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Edited Transcript of LPT earnings conference call or presentation 30-Apr-19 5:00pm GMT

Q1 2019 Liberty Property Trust Earnings Call

MALVERN May 4, 2019 (Thomson StreetEvents) -- Edited Transcript of Liberty Property Trust earnings conference call or presentation Tuesday, April 30, 2019 at 5:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christopher J. Papa

Liberty Property Trust - Executive VP & CFO

* Jeanne Ackerly Leonard

Liberty Property Trust - VP of Corporate Communications and IR

* Michael T. Hagan

Liberty Property Trust - Executive VP & CIO

* William P. Hankowsky

Liberty Property Trust - Chairman, President & CEO

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Conference Call Participants

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* Alexander David Goldfarb

Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst

* Blaine Matthew Heck

Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst

* Craig Allen Mailman

KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst

* Emmanuel Korchman

Citigroup Inc, Research Division - VP and Senior Analyst

* Eric Joel Frankel

Green Street Advisors, LLC, Research Division - Senior Analyst

* John William Guinee

Stifel, Nicolaus & Company, Incorporated, Research Division - MD

* Ki Bin Kim

SunTrust Robinson Humphrey, Inc., Research Division - MD

* Michael Bilerman

Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research

* Michael William Mueller

JP Morgan Chase & Co, Research Division - Senior Analyst

* Vikram Malhotra

Morgan Stanley, Research Division - VP

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Presentation

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Operator [1]

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Good day, ladies and gentlemen. My name is Lorry, I will be your conference operator today. At this time, I would like to welcome everyone to the First Quarter 2019 Earnings Call. (Operator Instructions) Thank you.

I would now like to turn the call over to Jeanne Leonard. You may begin your conference.

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Jeanne Ackerly Leonard, Liberty Property Trust - VP of Corporate Communications and IR [2]

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Thank you, Lorry. Good afternoon, everyone, and thank you for tuning in today. You are going to hear prepared remarks from Chief Executive Officer, Bill Hankowsky; Chief Financial Officer, Chris Papa; and Chief Investment Officer, Mike Hagan. This morning, Liberty issued a press release detailing our results as well as our supplemental financial package, and you can access these in the Investors section of Liberty's website at libertyproperty.com.

In these documents, you will find a reconciliation of non-GAAP financial measures to GAAP measures. I will also remind you that some of the statements made during this call will include forward-looking statements within the meaning of the federal securities law. Although Liberty believes that the expectations reflected in such forward-looking statements are based on reasonable assumptions, we can give no assurance that these expectations will be achieved. As forward looking statements, these statements involve risks, uncertainties and other factors that could cause actual results to differ materially from the expected results, risks that were detailed in the issued press release and from time-to-time in the company's filings with the Securities and Exchange Commission. The company assumes no obligation to update or supplement forward-looking statements become untrue because of subsequent events.

Bill, would like to begin?

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William P. Hankowsky, Liberty Property Trust - Chairman, President & CEO [3]

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Thank you, Jeanne, and good afternoon, everyone. Liberty continues to benefit from an outstanding demand for industrial space. U.S. industrial absorption was 32 million square feet in the first quarter and the national availability rate remained unchanged at 7%. So in general, supply and demand remain in balance.

As others have noted, national supply is increasing with a bulk of the supplies skewed toward very large buildings in certain submarkets. The key to effective execution in this environment is diligence and on-the-ground knowledge of the markets.

Liberty's teams executed very well in the first quarter, and we've made significant and excellent progress in advancing the company's business and strategic goals for the year.

Leasing activity was outstanding. We leased close to a record 8.9 million square feet in the quarter, this level of activity represents 44% of the leasing we had anticipated doing for the entire year. These leases yielded extremely strong rent growth at 6.6% on a cash basis and 16.3% GAAP.

Our retention rate for the quarter was a very high 75%. Average lease terms were longer than historical for both replacement and retention leases. Occupancy declined modestly as expected according to our business plan for the year to 95.6%. Occupancy will increase during the second half of 2019 consistent with our plans for the year. We are making significant progress in our strategic objective for the year of disposing of our remaining office assets and are deploying the capital from those sales diligently and significantly, executing over $300 million of value-creation capital activity this quarter with our dispositions, acquisitions and development deliveries.

So let me now turn it over to Chris and Mike to provide some further color on this strong first quarter activity. Chris?

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Christopher J. Papa, Liberty Property Trust - Executive VP & CFO [4]

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Thanks, Bill. Operating results were stronger than expected with FFO of $0.62 per share compared to $0.65 per share last year. Robust leasing of 8.9 million square feet, GAAP rent growth of 16.3% and a healthy 75% retention rate during the quarter helped drive results. Industrial same-store NOI grew 4.6% on a cash basis, breaking down the contributing factors, cash rent growth contributed 1.6%, embedded contractual rent bumps contributed 2.4% and the burn off of straight line rents from the prior year quarter contributed 1.6%.

So cumulatively these factors positively impacted same-store NOI by 5.6%. These contributions were partially offset by expected transitory decrease and occupancy relating to 4 expected vacancies. Roughly half of this space has already been released according to plan.

