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

Q2 2019 Liberty Property Trust Earnings Call

MALVERN Aug 2, 2019 (Thomson StreetEvents) -- Edited Transcript of Liberty Property Trust earnings conference call or presentation Tuesday, July 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

* Caitlin Burrows

Goldman Sachs Group Inc., Research Division - Research 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

* 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

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Presentation

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Operator [1]

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Good afternoon, ladies and gentlemen. My name is Jerome, and I'll be your conference operator today. At this time, I would like to welcome everyone to the Second Quarter 2019 Earnings Conference Call. (Operator Instructions) Now it's my pleasure to hand the call over to your host, Ms. Jeanne Leonard. The floor is yours.

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

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Thank you, Jerome. Good afternoon, everyone, and thank you for tuning in today. You're 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 that become untrue because of subsequent events.

Bill, would you 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. We are operating in a very interesting world. The industrial real estate markets continue to provide unprecedented opportunity, particularly for long-term real estate operators. We entered this year with certain goals. One, substantially complete the repositioning of our portfolio through the sale of our wholly owned office platform.

Two, take advantage of the market and our operating strengths to drive portfolio performance while operating with a couple of constraints, namely high occupancy, which is a nice constraint to have; and a lower-than-typical volume of scheduled lease rolls for the year. And third, maximize output of our development pipeline while maintaining an appropriate risk profile.

On the first, our repositioning goal, we're pleased with our progress on that goal and very pleased with the monetization of valuable properties that we've created. Mike Hagan will give you a thorough update in a moment.

Moving on to our portfolio execution. As you know, we started the year with very strong leasing volume in the first quarter. Our teams were able to maintain that production volume from the first quarter through the second quarter. We leased 8.6 million square feet in the quarter, bringing our first 6 months total to 17.5 million square feet, nearly what we expected for the full year.

We've reduced our 2019 expirations by 72% and our 2020 expirations by 26%. Our retention rate remained high at over 73%. Average lease term for both new and retention leases were significantly above average.

Save for the effect this quarter of one lease transaction in Indianapolis, our rent increases were in line with our expectations for the year. And this was done with our CapEx TI cost per square foot per lease year lower than last quarter and lower than last year.

Thus, we're locking in future cash flow at a volume well beyond our forecast. It's impossible for market to be so hot for so long without folks stepping in to take advantage. As I know you are aware, national industrial absorption was down this quarter year-over-year and national supply is modestly increasing, concentrated in certain submarkets and generally in big box. In fact, we view the national industrial markets to be in a state of sustained equilibrium where occupancies are high and demand will remain strong enough to support good rent growth.

Naturally, supply increases in response which tends to create pockets of inefficiency, where supply temporarily outstrips demand, hence the negative absorption. Within this context of maximizing value in this environment, we have made certain decisions regarding the portfolio. We will continue to seize opportunity where appropriate, tackling lease expirations not only for 2019 but for 2020 and even 2021, locking in extended term at current strong market rates with low transaction cost, but also being laser-focused on our vacancies, which provide us with future upside.

Also due to the somewhat increased market supply, we have modestly revised our anticipated development starts for the year by deferring several spec big box projects in certain submarkets, in Dallas, Atlanta and Pennsylvania, where a bulk of the new supply is concentrated. This also permits us to focus on maximizing the value of the existing portfolio, while the market absorbs supply.

Before I turn the call over to Chris, I'm going to briefly touch on our response to the press release that was issued by Land & Buildings on July 22. As we said at that time, Liberty Property Trust maintains open communications with shareholders and values input that may advance our goal of driving long-term shareholder value.

Members of Liberty Property Trust Board of Trustees and senior management team have had numerous discussions and have engaged with Land & Buildings principals to better understand their views and their perspectives.

We believe that our focus on high-quality industrial assets in major logistics markets, together with our outstanding operational development capabilities, thus positions us to drive growth and enhance shareholder value.

That said, our Board is mindful of its fiduciary duties and obligations to shareholders. And regularly reviews the company's strategy and assesses it against a variety of other options that have the potential to advance our objective of enhancing value for all shareholders.

