. This uncertainty maybe election and fiscal cliff related. Consistent with what we have been seeing over the last year, this pullback is focused on smaller local businesses. Larger corporates remain more active and decisive.

This uncertainty is also focused on the office sector with our industrial customers more decisive. Some of this behavior is evidenced by the larger industrial occupancy gain this quarter, up 160 basis points plus modest rent gains. This compares to the more tempered office occupancy gains of 50 basis points to 89.3% and rent roll-downs particularly focused on some of the softer office markets.

Another area where the larger corporates activity is evident is our build-to-suit prospect pipeline. This pipeline has grown further in the last 90 days to nearly 9 million square feet. More large customers are thinking about more large projects with potential start dates in 2013 and 2014. So where does this put us for the rest of the year? We think smaller customers, particularly in the office sector, will be cautious until they see further clarity. We see industrial activity remaining stronger. We are excited about our acquisition pipeline, and we are hopeful that our development activity will grow as the year ends.

And with that, I’m going to turn it over to Rob, and Mike and George for further color on the quarter’s activity in the markets. George?

George Alburger

Thank you, Bill. FFO for the third quarter of 2012 was $0.64 per share. The operating results for the quarter include $850,000 in lease termination fees. Our guidance for the year is that lease termination fees would be in the $0.04 to $0.06 per share range.

Let met provide color on one item which is a little confusing. Included in equity and earnings and unconsolidated joint ventures is $4.5 million write-down of our investment in the Lehigh Valley joint venture. Lehigh Valley is a 450,000 square foot office park in suburban Birmingham in the U.K., and we have a 20% interest in that joint venture. Any time there is an indicator of impairment, we need to evaluate the recoverability of our investment and that recoverability is based on a projected holding period.

The loan on Lehigh Valley matures this month. We are in conversations with the lender and are hopeful of a restructuring of the loan, but prudent accounting would not suggest we assume a loan restructuring and a holding period that extends past October. We have done a wonderful job with this portfolio. It’s 97% leased. There is your real value that can be created from the 97 acres of undeveloped land that the joint venture owns, but today, the asset is worth less than debt and we can assume lender cooperation that would enable us to recover our investment. Consequently, we’ve written off our investment of $4.5 million and this write-off is reflected in equity and earnings of unconsolidated joint ventures.

Let me move on now to more routine matters. There was modest capital activity this quarter. We acquired one building for $6.4 million and we acquired 107 acres of land for $20 million. We also sold 49 acres of land for $2.7 million.

During the quarter, we brought into service two development properties with an investment of $15.7 million, and we started three properties which have a projected investment of $55.5 million. As of September 30, our committed investment in development properties is $349 million and a projected yield on this investment is 9.5%.

For the core portfolio during the quarter, we executed 3.6 million square feet of renewal and replacement leases, for these leases rents decreased by 8.6%. This decrease is much greater than decreases suggested in or guidance range, which was 0% to 4% decrease in rents. Rob will provide some color on this, but to put it in context, understand that for the 12.2 million square feet of leases commenced for the nine-month period through September, the decrease in rents was 4.2%, essentially it’s consistent with guidance.

For the same-store group of properties, operating income decreased by 0.3% on a straight-line basis and increased by 0.3% on a cash basis for the third quarter of 2012 compared to the third quarter of 2011.

In a few minutes I’m going to turn the call over to Mike and Rob. They will discuss anticipated acquisition activity and build-to-suit possibilities, which could be quite significant.

We have a balance sheet that can accommodate an increase in investment activity. We are not highly leveraged and we have availability on our credit facility. Also, earlier in the year, we redeemed $228 million of preferreds. That market is available to us as are the debt and equity markets.

The third quarter was fairly straightforward, but the fourth quarter is a little more active. We believe investments and acquisitions in the fourth quarter will be $167 million. The expensing of the cost for these acquisitions, which we estimate at $3.4 million, is included in our fourth quarter earnings guidance of $0.62 to $0.64 per share. And finally, we will provide 2013 earnings guidance on our scheduled December 11 call.

And with that I’ll 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 sale market.

During the quarter we completed one acquisition totaling $6.4 million. This building is 232,000 square foot multi-tenant industrial building located in Phoenix. The building is located 3 miles west of Phoenix Sky Harbor airport, a great location providing highway access and access to labor. The building was approximately 18% leased at acquisition. The property sits on approximately 14.5 acres and will provide tenants with ample trailer storage. It is our intention to renovate the property. In addition to needing CapEx dollars, we will add dock doors and paving to create a cross-dock facility. Upon completion of the renovation, we will have turned a B minus building into a Class A building. On lease up we expect the property to yield approximately 8.3%.

In addition to our building acquisition, we acquired 104 acres of zoned industrial land in the Lehigh Valley. Our expectation is to build approximately 1.2 million square foot building, the purchase price was $18 million. Subsequent to the quarter-end we acquired a warehouse in Chicago for $17.5 million. The building is 456,000 square foot cross-dock facility with expansion capability to add another 200,000 square feet. The building was built in 2005.