Today, we also revised FFO guidance to $2.55 to $2.65 per share for the full year of 2019, reflecting an increase of $0.02 per share on the lower end of the range, considering our operating results for the first quarter.

Our guidance assumptions generally remained unchanged, except that we've adjusted industrial same-store NOI to reflect the move out of Sears, which we discussed on the last call, and are now assuming will occur on May 1. We now anticipate that same-store NOI will increase in 2019 by 3% to 4% on a cash basis and 1.6% to 2.6% on a GAAP basis compared to 2018. We anticipate that the Sears vacancy and the same transitory factors affecting occupancy will continue into the second quarter, but should revert to within our forecasted range by the second half of 2019.

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

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Michael T. Hagan, Liberty Property Trust - Executive VP & CIO [5]

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Thanks, Chris. We continued to execute on our strategic disposition program during the quarter selling $85 million of office properties. These properties consisted of 3 single-story office buildings in Orlando and 1 of our 2 wholly owned Washington, D.C. assets. The cap rate on these sales was approximately 4.5%.

Subsequent to quarter end, we sold 74,000 square feet of vacant single-story office assets located in the Great Valley Corporate Center in suburban Philadelphia for $3.8 million. We're also currently under firm contract for the remaining planned sales in Southeastern PA as well as for our remaining wholly owned Washington, D.C. asset. In addition, we are now negotiating contracts with the sale of our 2 medical office buildings in the city of Philadelphia.

We currently have listed for sale our 345,000 square foot asset in Minneapolis and shortly have listed our 2 wholly owned assets in the U.K. The remainder of the wholly owned office assets are located in the Navy Yard of Philadelphia. These assets total about 700,000 square feet of life science and general office buildings.

We have had multiple inquiries about this portfolio, and we have received several offers for all or parts of it. Given the significant activity, it is conceivable that we could exit our wholly owned office portfolio by year-end and exceed our sales guidance of $600 million to $650 million.

Next, let me update you on our external growth platform. Consistent with completing our 1031 needs from our sales and our desire to invest in certain targeted submarkets, we acquired 5 properties for $127 million. These property consist of 2 multi-tenant infill buildings in Northern New Jersey, a 2-building multi-tenant portfolio in the great Southwest submarket in Dallas and a property in the Redlands submarket in the Inland Empire of Southern California, a blended yield on these acquisitions was 4.9%.

Our development platform continues to provide us with excellent opportunities. During the quarter, we delivered 850,000 square feet of properties, which are 100% leased. An example of how we are deploying capital from our sales program, the deliveries included a Southern California property we purchased empty at shell completion in the second quarter of last year, which we have leased and brought into service. Consistent with our business plan for the year, we commenced 2 developments during the quarter both in the U.K. totaling 163,000 square feet for $18 million. There is good leasing activity on the balance of our pipeline with our estimated second quarter delivery is currently 97% leased.

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

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William P. Hankowsky, Liberty Property Trust - Chairman, President & CEO [6]

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Thanks, Mike, and thanks, Chris. Lorry, we're ready for questions now.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your first question comes from the line of Craig Mailman from KeyBanc Capital.

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Craig Allen Mailman, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [2]

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Just to clarify, in Sears, I know -- have you guys gotten any formal notification, they're leaving? Or just as they continue to stay, you guys are going to be pushing out the expectation kind of monthly or quarterly?

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William P. Hankowsky, Liberty Property Trust - Chairman, President & CEO [3]

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We have not received formal notification, but based on what we do know, we anticipate that they will vacate this space, and we will not receive rent for May. So that's what's included in our guidance.

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Craig Allen Mailman, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [4]

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Okay. Will there be a lease term fee associated with that or no?

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William P. Hankowsky, Liberty Property Trust - Chairman, President & CEO [5]

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There will be not. We're not expecting any fees or revenue from that space beyond the end of this month.

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Craig Allen Mailman, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [6]

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Okay. That's helpful. And then...

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William P. Hankowsky, Liberty Property Trust - Chairman, President & CEO [7]

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Craig, it's in bankruptcy, right? So presumably, they reject the lease, though we don't have formal notice.

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Craig Allen Mailman, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [8]

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Okay. And then on the dispositions, could you put some dollar amounts around kind of what's under contract? What's under LOI? And maybe a little bit of timing around things? I know that the Navy Yard would be kind of back-end weighted and is not necessarily in your guidance, but the stuff that you guys have teed up or is maybe in that $400-plus million of assets held for sale.

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Christopher J. Papa, Liberty Property Trust - Executive VP & CFO [9]

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I would -- as I go through that list there, there is 2 medical office buildings in the city of Philadelphia. There is a building in Washington, D.C. and there is few buildings still in the Southeast Pennsylvania. The value of that real estate, I'll tell you, is somewhere between $275 million to $300 million, and our expectation is that those things close between the second and third quarter.

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Craig Allen Mailman, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [10]

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Okay. And then just lastly, Bill, you touched on development has been increasing particularly in some of the markets that you guys are active in. Could you just give us thoughts around incremental starts from here or maybe how you guys are viewing specific product that you may start in markets that do have supply?