And with that, I'd ask that, later in the call, that we would keep our questions and comments focused on our quarterly results. Let me turn it over to Chris and Mike. And Chris, to you.

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

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Okay. Thanks, Bill. In line with our expectations, FFO was $0.68 per share compared to $0.12 per share last year. Our second quarter 2019 results included about $0.01 of net nonrecurring income as discussed in the earnings release.

The prior year period also included nonrecurring charges relating to our Comcast and Camden projects. Bill walked you through our robust leasing activity. Year-to-date, we've closed leases at approximately 20% longer average lease terms and approximately 24% lower average fit-out cost per square foot for a year of term than we achieved in 2018.

GAAP rent growth of about 14% during the first half was also in line with expectations and the healthy retention rate helped drive results.

On the flip side, the Sears move out in Central PA and to a certain degree some vacancies impacted year-over-year operating income in the quarter. In addition, our success in re-leasing a 476,000 square-foot industrial vacancy for a term exceeding 10 years in a competitive Indianapolis submarket brought down our rent growth about 90 basis points.

Industrial same-store NOI grew 2.9% on a cash basis during the second quarter, with cash rent growth contributing approximately 1.7%, embedded contractual rent bumps contributing approximately 2.4% and the burn-off of straight-line rents from the prior year quarter contributing approximately 1.8%.

Offsetting these contributions, average occupancy declined by 3% quarter-over-quarter coming off a particularly high average occupancy rate of 98.3% in the comparable period in 2018. Excluding the Sears vacancy in Central PA, which decreased same-store average occupancy by 70 basis points, industrial same-store NOI would have grown by 3.8% on a cash basis and average occupancy would have been 96%.

We remain comfortable with our FFO guidance of $2.55 to $2.65 per share for the full year 2019. Our guidance assumptions generally remained unchanged, except that we've adjusted development starts to a range of $250 million to $350 million for the year as well as average occupancy assumptions.

Our estimates for 2019 same-store NOI growth of 3.0% to 4.0% on a cash basis and 1.6% to 2.6% on a GAAP basis remained unchanged.

Consistent with our prior guidance, I'd remind you that we expect additional severance expenses of around $0.02 per share in the second half of 2019. We also expect additional digital initiative expenses of around $0.02 per share in the second half of the year.

We anticipate that capitalized interest and overhead relating to development will slow in the second half commensurate with the expected decline in development starts and continued deliveries, including the Four Seasons Hotel at the Comcast Technology Center.

With regard to that project, we are forecasting additional preopening expenses and an initial operating deficit, which to Liberty, is estimated to be roughly $0.02 per share in the second half of 2019 as hotel operations ramp-up and would not have yet reached stabilization.

To update you on the Comcast Technology Center, the Four Seasons Hotel is substantially complete and is opening to the public in mid-August. Liberty has continued to fund cost overruns on the project to subcontractors. And as of June 30, our remaining accrual for such cost totaled just under $35 million, which includes estimated retainage of approximately $24 million payable to subcontractors.

Otherwise, there were no significant new updates to report regarding ongoing construction dispute. 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. During the quarter, we continue to execute our strategic disposition plan to exit our wholly owned office portfolio by completing 2 transactions for $103 million. In the first transaction, we sold 74,000 square feet of vacant buildings in suburban Philadelphia, and in the second transaction, we sold a 153,000 square-foot medical office building in CBD Philadelphia. The medical office building went for a cap rate of 4.45% on a current cash basis and a 5.1% cap rate on a GAAP basis.

And subsequent to quarter end, we sold 2 flex buildings in suburban Philadelphia and industrial building in North Carolina for $44 million. Both transactions were to users.

This brings our year-to-date sales to $232 million, and we now have completed our suburban Philadelphia sales program. We currently have 305,000 square feet of Philadelphia office assets under contract and are negotiating contracts for an additional 731,000 square feet of office assets.

The value of these transactions is approximately $300 million, and we believe we will execute most of these sales in the fall. In addition to these transactions, we have received offers on an additional 545,000 square feet of office buildings, and we continue to work toward our goal to exit our wholly owned office product by the end of the year.