In addition to this acquisition, we have under contract an additional $60 million. We are also negotiating contracts on additional $90 million. All of these acquisitions will be industrial properties. We expect all of these transactions to close by year-end.

Upon the execution of all these transactions, our acquisition activity for the year would total just over $200 million. The cap rate for this fourth quarter activity will average approximately 7%. Our guidance for the year was $100 million to $300 million at cap rates of 6% to 8%.

Our acquisition goals for the year will require quality warehouse product. We have been disciplined in our activity and now we have acquired Class A industrial project in markets where we wish to grow our industrial presence. We have done this through both the acquisition of core product and the value-add acquisitions Liberty is known for. It is a challenging time to be acquiring quality real estate. There continues to be more investment dollars available for well-leased Class A product in top tier and secondary markets than there is product available. In addition, there’s less product available now than there has been in the last 12 months. As a result of this, cap rates for this product remain in the 5.5% to 7% range.

As for dispositions, there were no property sales during the quarter. Subsequent to the quarter end, we sold one office and flex property for $14.5 million. With this sale, our year-to-date dispositions totaled approximately $230 million. While we are working on a few other sales, we do not expect any significant transactions to close between now and the year-end.

With that, I’ll turn it over to Rob.

Rob Fenza

Thank you, Mike. Good afternoon. Our portfolio performed as expected in the third quarter with occupancy advancing 110 basis points. It was a strong quarter for leasing in nearly every market, but the occupancy gains were driven primarily by the strengthening industrial markets, supplemented by significant leasing in our Northern Virginia and Southern New Jersey office portfolios.

Some of that leasing success came at a price though, because Northern Virginia and Southern New Jersey are the markets in our portfolio experiencing the most negative rent pressure. We are pleased to continue to lease more than our fair share of the market, but until the competition catches up somewhat to this performance, we will continue to face aggressive competition for leasing at existing space. So, pricing power, particularly on the office side, remains elusive.

In our conference call last quarter we talked a bit about the bifurcated nature of tenant demand. We continue to see this, large corporate users sitting on cash and years of with John Stewart – Green Street Advisors Pent-up demand starting to seek solutions to their space problems. This is translating into demand for existing and build-to-suit space in the industrial market and primarily for build-to-suit space in the office market as the needs for the office tenants are generally more complex to be satisfied by existing inventory.

Smaller and mid-size companies are generally more hesitant to make significant moves now. This is translated into somewhat softer general prospect activity for existing space in the past 45 days or so while at the same time, the build-to-suit pipeline and prospect list is somewhat extraordinary. Real estate companies like Liberty with development expertise and strong balance sheets are clearly positioned to reap the benefits of this build-to-suit demand.

To walk quickly through our markets; on the industrial front the Lehigh Valley, Central Pennsylvania and Chicago are clearly benefiting from demand from large users. I don’t think I need to say much about the Houston market, it’s clearly one of the nation’s strongest industrial markets and we are pleased with our position here and our growth prospects.

Markets catering to smaller and midsized users are less active, but are generally healthy. On the office side, most suburban markets are holding their own, and general prospect activity continues to be sluggish, again awaiting for job growth. However, when job growth rebounds, we clearly will have an opportunity to drive both occupancy and rent growth.

Retro markets are more active. We continue to see tremendous interest in the Philadelphia Navy Yard, the newest Philadelphia magnet market. Another market experiencing increasing activity is Phoenix. As you know this market was particularly hard hit by the financial recession but in the last several quarters, both industrial and back-office prospect activity is up significantly.

Turning now to development, our development pipeline continues to add value. During the second quarter we brought into service two industrial projects totaling 282,000 square feet fully leased. We increased the pipeline by starting three new projects totaling 530,000 square feet. One of these projects is 139,000 square foot build-to-suit office project in Phoenix, Arizona for a multi-tenant – multi-market, excuse me, multi-market Liberty customer. The other two commenced developments are multitenant industrial inventory projects and 164,000 square foot building in Houston, Texas and 227,000 square foot building in Rogers, Minnesota. With the addition of these Q3 commencements, the development pipeline stands at 14 projects for 3,552,000 square foot at an investment of $349 million spread over seven of our markets.

We are particularly pleased with the build-to-suit prospect pipeline. Right now we’re in negotiations with three build-to-suit customers for over 0.5 million square feet and have proposals in the hands of nearly 6 million square foot of potential customers. And if you combine the industrial office and industrial prospect activity and suspects, that’s another 2.6 million square foot for a total of almost 9 million square foot of opportunities. This activity is spread over 12 of our markets. Obviously some of these transactions may not happen nor will we win them all, but we are in a unique position to capture a good portion of this robust build-to-suit activity.

And with that I’ll turn the call back to Bill. Thank you.