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William P. Hankowsky, Liberty Property Trust - Chairman, President & CEO [11]

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Yes. That's a great question. So you're right. I mean there are markets where, I think, we've all talked about it. You're seeing some fairly decent increase in amount under construction and in particular seeing a fair number of big boxes. So I would -- Atlanta, Dallas, Central PA. So from our perspective, it would be -- probably would not be the case that we would be building a big box in those markets and sort of join the crowd, that would probably not be the way we would be starting doing starts for the rest of the year. The bread-and-butter for Liberty is a multi-tenant industrial building, and so we can build those kinds of buildings in Lehigh Valley, we can build them in Houston, we can build them in Dallas.

So I think you're going to see that product type generally, multi-tenant industrial. I think the average size of the building in the pipeline right now -- the pipeline that's underway right now is like 280,000 square feet. So I think that gives you some sense of what we're thinking about. But as I said, we're going to, as we always do, pay pretty close attention and we always do one last investment committee before we actually say, "go". And we will do that again and we will be paying attention to what's happening in the markets.

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Operator [12]

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

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Emmanuel Korchman, Citigroup Inc, Research Division - VP and Senior Analyst [13]

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Bill, in your press release this morning, you talked about the dynamism of the market. I was wondering if you could sort of delve deeper into that. Is that a comment on the industries or markets you're seeing demand from? Or just a broader comment.

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William P. Hankowsky, Liberty Property Trust - Chairman, President & CEO [14]

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Yes. Sure. I think what is -- what we're seeing is the following: number one is, there is a tremendous amount of activity in the -- again, in the multi-tenant industrial space, basically across every market we're in. So it will vary as the -- markets themselves have their own characteristics. So in some markets, that could be 50,000 and 75,000 square foot users, in other markets, it might be 200,000 to 300,000 square foot users, but that piece of the market is very busy, very active. We all know some of what's filling it, we have 3PLs in that space, you have e-commerce people who are looking for that smaller space closer in on the last mile.

You've got food and beverage in that space. So it's active. I'd say, it's a little bit less active. I don't want to -- I'm not pushing a little hard, I'm not telling you there's a big problem but it's probably a little bit less active on the big box. And so when we look at the amount of activity we did in the first quarter, that 8.9 million square feet, I mean, that's a very big number for us, past where we thought we'd get done in the quarter. So I think that speaks to the amount of activity that's out there, the amount of activity we can get done and sort of go back to the question of the dynamism we're seeing.

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Emmanuel Korchman, Citigroup Inc, Research Division - VP and Senior Analyst [15]

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Great. And maybe following up Craig's question on Sears. Maybe this one's for, Chris. Chris, you didn't change your occupancy guidance. So is that to say that you expect to have Sears re-lease by the end of the year, but there won't be any GAAP or cash income?

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Christopher J. Papa, Liberty Property Trust - Executive VP & CFO [16]

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You're going to see the same factors we saw in the first quarter continuing, and you'll also have the impact of Sears, which is going to impact occupancy as well during the latter part of this quarter and into next year. But overall, we think that, that our occupancy will revert back to within the range by the latter half of the year.

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William P. Hankowsky, Liberty Property Trust - Chairman, President & CEO [17]

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We assume Sears is vacant for the year.

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Christopher J. Papa, Liberty Property Trust - Executive VP & CFO [18]

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Starting on May 1.

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William P. Hankowsky, Liberty Property Trust - Chairman, President & CEO [19]

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Starting on May 1. Just -- so it's not affecting occupancy -- I mean, affecting occupancy negatively for the last 3 quarters and it's not producing income. That's what's in the assumption.

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Emmanuel Korchman, Citigroup Inc, Research Division - VP and Senior Analyst [20]

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But you didn't change your occupancy guidance and you did change your same-store guidance. So is that to say that it was already out of occupancy, but not out of same store? And now it's out of same store, I'm just confused as to why you didn't change the occupancy guidance.

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Christopher J. Papa, Liberty Property Trust - Executive VP & CFO [21]

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Yes. I mean it was in our original guidance, it's just that the same-store guidance we had given broke out the range for GAAP and cash based on what we anticipated without Sears and then what the Sears impact would be. We didn't do the same thing with occupancy. This quarter, since we know that we now believe they're moving out on April -- on May 1, we've actually just changed the guidance to reflect what we now know. But we never changed -- the occupancy had it in there to begin with and it's still contemplates that.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [22]

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Bill, it's Michael Bilerman. I just had a question on the Board announcement that you made that into quarter. So you added Larry Raiman who was a fierce competitor of ours and so I do hold him in high regard. But I just question in this day and age of looking at that diversity to boardrooms, how you came to Larry? How was that involved with shareholder engagement? Was it the result of something else? Larry is not on any other REIT Boards. And so I'm just trying to understand the dynamics of bringing him on and putting him all on the Nominating Committee, the Corporate Governance Committee, the Compensation Committee. I'm just trying to tie everything together and really understand the background behind it given some of the things that I mentioned about diversity and stature within the industry.