Turning to acquisitions. During the quarter, we acquired one property for $27 million. This is a multi-tenant 200,000 square-foot cross-dock facility located in Edison, New Jersey. It is fully leased with rent significantly below market. Subsequent to quarter end, we acquired a 203,000 square-foot multi-tenant industrial building with excess land located in the highly desirable heavyweight corridor of the South-based submarket of L.A. for $55 million.

This brings our year-to-date acquisitions to $209 million.

We continue to utilize proceeds from office dispositions to source good quality properties in top tier coastal markets with significant value creation opportunities. Moving to our development pipeline, we delivered 824,000 square feet in 2 projects totaling an investment of $79 million.

One of these projects was a build-to-suit in Houston, the other was a multi-tenant industrial building in the O'Hare submarket of Chicago. Upon stabilization, these projects are projected to yield 7%.

During the quarter, we started one wholly owned development project for $10.7 million and a joint venture in which we have a 25% interest, started a project for $6.3 million.

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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Thank you, Mike, and thank you, Chris. And Jerome, we'll now open it for questions.

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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 Alex Blostein with Goldman Sachs.

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Caitlin Burrows, Goldman Sachs Group Inc., Research Division - Research Analyst [2]

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This is Caitlin Burrows from Goldman Sachs. But I just had a question, in terms of leasing spreads, they were up 2.9% in the quarter and I know you talked before about some of the activity you had in Indianapolis. So I was wondering if you could just go through what made you decide to move forward with that Indianapolis lease. And then excluding it, kind of how rents and leasing spreads and mark-to-markets are looking across the rest of the portfolio?

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

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I'll take the first part about the transaction and maybe I'll ask Chris to jump in and talk about the spreads if you subtract out that transaction. So this was a 476,000 square-foot building that we own in Indianapolis. It's an in-place asset and one of the issues in the Indianapolis market is there's a fairly robust tax abatement program. So when you build new construction, it enjoys the abatement. It's worth roughly $1 a square foot in operating expenses. And so when you're an existing asset, you sort of compete against that. We were able -- the customer that was in the building left the building. We were able to put another customer in. We got about 10 years -- 10 3/4 years of term. So very nice term. We did it at basically market rents. But those market rents reflect the fact that you're a nonabated building, and so you're sort of competing in terms of the gross expense of the occupancy against abated buildings.

And the result was a rent roll down that was I think double-digit -- I mean teens -- in the teens and as a result because of its scale of the building it had a disproportionate effect on overall rents for the quarter. And Chris, why don't I turn it over to you and I think you did the math of take that building out.

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

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Yes. It had about a 90 basis point impact. So GAAP rent growth would have been about 12.8% and cash would have been about 3.7% on a combined basis.

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Caitlin Burrows, Goldman Sachs Group Inc., Research Division - Research Analyst [5]

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Got it. So I guess just thinking about that 3.7% that it would have been even excluding now I think that is lower than your recent trend. So would you say that, that's more reflective of relatively lower volumes? Or is that some of the kind of mark-to-market opportunity that's been out there is starting to already have been realized?

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

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No. I think, look, our guidance for cash rents was 3% to 5%. We were quite strong in the first quarter. This quarter, we're in the range. We're comfortable with the range. So this is simply mix by quarter, what happens when. I don't think there's any big conclusion to draw from it. It's not a trend.

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Caitlin Burrows, Goldman Sachs Group Inc., Research Division - Research Analyst [7]

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Okay. And then maybe just something on development deliveries. You guys were about $80 million in the quarter, but if I look back to the first quarter supplement, it seems like that was expected to be over $100 million. So I was just wondering, is the right takeaway that some of those projects got pushed out, and if so, what drove that?

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William P. Hankowsky, Liberty Property Trust - Chairman, President & CEO [8]

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I actually don't think there's a build -- there may be a building that just slipped a little bit. But it would have been -- I mean we had a rainy spring. It could have been a construction delay, but there is nothing to take from it.

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Operator [9]

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

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Blaine Matthew Heck, Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst [10]

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So if you think about the reduction in development starts this quarter, is there any way you guys can give us some color on the specific development starts that were taken out of guidance? And the mix between the markets, you mentioned Dallas, Atlanta and Pennsylvania, I think?