Bill Hankowsky

Thanks, Rob, appreciate it. So, Amanda, we’re open for questions.

Question-and-Answer Session

Operator

(Operator Instructions) And your first question comes from the line of John Guinee with Stifel. Your line is now open.

John Guinee – Stifel Nicolaus

Well, you call me off guarded. I didn’t expect to go first.

Bill Hankowsky

(Inaudible).

0

John Guinee – Stifel Nicolaus

Now it’s the great news here is you guys have really righted the ship, you’ve managed to hold FFO fairly steady, while improving the quality of the portfolio greatly, because you have a wonderful deep team, 15, 20 different markets you’re able to allocate capital appropriately.

The tough part is just with no rental rate pricing power 20%, 22% annual leasing of your 77 million square foot space and $4 to $5 in CapEx kind of tough to get into a position where you feel comfortable that maybe you could raise the dividend. Do you have any light at the end of the tunnel on that conundrum?

Bill Hankowsky

Sure. That’s a fair question John. So I think in part the answer is a little bit inside the question you asked. So here is what we need to do, and I think we made this comment I think maybe at the end of the second quarter call, which was that going forward we would be a net investor versus a net disposer, which isn’t to say we still won’t get rid of assets that don’t fit in this portfolio, but as was indicated by the various comments made, as Mike said, we hope to land about $167 million in acquisitions in the fourth quarter and we are getting more industrial so we are going to be continuing to want to emphasize that piece of the portfolio.

As Rob said, we want to continue to see if we can build this development pipeline up. So one place where we’d hope to see earnings growth is by literally growth in the portfolio, both in acquisitions and in development. The second place is occupancy gains, and we are heartened by the progress we made this quarter. There’s still more to make, and as you know, it’s particularly focused on the office space, which is still in the kind of 89% range versus the industrial, which is more like almost 94%. So if we could pick up some occupancy even at the more challenged rents, that’s a place to gain revenue. And then of course, the final place is rent movement.

Now, I think rent movement has already begun, i.e. in the positive direction in the industrial space. The last two quarters we’ve seen our industrial piece of the portfolio seeing rent gains. We are not there yet on the office side and I don’t think we are there, it could be a year from now, right. I mean, it could be deep in the 2013. So, the combination of those factors moving occupancy, more industrial rent growth, the beginning three or four quarters from now for maybe some office rent growth, and then acquisitions and development, I think those all come together to begin to put us in a place where we can consider that the point of your question where we could consider growing the dividend.

John Guinee – Stifel Nicolaus

Great. Thank you very much.

Bill Hankowsky

Thank you.

Operator

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

Jordan Sadler – KeyBanc Capital

Thank you and good afternoon. Just wanted to touch base on some of the uncertainty you mentioned seeing more recently. It sounds like it’s focused on the office side, which I guess is a bit understandable, given all that’s going on. I’m curious, what you are seeing trend-wise on the industrial side? It sounds like maybe not seeing uncertainty, is there actually strength and improved velocity, is that the takeaway from the increased build-to-suit activity?

George Alburger

All right. Let me parse that a little bit Jordan. So, by the way, I think what we are seeing – I’ve actually in conversations with business folks in other spaces, banking, finance, I think I have a general sense that there has been a tad pullback in this last 30-day, 45-day period. I mean there is less loan applications in, we are seeing less prospect activity. Mike indicated in his comments, there is little bit less product in the market, and we all know that there is a lots of uncertainty dealing – we’ve got the election, but I think more importantly how do the fiscal policies play out after that. So, people might be awaiting some clarity.

I think it’s more pronounced in small businesses and what I call the mid-size guys and I think that could actually impact small industrial users, but when you look at the major corporates and supply people, so logistics firms, food guys, consumer products, retailers and by the way ecommerce guys, they are out there and they are out there with big requirements, moving around, looking for spaces and we have not seen any comparable pullback there the way we have seen in this tad amount of pullback with the smaller customers.

So, I do think it’s a bifurcation on the market, and as Rob walked you through, I mean, what is interesting again – just it’s all interesting, is, in a same timeframe where you sort of feel in the markets guys are looking to lease some space that’s pulled further little or pulled back, we’ve actually seen the potential build-to suit pipeline grow. Again, that is, everybody on that pipeline is somebody – it’s a brand name you would know. These are requirements of scale in both the office by the way, both the office and the industrial space. So, that’s going on at the same time that big guys are looking for existing industrial space and at the same time the smaller customers have sort of taken a pause. That’s our description of the current landscape.

Jordan Sadler – KeyBanc Capital

Are you – just digging a little deeper seeing any benefit or do you expect to see any benefit from sort of a recovery in the housing markets, sort of how you are handicapping that?

George Alburger

There is no question that in certain markets that are – to be candid, where we saw a great bit of their growth driven by population growth and therefore, housing growth. So, we all know, right? I mean, we are not Vegas, but they were sort of the poster child. Phoenix is in this bucket, the Floridas, they are in this bucket, number of the Florida markets. That if housing comes back, if housing is able to sustain some activity here that will absolutely be an additive.