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William P. Hankowsky, Liberty Property Trust - Chairman, President & CEO [23]

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Yes. So there's lot of points there. So our Board is constantly interested in refreshment, and we're looking for strong smart, independent, experienced people to add to the Board. We've added a couple of people within the last year, 1.5 years, strong in real estate. Here's a third person. We were looking for somebody, who I think brought, to your point, Michael, background in the REIT space from -- both from a sell side and a buy side. We think Larry has a lot of that with his 30 years in this space. And he's active today, as you know, with the fund that does preferreds. So he's paying pretty close attention. So we think all that's a positive.

Our Board does care about diversity. And as one of the criteria, and it is something -- we're not done, the Boards turnover over time. And so there will be other opportunities to see if we can make advances on the diversity front. So it's not something that was not considered. There were many factors considered, and sometimes you can solve for 4 out of 6 or 5 out of 6. Sometimes, it's hard to solve for 6 out of 6 factors. So -- but we think we achieved a lot, a lot. We think we achieved a lot by adding Larry.

We do listen to shareholders and talk to them, as you know, all the time and take their thoughts into consideration when we think about potential Board refreshment, when we think about strategy, when we think about tactics. So yes, we had input and thoughts from a lots of people and all that went into the mix.

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Emmanuel Korchman, Citigroup Inc, Research Division - VP and Senior Analyst [24]

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Was this a settlement with a shareholder? Or this was done by the Board itself?

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William P. Hankowsky, Liberty Property Trust - Chairman, President & CEO [25]

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It was done by the Board. This was done by the Board, by the Governance Committee. There was a search for him involved, there were series of candidates, yes.

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Operator [26]

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Your next question comes from the line of Blaine Heck from Wells Fargo.

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Blaine Matthew Heck, Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst [27]

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So Bill, just a follow up on the sales. I think most of what you guys talked about was wholly owned, but can you talk about any discussions you may be having with your JV partners about selling off that portion of your office exposure and maybe just how those negotiations are going?

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William P. Hankowsky, Liberty Property Trust - Chairman, President & CEO [28]

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Sure. As you know, we basically have 3 -- and I'll do this and if -- Mike can jump in if I forget something. But we basically have 3 JVs that are in the office world. One has 2 assets in D.C. and I would say that we've had pretty good conversations with that JV partner. And I think we shared the view that we would, I think, over time want to probably exit that market. So that will happen with some base -- more news to follow. In the U.K., we've got -- we're partners on a park, and that's really about that owner and much more driven by their thoughts about when they might think of a capital event. We are in dialogue with them, but there isn't sort of finality as to next steps. And then clearly the biggest one, which everybody knows about, we talk about a lot is our JV, we actually have 4 of them, but they're all part of that campus that Comcast has in Center City, Philadelphia. And at the moment, we are focused completely on completing the Comcast Technology Center building. And let's get that done and then we'll see where things go.

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Blaine Matthew Heck, Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst [29]

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Okay. So as you stand right here right now, do you think you can have an activity on those dispositions in 2019? Or is that more likely still kind of a 2020 or later on event?

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William P. Hankowsky, Liberty Property Trust - Chairman, President & CEO [30]

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Yes. It is -- again, just to be -- I know this isn't quite -- but just to be precise, as Mike said, we are making terrific project on all the wholly owned office assets. And it is conceivable that we're not -- we didn't move guidance that we could even get all those done this year. That would pretty remarkable. And we told you, I guess, back when we gave guidance that, that whole bucket of wholly owned are around $700 million to $800 million worth of value. So that's pretty significant of itself. Might there be another JV asset done in '19? Maybe. But I think getting the wholly owned done is clearly the first priority, and the others whether they happen in '20 or whenever, but the scale is just massively different and the impact on Liberty is we're 20% partners in these things.

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Blaine Matthew Heck, Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst [31]

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Okay. That's fair. So switching to developments. Second quarter in a row, your development starts for all spec. Can you just talk about how we should think about the mix between spec and build-to-suit throughout 2019? And whether there are any trends or conclusions we should draw from those latest starts all being speculative?

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William P. Hankowsky, Liberty Property Trust - Chairman, President & CEO [32]

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Yes. From our perspective, our pipeline has always been predominantly inventory in spec. So that's not news for us. Sometimes it's around 70/30, 80/20. We don't, and I'm not saying this in a bad way, we sort of don't chase build-to-suits in a sense of going off of our land positions and trying to -- sometimes people are in the market and they go with merchant builders and others. That's not a transaction that Liberty is going to necessarily pursue. We end up doing build-to-suits basically on the real estate, the land that we have in land inventory and sometimes that has been extremely successful. We started a number of them last year that are in the pipeline, a couple in Houston.

So that there could be some of those that might occur on this calendar year, but it is more probable that the starts that we have in guidance will be inventory and that goes against the backdrop sort of the earlier question about where is the market and what's happening with supply. And we feel pretty good, I mean, this kind of couples with the question of the amount of activity you're seeing in multi-tenant in terms of demand and the thinness of supply, and candidly, it's not where lots of people are building. Lots of people are building big boxes, that's okay. But to the degree we would be able to bring some multi-tenant product in as our starts and our inventory way we'll comfortable doing that, and that's probably the overall profile of what we're talking about for 2019.