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

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Yes. It's actually pretty straightforward. It's actually one building per market that would have been roughly 1 million square foot or one would have been 9 -- one might have been 900,000, one might have been 1,050,000. So 3 big-box projects that when we began the year, when we gave you guidance in the -- I guess after fourth quarter call, we're in the plan. As we now look at the market and see in those markets the amount of comp -- I'll use the term comparable products and look at the demand side of that, so what's the depth of market for that size product. We just made the decision not to do those right now. So we defer them. I mean we have the sites, we can do them down the road. We can clearly do them as built-to-suit if something comes along and we're pursuing a few build-to-suits. So things may change over the course of the year. But at the moment, they're not anticipated they'll start in the next 2 quarters. And so we've lowered that number and obviously that does have somewhat of a ripple effect with cap interest and other things.

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Blaine Matthew Heck, Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst [12]

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Okay. And you guys obviously have some substantial exposure to those markets as a whole. Has the change in the supply picture affected your thoughts on future rent growth within those markets as well?

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William P. Hankowsky, Liberty Property Trust - Chairman, President & CEO [13]

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I think what we're seeing, it depends. It's sort of market-specific as you would think, right? So I don't see it having an immediate effect in the Lehigh Valley, part of Pennsylvania. Lehigh Valley is still south of 4% vacant, very tight market, but the demand right now is much more in the kind of 200,000 to 500,000 square-foot kind of user versus say the 1 million square-foot user in terms of product matched up against demand. The rent situation's different in Central PA, let's say, if you go down that or down that Carlisle corridor, you've got 7 or 8 fairly large -- I think you've got 8 buildings over 800,000 square feet. So that's a pretty competitive market, and that does have some effect on rent growth. I don't think it's, at the moment, rolling rents back. If I go to Dallas, it really is dependent on submarkets. So South Dallas is pretty competitive. And I think that -- and you've got fair amount of merchant builders there. And I would say that's probably constraining rent growth, whereas if you have a multi-tenant building in the core that sort of Fort Worth, Dallas corridor between -- near the airport, you're enjoying decent rent growth. And I would say roughly analogous for Atlanta. Some big box competition, but when you get into the multi-tenant good rent growth. So it's submarket product type as you would expect.

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Blaine Matthew Heck, Wells Fargo Securities, LLC, Research Division - Senior Equity Analyst [14]

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All right. Last one for me. On the acquisition front, the 1.3 million square feet that you've acquired this year has been 93% leased, I believe. So seemingly pretty heavily skewed towards core properties. Can you talk about your appetite for value-add properties and maybe the competitive landscape in that product type versus core?

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Michael T. Hagan, Liberty Property Trust - Executive VP & CIO [15]

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I think as Bill talked about in terms of what's going on in the industrial market right now, you see occupancy is up virtually everywhere. So trying to find those value-add components is difficult. I think what we've been looking for, Blaine, in all candor, is we're all buying occupied buildings, but what we are trying to do is get buildings where we can get to leases in a hurry, where we think they're under market. So the building that we bought in Edison has a lease that rolls in the next couple of years, and we think it's next -- somewhere between 20%, 25% below market. The building that we acquired in LA is probably somewhere between 20% and 30% below market. There's 2 leases in there, one we can get to in '21, the other we get to in '22. And so I think that's the way you're going to have to add value to this thing. The LA piece also has a little piece of land that maybe at some point in time you can expand the building. But that's the value-add component. It's difficult out there, to your point, but that's what we're trying to accomplish.

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Operator [16]

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Your next question comes from the line of Emmanuel Korchman with Citi.

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Emmanuel Korchman, Citigroup Inc, Research Division - VP and Senior Analyst [17]

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Bill, given the transaction activity that's been prevalent in the market the last few months, how much do you think scale matters, especially with the big guys getting much bigger? Is it going to be harder to compete as a very large small owner?