That will be – that will produce the 10,000, 20,000, 30,000 square foot industrial user who needs multitenant industrial space, who supplies product, components, the kitchen gamut, the tile work, the ceramic guy, all those guys who have shrunk either maybe gone away or shrunk to one facility, shrunk their lease when it expired, that’s all opportunity. So yeah I think it would help in the mid-size space in housing dependent markets.

Jordan Sadler – KeyBanc Capital

Thank you. I think Craig has a quick one.

George Alburger

Sure. Craig?

Jordan Sadler – KeyBanc Capital

Craig, you are there?

Craig Mailman – KeyBanc Capital

Oh, sorry. Sorry about that, George, could you just give us maybe an update of what you think dry powder is today, just given your leverage target? And then just put that into perspective given the ramp in investment activity in kind of the way you would want to manage the balance sheet here going forward. Is it running up on the line and then pay it down or would you want capital in advance of spend?

George Alburger

Okay. As you know, we have – our balance sheet is in pretty good shape and we have a fair amount of flexibility. Clearly dry powder we have more than $0.5 billion worth of dry powder. But I think I mentioned a little piece that we redeemed a fair amount of preferreds during the year. That’s a market that’s a very attractive market for us. We could probably do preferreds 6% maybe inside 6%. The debt markets are wide open. We could do a 10-year meaningfully under 4%. So that’s an attractive market to us, so we could touch both of those markets. So we’re in good shape in that regard.

I think one of the things that you do need to keep in mind is that we mentioned a lot about acquisition activity, but there will be disposition activity on a going-forward basis, perhaps not that much I don’t think in the near-term for the fourth quarter, but we will again be selectively selling out some suburban office products maybe in certain submarkets and things like that. So that should be a source of capital. And although Rob touched on huge amounts of built-to-suit activity, it takes a while to initiate these projects, and the spend is over a more extended period of time. So there’s no immediacy but could we look at the markets in the near term, perhaps.

Craig Mailman – KeyBanc Capital

Okay and then just one quick one, on the development pipeline, the expected yield came down 40 bps. Is that just a function of bringing on the office build-to-suit or as you guys went back through the portfolio, is it longer lease-up maybe in the bigger assets in central PA or anything else specifically?

Rob Fenza

No, just to be clear. We do not change the lease-up period for assets in the pipeline. We build them. We get them when it’s inventory product and we give them 12 months. So predominantly the change is the mix. A few came out and a few came in and that mix moved that yield. It was not a function of changes in the underwriting of the ones that were on it from prior quarter.

Bill Hankowsky

Now they would only change from the prior quarter if there is some level of leasing that happens and that leasing is a little bit more or less than what was the projected leasing.

Craig Mailman – KeyBanc Capital

Great. Thank you.

Rob Fenza

Thank you.

Operator

And your next question comes from the line of Alex Goldfarb with Sandler O’Neill. Your line is now open.

Alex Goldfarb – Sandler O’Neill

Hi. Good afternoon. Just going back to the tenant demand question, just want to make sure I fully – got it all straight. On the industrial side, the big corporate users are fine. It sounds like really the weakness on the industrial versus small tenants and maybe some of the midsize. On office, were the comments that office is generically weak or is it still the same thing? The big corporates are fine. It’s really the small users in office and maybe some of the midsize users in office are showing a slight pause.

George Alburger

Yeah. Good question Alex and just to make so that we are communicating. Just to be clear, for the entire year, industrial has been more vibrant than office, so that phenomena remains the same, right? So, there is kind of more industrial velocity, there is more industrial net absorption than there has been in office regardless of customers.

Our commentary about the last 30 to 45 days is that it feels like there is somewhat less prospects in the market looking for space right now. Who is that? That tends to be smaller companies; smaller local, maybe locally based might be another way to think about it, predominantly in the office space. So, I think you are right that the bigger office guys are still kind of out there doing whatever they are doing to think about making decisions, but it’s this sort of smaller local mid-size and it’s more pronounced in the office and it’s a tad in the industrial.

Alex Goldfarb – Sandler O’Neill

Okay, that’s helpful. Then, as we think about 2013, your exposure, you’re well over there, just broadly speaking, central and southern regions it’s predominantly industrial is the bulk of the role, whereas in the northeast, it’s industrial and office. So, given that commentary and how are you thinking about or how should we be thinking about your 2013 leasing as far as which markets are really the real drivers, the ones that are critical for either to see improvement or the ones you will see the greatest strength that’s really going to drive your 2013?