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Blaine Matthew Heck, Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst [33]

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Okay. That's helpful. Last one for me. We noticed XPO jumped to the top of your tenants list as a percentage of rent, but they're actually occupying a little less space. Can you just talk about what happened there? And maybe just generally the demand you guys are seeing from 3PLs?

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William P. Hankowsky, Liberty Property Trust - Chairman, President & CEO [34]

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Yes. So I think on that specific one, without getting into confidentiality. I think there might have been a couple of renewals with them, therefore, they're still in the space, but the amount of income went up as it was reset. I think that's what happened, correct me, if I'm wrong about that.

In terms of 3PLs, generally, you're right. I mean this is a very active space. As more and more companies think about using the expertise and skills of 3PLs to basically solve their logistic problems. And so we'd like having good relationships with the 3PL firms, because they in fact are very much active in the markets on a go-forward basis. And so they -- we had a group of national accounts and a number of 3PLs are in that mix. And I think you're going to continue to see that on a go-forward basis, which is that -- their growth and they've done a lot of consolidation in this space. So the big guys buying up smaller guys, and I think that will continue to be the case also.

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Operator [35]

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

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John William Guinee, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [36]

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Two questions. One, first, Bill, this guy, Mike Bilerman is a pretty smart guy. Can you talk a little bit more about the settlement he was discussing?

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William P. Hankowsky, Liberty Property Trust - Chairman, President & CEO [37]

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There was no settlement. I don't know -- he made a statement. I didn't make a statement. I told you on the call that what we did was we went through a process, the Board went through a process with our Governance Committee, something we do all the time, thinking of Board members, and we found a terrific guy. We're very excited about it, who is interested in joining our Board and we brought him on Board, and that's what we did.

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John William Guinee, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [38]

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Okay. Well that can be different than a settlement. Okay. Switching -- looking at your dispositions, Orlando, $150 a foot, full buildings, and D.C., $421 a foot for a 2/3 leased building, a mid-block building. Mike, can you give us a little more color on what the buyer stabilized cap rates might have been on both of these portfolios? Or both of these transactions?

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Michael T. Hagan, Liberty Property Trust - Executive VP & CIO [39]

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John, on the Orlando assets, it was an upper 8. I'm going to tell you maybe between 8.5 and 9. And the cap rate on the D.C. building was about 4 -- 3.5, 4.

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John William Guinee, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [40]

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So basically -- so you're saying that the Orlando -- basically, the going rate for stabilized is 8.5 to 9 and $150 a square and then D.C., I guess...

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Michael T. Hagan, Liberty Property Trust - Executive VP & CIO [41]

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I think if I understand -- the Orlando assets were single-story buildings so the price per square foot clearly enters into the dynamic of that pricing. That's what I want to make sure you understand.

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John William Guinee, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [42]

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Okay. How about D.C., if you looked at the buyer, they were obviously buying it on partially occupied. What will the cap rate be and the price per pound on a stabilize per their underwriting?

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William P. Hankowsky, Liberty Property Trust - Chairman, President & CEO [43]

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I don't know their underwriting. The building was 65% leased. It was -- we had put some renovations into that building, put some first floor retail in there and an amenity base there, but something with it fully leased, would have gotten another $100 a foot? Maybe in that range.

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Operator [44]

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Your next question comes from the line of Alexander Goldfarb from Sandler O'Neill.

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [45]

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Just 2 questions. The first one on the acquisitions, you guys bought a project, $127 million, that's a stabilized 4.9%. Could you just walk us through this asset? And sort of how it fits with Liberty's overall cost to capital, I mean, given that you guys are trading sort of in the midsized, on an implied cap?

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William P. Hankowsky, Liberty Property Trust - Chairman, President & CEO [46]

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Alex, I think, it's not an asset. There are multiple assets and multiple transactions. There was a warehouse in Redlands in the Inland Empire, which, consistent with what we're trying to do, is get deeper in Southern California. There are 2 buildings in Northern New Jersey, one in the Meadowlands and one in Edison, getting consistent with investing up there. The third transaction was 2 multitenant buildings in the Great Southwest in Dallas in a market where we operate in and have investments in. And I think we're in the market to acquire simply because we're deferring 10/31 gains or gains on the sales of the office dispositions that we're doing. We gave you a range of guidance where we thought we'd make these trades and it's consistent with all that.

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [47]

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No, I can appreciate that. But just thinking about the investment, if you guys are trading at an implied 5.5% and you want to grow NAV, I'm just wondering -- and I understand its multiple acquisitions. I just want to understand better how we should think about a 4.9% on a stabilized basis, maybe it's just a definitional term, maybe on a 5-year basis, the return, the IRR is actually better. Maybe it's just the initials of 4.9%, but just want to get a sort of better clarity on that, Mike.