Bill Hankowsky

Yeah. So as George said, we’ll have a call in December 11 and we’ll really give you a full description and delineation of how we think 2013 is going to go, and I think part of that Alex, we’re really candidly – I do believe that part of what is happening at the moment is really driven by kind of an uncertainty overhang driven by current environment. And who knows what will exactly happen, but I think by the time we get to December, there will be some clarity. We might like the clarity, we might not like the clarity, but I think there will be clarity, and then that will I think perhaps take this – we view this as a temporary pause. We do not view this as a permanent phenomenon that people pull back.

We think it is people waiting to get some clarity. Now that clarity may lead them to say, oh, wow I don’t like what I see, so I think I’m not going to expand, okay, so I’ll just renew. It may lead them to say, oh, okay, I think the world might get better over the near term and I’m going to enter into that lease that has more square foot than what I’m vacating. If they break – however it breaks, but I think it’s a little early – I mean I general feel that 2013 should be better than 2012 for a lot of reasons, but I think the specificity of that if you will give us another 60 days, we will give you a much better answer.

Alex Goldfarb – Sandler O’Neill

Okay, that’s fine. Last night we just found out that there’s going to be no sequestration. So apparently that’s...

Bill Hankowsky

Right, right, right. It’s moving very quickly, right Alex, it’s moving very quickly.

Alex Goldfarb – Sandler O’Neill

Finally just channeling David Harris in me. Blythe Valley, U.K., you took the write-down, it’s a legacy investment, obviously it’s fun to go over to Britain and see it. But how does the U.K. fit in Liberty today? Does it make sense to continue? I know you can say it’s a small investment and go down the list, but from your opening commentary, it didn’t sound like there’s much near-term opportunity and if it’s just going to be one of those little things that begs questions every few quarters. If it’s not adding value to Liberty, the company, the stock, why not just sell it to someone else, to a private equity firm or someone else?

Bill Hankowsky

Good channeling by the way on behalf of David. So, here is what I think in terms of U.K. We have been there a long time. We have a presence there. We understand the market. We have a talented team. And it is a different business proposition. So this is not really about NOI growth in the sense of quarterly recurring revenues that drive it. It’s really about value creation that gets harvested, and so we harvested a fair amount of value creation in Kings Hill when we did a JV there. We have a project in Cambridge where we basically it took seven years to get there. We are there. The first project paid off. The accumulated costs for seven years to get there, so their profits are in front of us. There you know that in Kings Hill, we have a residential component that yields fairly decent profits on the sale of that residential land. I think the last land sale George was – we got to £2 million an acre?

George Alburger

Yeah, we go to £2 million an acre on the last land sale.

Bill Hankowsky

So these are...

George Alburger

That – just to interrupt Bill that does eek in over...

Bill Hankowsky

It eeks in and there is the – £2 million is not net in it – £2 million and some goes to the county and all that. But there is absolute creation of economic value. It happens in a kind of episodic way, as George said, not in a – not every quarter exactly the same. That is fairly significant. And we think it is a value and we think that given sort of our investment and time, effort, and positioning, we are now able to sort of on a going forward basis harvest that.

Alex Goldfarb – Sandler O’Neill

Thank you.

Bill Hankowsky

Thank you.

Operator

Your next question comes from the line of Joshua Attie from Citigroup. Your line is now open.

Joshua Attie – Citigroup

Thank you. As we think about the continued repositioning of the portfolio, I know you’ve said in the past that 2013 will probably be more balanced in terms of acquisitions and dispositions, but has the success you’ve had selling assets this year and also the continued softness in office rent economics made you reconsider the possibility of continuing to be a net seller in order to accelerate your exit from some of those assets?

Bill Hankowsky

I think there’s a couple pieces to that Josh. So one is, to be clear, we do plan on a going forward basis continue to sell real estate, and again, we’re not – this call is not about 2013, so I’m not going to give you guidance for 2013, but I think to the degree it makes sense, we will dispose off real estate that doesn’t fit long term in this portfolio, and I think that real estate will predominantly be characterized. I mean, there might be an industrial asset that’s older or something like that, but predominantly it’s going to be suburban office. So we will continue to subtract that product.

But I do think at the moment, our thinking is that we would tend to acquire, develop more industrial, more metro office and therefore be a net investor if you use that phraseology than a net disposer. But it doesn’t mean that there wouldn’t continue to be dispositions. I think dispositions will be out there. We will evaluate opportunity and markets, and if it makes sense to accelerate one component of this idea versus another from a timing perspective, you could end up one quarter selling more than you are buying. That wouldn’t – it would be put off by that if that made some kind of sense to us. I think we kind of laid out you the next 45 days or the rest of the year and what that’s going to look like, and we will talk about 2013 in December if that’s okay.

Joshua Attie – Citigroup

Yeah. Maybe let me ask it in a little bit different way. If you had the opportunity to sell more assets in the near term, would that offset kind of in your mind, or is it more important to kind of maintain the consistency of earnings too one, to cover the dividend; and also, to fund your development? Are there any reasons why if you had the opportunity to sell assets you wouldn’t kind of for those reasons?

George Alburger

Well, I think there is a variety of reasons and it’s build together. So, part of it’s capital plan, I mean, so what’s coming in, what’s going out, what do we need to spend money on, how much money do we need? Part of it is transition. So, what characterized our sales over the last year and half was a decision that was both product oriented and geographically focused. So, not only did we sell a lot of suburban office in unfinished plex we exited in those product types, Milwaukee, Richmond, Greensboro, Greenville, Lehigh Valley, a number of markets.

So, part of this is also a market judgment about okay, is there a market that we’ve decided, does it – in a particularly product it doesn’t make a sense to us and is that a logical disposition? That’s different than just saying, let’s prune 10% of our suburban office off annually couple of assets here and there. So, I think it’s about that kind of market evaluation as well as potential opportunity, so – but we think about those things on a fairly constant basis. So, again, we can make a decision that something makes sense to us and go out and execute, decide that there’s a piece of geography that doesn’t fit for us or some market that doesn’t fit for us, but that would all go into the thinking.

Joshua Attie – Citigroup

Okay. Thanks. And, if I could ask one more question separate...

George Alburger

Sure.

Joshua Attie – Citigroup

On the development pipeline, the 1.2 million square foot industrial asset that was delivered in Lehigh Valley, I guess, first, has that product been delivered and have you started trying to lease it up and if you have, what has the activity been like?

George Alburger

Yes. There were two large industrial assets in the pipeline, so – and you identified the one in Bethlehem and then there is another one in Carlisle. At the moment, there is significant interest in both assets by more than one party, and it’s not just in these prospects, we’d be able to take that in the entire square footage. So, we’re heartened at the moment and we’ve put in a 12-month lease-up period and we think that sometime over that lease-up period, we are going to get these things leased. We are pretty comfortable with where we are at the moment.

Joshua Attie – Citigroup

Okay, great. Thank you very much.

Operator

(Operator Instructions) Your next question comes from line of Brendan Maiorana with Wells Fargo. Your line is now open.

Brendan Maiorana – Wells Fargo

Thanks. Good afternoon. Question for Bill. I think there is maybe some formulas question that’s been asked a little earlier on the call, but you guys a year and half ago, spring of last year said that you began to get comfortable that to take on some leasing risk either through acquisitions that were lease up stories or doing some development and come spec development, and some of the caution that you expressed in the call, is there any of that leasing risk that’s on the industrial side of the portfolio in the markets where you’ve been willing to take that risk that you feel less comfortable with now?

Bill Hankowsky

That’s a great question. I think the answer is no, there isn’t. We’ve been very – and hopefully we remain this way – thoughtful and disciplined about how we think about this. So we just had a question about the building in Lehigh Valley, there’s one in Carlisle, both of those are markets where as we’ve talked earlier on this call, those large big corporate users of industrial space are in those markets looking for space. We’re in conversations with a number of them. So our business theory about why we created that inventory product at the moment feels correct.

We still have to finish the execution, but we’re totally comfortable that we put product in a market where there was a need and those lines will cross. We did the same thing in Houston, created inventory product. We created it in the first quarter of this calendar year. We created additional inventory product in the third quarter. Yeah, so and that market remains very active and we get it leased and we’re in like 97% in the portfolio, so we’re very comfortable that that inventory decision was the correct one.

We have just started a building in Minneapolis and there again we’re comfortable there’s enough velocity in that market to make – that can make sense. There are obviously a lot of our markets where we’ve decided inventory doesn’t make sense at the moment and we haven’t started those products. So I think we’ve been trying to be very precise about where this can work and where there would be enough demand and the current pause among smaller mid-sized users doesn’t at the moment change our thought process.

Brendan Maiorana – Wells Fargo

And the progression of how we look at the pipeline of investments, whether it’s lease up acquisitions or development projects as you go into next year, is that still sort of the same mix that you’ve got currently? There wouldn’t be a migration to more core product or something like that?

Bill Hankowsky

Well, I think on the acquisition side, and I guess I probably have mentioned, didn’t really speak to that. On the acquisition side, as Mike mentioned, we are buying both core, so there is product we are buying that’s 100% leased, but we are also buying product that has leasing issues. Then the one we acquired this quarter is 18% leased, so there’s obviously lease-up required. We have underwritten those consistent with where market rents are at the time, what we think the lease-up period is for those assets, and we’ll be thoughtful. I mean, so we won’t want to have millions of square feet in one market that we picked up just because it’s a value add. If we think there’s not enough demand to justify or getting it leased up in a lease-up period. So again, the product we acquired in Chicago this quarter, the lease expires in a year, Mike?

Mike Hagan

Yep.