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Michael T. Hagan, Liberty Property Trust - Executive VP & CIO [48]

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Well, I think, clearly, we think there's a lot of upside in the rents in those buildings, and those markets are experiencing terrific rent growth. And so I think it's -- again, it's why we've targeted those markets to invest in. I don't have the IRRs. We ran on the front of that, but I do think those markets, especially on Northern New Jersey, Southern California are experiencing high single digits to low double digits rent growth, and we expect that to continue.

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [49]

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Okay. And then just going back to the addition of Larry Raiman. Certainly a strong candidate, someone who's opinionated but also someone who probably didn't need an additional day job. So just sort of curious, is there sort of a shift that you guys are thinking from a Board level as far as Liberty continues to focus on industrial and move away from office? Are there other shifts that could be in store? Does this mean that maybe some of the industrial stuff that you have, just given the strong bid for industrial, maybe there's some industrial assets that you want to pair to try and improve the growth profile of the company? Just trying to get a better sense because the addition of Larry definitely stands out. And it seems like he was brought on for a specific purpose, and just trying to get better color on that.

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Michael T. Hagan, Liberty Property Trust - Executive VP & CIO [50]

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I think that you might be mixing a little bit 2 different concepts. So we have been upgrading and adding to and strengthening the Board for a long time. So we added Tony Fernandez a few years back, who's a logistics expert and brings tremendous insight to us about, he worked for a number of big logistics companies and he's been extremely helpful to us thinking about that. We bought Rob Gifford on recently, who's had a tremendous experience at AEW and AIG. He was on the Board of the Lehman liquidation. So he's very experienced in sort of what's happening in the real estate space and the buying and selling of real estate on a great basis. We brought Marguerite Nader on. So we have, I think, one of the more accomplished REIT CEOs and now, we brought on somebody with a buy side, sell side background. Strikes me and I think it strikes the board that what we're achieving here is a diverse Board in terms of diversity of thought about the business.

We also have people with financial backgrounds, capital market backgrounds, people have been CFOs on big Fortune 100 companies. So we have a, I think, extremely strong board, both experience, thought that they can bring to the table and that's all just adds to our capacity to think through where we're going. That's about the Board and the Board's thinking. Doesn't necessarily mean because -- when we added anyone that I just named, that necessarily reflect some decision to make some strategic move. We made the strategic move collectively, taking all those thoughts together when we decided to pivot and become an industrial company, and now become singularly and totally an industrial company. So that was a Board and management strategic decision. We might make other decisions, you're totally right about that, Alex, as we think things through, but I wouldn't say that the fact that we've added somebody to our Board represents an immediate change in strategic thinking. I don't think that's the way you should think about it.

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Operator [51]

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

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Eric Joel Frankel, Green Street Advisors, LLC, Research Division - Senior Analyst [52]

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I was just looking at your income statement and your discontinued operation income statement. Can you help me understand the impairment charges a little bit better?

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Christopher J. Papa, Liberty Property Trust - Executive VP & CFO [53]

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Sure. The one asset that Mike mentioned that we're selling in D.C., we took an impairment on that asset to write it down to its now estimated fair value and that is reflected within discontinued operations as you point out.

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Eric Joel Frankel, Green Street Advisors, LLC, Research Division - Senior Analyst [54]

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Okay. All right. As it's -- got to understand...

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Christopher J. Papa, Liberty Property Trust - Executive VP & CFO [55]

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And Eric, I would also add that, that does not affect FFO since it's an operating property. So just to be clear.

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Eric Joel Frankel, Green Street Advisors, LLC, Research Division - Senior Analyst [56]

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Yes, understood. And then just a final question, I think everything else has been asked and answered. But are there any concerns -- you're saying earlier that where there's a lot of demand, there isn't a lot of supply. So I think some of the supply figures more broadly might overstate things a little bit. Is there any concern that there's going to be a bigger shadow pipeline the next couple of years as land values make a lot more sites economically viable, and so maybe you have some more competition in areas where you're trying to buy like in, say, Northern New Jersey or Los Angeles the next 3, 4 years that might dampen rent growth?

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William P. Hankowsky, Liberty Property Trust - Chairman, President & CEO [57]

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I'm sorry, Eric, I'm not sure -- why do you think...

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Eric Joel Frankel, Green Street Advisors, LLC, Research Division - Senior Analyst [58]

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So from what I understand, just as an example, like in those places that's fairly hard to develop, there isn't a lot of land or available sites, which is understood. Industrial's not the highest and best land use but as land values rise, as rents rise, it makes a lot more sites more viable. I'm just wondering if you're going to see a supply response that the market's not expecting or -- in the next couple of years that might dampen rent growth.

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William P. Hankowsky, Liberty Property Trust - Chairman, President & CEO [59]

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Now I get it. Sorry. Yes, yes. I don't see it in the near term. I mean mark my words, I've been here. But I mean, what we see in these very tight markets, whether it's North Jersey or Southern California, South Florida is yes, land prices just keep going up. And because of the lack of availability and so you end up with our sites where you have to take something down, right? So you have to take -- demolish a building or it's got site issues that require greater investment just to get a site ready to go or off sites. So the overall development cost are going up.