Bill Hankowsky

Roughly a year. So that’s actually, even though you’ll see it when it shows up in the pipeline or excuse me, when it shows up in the portfolio or show up as 100% leased, you actually a year from now it won’t be. But that’s because – that’s okay. I mean, we are comfortable that at that point given the velocity of big users in that market that there will be demand and that we’ll be able to respond. And to some extend it speaks to – for us it’s a way we’ve decided to produce inventory product for us in Chicago without having to go vertical. So, we think that math works a little better for us than building inventory product in Chicago. We’ll buy – we are going to buy value-add in Chicago, it’s a way to have interest product...

Brendan Maiorana – Wells Fargo

Sure, I know that...

Bill Hankowsky

Particularly the case.

Brendan Maiorana – Wells Fargo

Yeah. I know it’s very helpful color. Question for George. I appreciate the comments earlier in the call about the balance sheet, if we look at where you guys like to run your leverage which is kind of in that 40% to 45% range. We add on the development spend that’s left, which I think is $90 million or $95 million. You have got a $167 million of acquisitions that are teed up for the fourth quarter. It sort of puts you in the middle of that range...

George Alburger

That $500 million number I gave would put you on the high side of that range.

Brendan Maiorana – Wells Fargo

Surely, yeah, I guess so. So, how much – I know you talked about preferred. How much preferred do you think you would like to have as a portion of your capital stack relative to where you are today?

George Alburger

Well, we had $292 million and that was a modest level of preferred compared to what you see out there maybe in more standard REIT model. So, we would be comfortable, we redeemed $228 million of preferred. It wouldn’t be extraordinary for us to do a preferred transaction that would a $100 million plus and bake that into our capital stack.

Brendan Maiorana – Wells Fargo

Is this preferred – given that your – I mean you are sort of call it under-allocated the preferred seemed more attractive than common today?

George Alburger

I mean, that’s a tough one to answer. Listen, we are in a situation where – it’s – there are attractive capital markets available...

Bill Hankowsky

Did you promise that?

George Alburger

It’s a good problem to have.

Brendan Maiorana – Wells Fargo

Right.

George Alburger

There are capital markets out there, I mean you touched on it a little bit also with yes or if we did all this activity and just did with debt, I mean you are running up leverage a little bit and might need to turn that out with some type of permanent capital if you will, but the 10 year money is absolutely extraordinary. So, that’s very tempting, preferreds at a good spot and common equities have reasonable number. So we kind of look at all of it, I guess it’s a good products to have. I think Bill chimed in what that. So, whatever one you select you can second guess yourself and maybe you should have selected another, but we will try and make a thoughtful decision to what we consider to be lots of attractive opportunities for capital right now...

Brendan Maiorana – Wells Fargo

Sure.

George Alburger

Hopefully, you spend the dollars wisely when you get them too.

Brendan Maiorana – Wells Fargo

No. That’s helpful and sorry I should know this by now, have it on my fingertips, my recollection is you guys do not have any ATM program if prices are right?

George Alburger

We had an ATM quite some time ago. If you recall back when lots of REITs were fortifying their balance sheet, the capital markets were wide open for REITs and lots of REITs were doing over nights at meaningful discounts to what their closing price was. And we were in a position where the capital maker was wide open and our balance sheet was such that we really didn’t have to do overnights and pay significantly fees and sell stock at a discount.

So, we launched ATM back during that timeframe and I think it was $150 million ATM, and then we repositioned that or re-launched that with another $150 million. We do not presently have IN ATM. I think it might make sense for us to have an ATM. We would try and use it intelligently, but you do see that we have a development pipeline that kind of is going to have some consistent delivery of product to earnings and to stabilize real estate quarter-after-quarter-after-quarter. Would it make some sense for us to have an ATM that kind of match funds that. That might make sense.

Brendan Maiorana – Wells Fargo

Sure. And then just last one, it’s very helpful the color about the acquisition costs, so if we strip those out of your fourth quarter number, it’s $0.66 a share, is there anything unusual in the fourth quarter that’s driving that number up or down or is that a pretty clean run rate as we go into 2013?

George Alburger

I’m not sure if I got quite...

Bill Hankowsky

Well, there’s two questions.

George Alburger

Yeah, there’s two questions.

Bill Hankowsky

Three number, but again...

George Alburger

You did some nice math and on December 11 all your questions will be answered.

Brendan Maiorana – Wells Fargo

We all had to try at least, you know, come on...

Bill Hankowsky

No, no, you all did a great job, trying. You all did a great...

Brendan Maiorana – Wells Fargo

Yeah.

Bill Hankowsky

Job trying.

Brendan Maiorana – Wells Fargo

All right.

Bill Hankowsky

We have not told you that’s the run rate for 2013, but it’s a good number for the fourth quarter.

Brendan Maiorana – Wells Fargo

All right, thanks guys.

Bill Hankowsky

Thank you.

Operator

And your next question comes from the line of John Stewart with Green Street Advisors. Your line is now open.

John Stewart – Green Street Advisors

Thank you. Mike, I had a couple of follow-up questions on that acquisition pipeline. I think you said you had $60 million under contract and we’re negotiating contracts on $90 million and quoted the 7% cap rate, is that a going in yield or is that a stabilized yield?