Now the good news, as you point out, is rents are going up and people have been able to make it work, but I don't see rents suddenly getting to a place where like some -- as yet untapped inventory of potential sites suddenly open up. I mean there's, as you know quite well, there are a lot of people who have found the industrial gain interesting, seemingly more all the time. It's an attractive asset class. So there's lots of people scouring almost all of these markets. And so there are very few sites that haven't been thought about. So I think it's -- I think actually it's a little bit to the contrary. I think that land availability will remain a moderator in terms of how much development there will be in these very tight markets because you just can't find the sites. So I think that's the way it applies.

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Operator [60]

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Your next question comes from the line of with Vikram Malhotra from Morgan Stanley.

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Vikram Malhotra, Morgan Stanley, Research Division - VP [61]

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Just wanted to get some more color. You talked about sort of the market, dynamism in the market just strength. I'm wondering if you can give us a sense of your latest thoughts on market rent growth across some of your key markets expectations for the year-end.

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William P. Hankowsky, Liberty Property Trust - Chairman, President & CEO [62]

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We have generally said that we think, on average, rents will grow in the market 3% to 5% kind of across-the-board, but that's way too general of a comment. So I think you're seeing -- you're continuing to see a North Jersey and Southern California high single-digit, low double-digit rent growth probably on an annualized basis, so that's kind of at one end in terms of robustness. And then there are probably some markets, second and tertiary, where you're probably more at the 3% kind of rent growth -- market rent growth. So it does very across-the-board, but probably, on average, 5.

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Vikram Malhotra, Morgan Stanley, Research Division - VP [63]

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Got it, okay. And then just -- I know Sears, you sort of -- it was understood, you telegraphed it. I'm just sort of wondering given just ongoing closures across retail, not obviously the same extent Sears, but just as you look at the portfolio, anything on the watch list, anything that could sort of maybe surprise you?

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William P. Hankowsky, Liberty Property Trust - Chairman, President & CEO [64]

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Well, I think we're aware of everything that's out there. And so there is a watch list, we pay attention. We have got 1,100, 1,200 customers, everybody's business isn't perfectly running. I would tend to say that if there's places that probably is of the same characteristic as a Sears in the sense that it's retail or retail-oriented. For example, maybe a consumer product, apparel person or something like that. But there's nothing that's anywhere near the size of an 850,000 square-foot building with a single bankrupt retailer. There's nothing like that.

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Operator [65]

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Your next question comes from the line of Michael Mueller from JPMorgan.

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Michael William Mueller, JP Morgan Chase & Co, Research Division - Senior Analyst [66]

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Just curious, when you talked about doing some 2020 leases and pulling those forward, can you just give us a little more color about how much more demand there is to do that when you -- if you're pulling something forward that's expiring in 2020? Is the spread you're getting on that notably different than if it was expiring in Q3 this year? Just any sort of color would be helpful.

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William P. Hankowsky, Liberty Property Trust - Chairman, President & CEO [67]

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Yes, sure. Yes, I think -- we talked a little bit about this when we gave guidance on the fourth quarter call, which was that in calendar '19, we happen to have a somewhat lower expiration level than normal for the year. So in '19, I think it was around 9 million, not quite 10 million square feet we're going to expire. We put about half of that to bed in the first quarter. So we did, I think, over 50% of our expirations for the year, year being '19, in the first quarter. Now that's not unusual because during the year, you should be doing that. But it is a lot, it's a little bit more than normal to get done 90 days into the year. On the 2020s, you'd be doing 2020s anyhow because some of them may expire in the first and second quarter of the next calendar year.

But what you have in this kind of dynamic market is you may have customers who are saying to themselves, "Hey, I have this facility. I'm in this submarket, it's a great facility, you're a great landlord, I want to make sure I have it. I don't want to take the chance that it's not available to me. I want to do my renewal now. I want to put -- because I know I want to be here and I want to operate my logistical operation." So they come in and we have that conversation and we talk about where we think rents should be representing that. And so I think when you look at the rent numbers and the retention portion of the supplemental, you'll see that in fact, they were pretty strong.

So pretty strong rent numbers with 75% renewal rate, with longer term, so we picked up over a year, I think, of term per average of lease and we did that with roughly the same cost per square foot per lease year that we have done last year. So from a kind of investment perspective, we're getting more term and we're getting better rents at no greater cost than we've experienced over the last several quarters. So that feels like pretty good business and it's really good business when you factor in downtime, i.e. there isn't any. So we're happy to do 2020s now, make good rents, not spend a lot of money, get more term and get it done.

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Michael William Mueller, JP Morgan Chase & Co, Research Division - Senior Analyst [68]

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Okay, that's helpful. And I guess anything, any update on Comcast that you could share with the cost?

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William P. Hankowsky, Liberty Property Trust - Chairman, President & CEO [69]

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No, I mean we are making -- everybody, us, contractors, everybody making good progress to complete the hotel portion of the building. As you know, the office portion open is fully operational, that hotel should open this summer. So we're getting very close, which is great. We continue to have a dispute between us and the contractor. We continue to talk between us. We don't have any final resolution, but we are -- but the news is it will get done and finished and that's great and then we'll have to sort everything out. So that's kind of the update.

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Operator [70]

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Your next question comes from the line of Ki Bin Kim from SunTrust.

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [71]

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So you have about 5 million square feet or so expiring in Central PA and Lehigh Valley over this year and next year. How does the rent growth profile or mark-to-market profile in those markets compare to the portfolio average? And second, how do you think about those market -- about your market exposure or concentration in those 2 markets overall?

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William P. Hankowsky, Liberty Property Trust - Chairman, President & CEO [72]

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Yes. So let me separate them out a little bit because I think there's a little bit difference between them. So Lehigh Valley, as you know, our concentration of assets, about 17 million square feet, is literally in the Lehigh Valley. So running roughly from Allentown to Bethlehem, from 476 over to 22, Route 22 -- or not 22, 33. So it's really in the core, it's where the preponderance of good labor is, it is where the highway network is and these are great buildings that are, in almost all instances, intrinsic or a piece of the logistical operation for our customers who are in them.

So I think we're feeling pretty good about the fact that most of those would renew, most of them would stay, I think, and rents in the Valley, some deals have been done close to a $6 per square foot. So I mean the Valley's got good, strong rent profile and feels good and has seen rent growth. We've talked about this in the past, but as you sort of leave the Valley and go somewhat southwest into Berks County, people have gone out there. They've built additional product. So there's several million square feet of product there. So Lehigh Valley, availability, 6%; Berks County, availability, 17%. We don't have any product there, we don't intend to have any product there, and I would say that I would not anticipate rent growth there being as vibrant as in the Valley. If I go to Central PA, here, the dynamic is not exactly the same but has some similar characteristics. It's a bigger submarket, it's about 180 million, 200 million square feet, right around Harrisburg as you're right on top of sort of the Pennsylvania Turnpike in 81 and all that.

That's main in main. Again, good labor, good access, et cetera. Rents have held well, et cetera. But if you go, again, southwest towards Carlisle, you will find that there's about 6 million square feet, almost 7 million square feet of product that's been developed. It's in like 7 assets that range from 800,000 to 1.2 million square feet in size that's become a little bit competitive, and I would anticipate that rent growth in that submarket, you're not going to see any until that all gets absorbed. People are going to fight -- get their product absorbed, which is what happens in the markets. We don't have a whole lot turning, we have some, but our major -- to your point about the expirations, the major concentration of that is in Lehigh Valley. And so net-net, with all that backdrop, we're pretty comfortable about where we stand.

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [73]

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And your land bank in those markets, about where are those concentrations?

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William P. Hankowsky, Liberty Property Trust - Chairman, President & CEO [74]

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So we have no land position in Central PA at the moment. The last building we built there was, like -- we started in '17 with spec, 800,000 square feet, leased in '18, we haven't built a building since. So we're not -- we like the market but right at the moment, we don't think it's a market we're going to necessarily develop in. In the Lehigh Valley, we've got I think the strongest land position of anybody. So we still got 3 pads in Spring Creek and then we've got a couple of pads over in Allen. So we've got positions kind of on the east side and the west side of the Lehigh Valley, and we can build either big -- we have pad sites, where you can build up to 1 million square feet, but we also have pad sites for 200,000, 300,000 square-foot kind of product. And earlier, someone asked about what might you see us do this year. It's very conceivable we might start more of the tenant industrial product in Lehigh Valley, not start a big box.

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Ki Bin Kim, SunTrust Robinson Humphrey, Inc., Research Division - MD [75]

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Okay. And just last question, if I think about your source of funds over the past couple of years, well, all that came from disposition in selling the office portfolio down. If I think about the next couple of years, how should we think about your sources of funds and is normalizing your concentrations in Lehigh Valley or Central PA, is that a part of the kind of suite of options that you have to find sources of liquidity or are you fine with the concentrations in the markets you're in today?

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William P. Hankowsky, Liberty Property Trust - Chairman, President & CEO [76]

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I think -- look, we are, as you said, fully booked at the moment in terms of disposition activity to get our wholly-owned done in -- hopefully in '19, maybe a little bit of it goes into '20. And that's great. I think when you think -- we're not giving guidance for '20, but when you get there, I think every company and every point should be doing the best it can to optimize its portfolio. So it would not be beyond the pale that we would be selling industrial assets in the future that you do it -- it might be some market you don't like, it could be an asset that's peaked in value or value harvesting. So would we entertain that? Absolutely. And if I can -- if you can do that on one side and do value add development on the other side, then that could be a good trade, but we'll talk more about that in a couple of quarters when we talk about 2020.

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Operator [77]

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There are no further questions at this time. Do you have any closing remarks?

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William P. Hankowsky, Liberty Property Trust - Chairman, President & CEO [78]

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We do not other than to thank everybody for listening in, I appreciate it. And we'll talk to you in 90 days. See you. Thanks.

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Operator [79]

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This concludes today's conference call. Thank you everyone for your participation. You may now disconnect.