Mike Hagan

Probably the stabilized yield.

John Stewart – Green Street Advisors

Okay. And can you give us a rough sense of what markets those will be in?

Mike Hagan

It’s consistent with where we’ve been playing before John, if they’re in Chicago, some of the Florida markets, for the most part that’s where it is, Charlotte is another piece.

John Stewart – Green Street Advisors

Okay. And then maybe for Bill, how much of this build-to-suit activity represents net absorption within your portfolio and how much is maybe a case to moving puzzle pieces around?

Bill Hankowsky

Yeah, good question. I would say – I’m sort of – I would say roughly half of it or more represents new requirements. Actually, might even be new requirements for the market, not just new to Liberty, but actually net new projects, maybe even a little bit more. A few of them represent customers who have a growth issue. So it would be they might be with us, but they might need something else, so they might need more than what they have today. It’s almost in no case a pure – I’m in 100, give me a new 100, but I just want it to be different. It’s almost none of that. So, it’s either a current Liberty customer growing or it is currently a prospect who is not a Liberty customer who has a need.

John Stewart – Green Street Advisors

Okay. Thank you.

Bill Hankowsky

Thank you.

Operator

And your last question comes from John Guinee again with Stifel. Your line is now open.

John Guinee – Stifel Nicolaus

George. Looks like you have about $2 million gains on property disposition, $2 million gain and $1.9 million of income gain for discontinued ops, but you have very little assets sold. Can you walk through what those two numbers are?

George Alburger

Let me see. Okay, yeah, let me go to the $2 million gain first, all right?

John Guinee – Stifel Nicolaus

Okay.

George Alburger

Is that, that one first John. The $2 million gain, there’s two pieces in there. We told you we sold a piece of land for $2.7 million. The gain on that piece of land that we sold for $2.7 million was I think $1.280 million. That gain didn’t go into FFO. Bill mentioned earlier that we do participate for gains on sale of residential land in the U.K. In that $2 million number there is a $720,000 gain on sale for land in the U.K. That gain is taxable, so you see the line rate above – right below that there’s taxable income, some of that taxable income relates to that $720,000 gain, it’s around $200,000 – it’s little less than $200,000.

So into our earnings we took in about $520,000, $530,000 worth of gain from that U.K. land sale. When you go to your discontinued operations, that $1.8 million, if that’s what you are talking about, there is a $1.540 million loss on sale. That number together with the impairment number of $4.5 million was reduced by the gain we didn’t recognize on the land sale is what’s added back to get the FFO. I don’t know if you followed all that Matt, but, if you look at...

John Guinee – Stifel Nicolaus

Okay.

George Alburger

Is that one first John, the $2 million gain. There’s two pieces in there. We told you we sold a piece of land for $2.7 million. The gain on that piece of land that we sold for $2.7 million was I think $1,280,000. That gain didn’t go into – do that right – that gain didn’t go into FFO. Bill mentioned earlier, that we do participate for gains on sale, residential land in the U.K. In that $2 billion number, there is $720,000 gain on sale for land in the U.K. That gain is taxable, so you see the line right below that there is taxable income. Some of that taxable income relates to that $720 million gain – I’m sorry, $720,000 gain it’s around $200,000, so a little less than $200,000.

So, we took in about into our earnings. We took in about $520,000 to $530,000 worth of gain in – from that U.K. land sale. When you go to your discontinued operations that $1.8 million if that’s what you’re talking about, there is $1,540,000 was on sale that number together with the impairment number of $4.5 million of reduced by the gain we didn’t recognize on the land sale is what’s added back to get the FFO. I don’t know if you followed all that math, but, it’s a little tricky...

John Guinee – Stifel Nicolaus

I followed it well enough. I assure that you took the $2 million of gain on property dispositions, are you sure you backed that out to get to FFO because I don’t think that was backed out?

George Alburger

I had backed out everything except $720,000.

John Guinee – Stifel Nicolaus

Got you.

George Alburger

I can walk you through it off line if you want to.

John Guinee – Stifel Nicolaus

No, we’ll talk to you.

George Alburger

I backed out everything, but $720,000 and that’s subject to tax and there’s some regularity of that quarter-after-quarter-after-quarter for those residential land sales we have in the U.K.

John Guinee – Stifel Nicolaus

Okay great, thank you.

George Alburger

And they’re usually of that magnitude, $0.5 million to $1 million quarter-after-quarter.

John Guinee – Stifel Nicolaus

Great, okay. Thanks.

Bill Hankowsky

Thank you.

Operator

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

Bill Hankowsky

Well, thank you very much everyone for listening in. We appreciate it. And differently than usual, in about 90 days from now, it’s December 11 and we’ll have a call, and we’ll give you our 2013 guidance. Thank you, everyone.

Operator

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

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