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William P. Hankowsky, Liberty Property Trust - Chairman, President & CEO [18]

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A very large small, I like it. Manny, I think that -- I think scale matters in some regard depending on sort of what your business model is. If you look at the top 25 owners of industrial real estate in the United States, they run from obviously people that own hundreds of millions of square feet. The 25th one owns like 30 million. And as you know, this is a market that's about 7 -- some different numbers out there, 17 billion, 20 billion nationally. Actually fairly diffused ownership, right, as I just described.

So it's a sector that clearly allows for further growth by acquisition, by consolidation, by development. But I think when you think about scale, I think you need to be big enough to enjoy the benefits of unsecured corporate debt, to enjoy the benefits of having the right technology, having the benefits of having expertise in-house like we do with development of property management and others. So I think we are big enough that we can enjoy the benefits of being a large operator in this space. And there aren't many of them.

So I think it has a benefit, and I think we enjoy it.

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Emmanuel Korchman, Citigroup Inc, Research Division - VP and Senior Analyst [19]

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Great. And Chris, on the technology rollout spend, I think you mentioned the impact at end of '19. And I think that's gotten pushed later into the year couple of times now. But are we going to have to think about that in 2020 also? Or is that going to be done once it's done in '19?

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Christopher J. Papa, Liberty Property Trust - Executive VP & CFO [20]

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As far as it -- really, what we had looked at this originally we were anticipating this going into a good part of 2019 as far as the rollout is concerned. We've actually gone live with the new system in the beginning of July with wave 1, which is essentially the core ERP system. And then we'll have a second wave which will go into the fall and that will largely be some of our customer-facing stuff like CRM and forecast manager, advanced budgeting, that type of thing.

So we're well on our way, but these costs will continue to play out, albeit they'll start to subside some as we get through the end of the year. I expect there'll be some follow-on expenses into 2020, but the bulk of the work will be done this year. And we should see those expenses get reduced going into next year.

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Emmanuel Korchman, Citigroup Inc, Research Division - VP and Senior Analyst [21]

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So just to help with our modeling. I know you haven't given guidance yet, but how much should we be thinking about of just those costs in '20 versus '19 versus '18, if you could?

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Christopher J. Papa, Liberty Property Trust - Executive VP & CFO [22]

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Well, this year, you're looking at somewhere around $5 million in total. And last year, I think it was around an equivalent, maybe slightly less. Yes, I think you can see that come down to clearly under $1 million on a go-forward basis because it really just depend on continued upgrades and the type of refinements we want to make to the systems on a go-forward basis. But, again, I'm not giving guidance at this point, but I would certainly think it's going to be significantly less than the last 2 years.

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Operator [23]

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Your next question comes from the line of Craig Mailman with KeyBanc Capital Markets.

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Craig Allen Mailman, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [24]

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Bill, I'm just curious, you guys are pulling back on development starts, cap rates are still pretty low for acquisition yields. I'm just curious, you guys think about kind of capital deployment, the development side of things had always kind of given you some cover to do, some lower cap rate acquisitions to minimize dilution. As you guys look at kind of the disposition proceeds you're going to be getting here through the end of the year, how does that, if at all, change your thinking about deleveraging the near term versus continuing to put capital out and maybe the impact on earnings growth?

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

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Yes. So I think you've asked a very good question that has a few elements. So let me just, if I can, try to parse them and then -- so the part of the reason we have been and have the guides we have out there for acquisitions is driven by the disposition part of this. And so, as you know quite well, we made the decision in the third quarter of last year and then when we gave guidance for this year to become a pure-play and then we put a time frame on it of 12 to 18 months. And we're trying real hard to make it closer to the 12 than to the 18 and get this done this year. That is creating proceeds. Those proceeds have two aspects, one is there's cash, but the other aspect is there's gains.

And so we are in a 1031 mindset, which does have us on the acquisition front looking for opportunity. And to the degree that opportunity exists, we'd love to focus it on markets where we think we're underrepresented, North Jersey and California being 2 of those. We bought, I guess, a building in Atlanta. We bought maybe 2 buildings in Dallas over the last couple of years as we've done that. But that's a very large focus. To the degree we achieve what we want to achieve, and we're well on our way, which is to say, sell $700 million to $800 million of office this year, I don't -- and we're not giving guidance for '20, but I don't think we're going to be selling anywhere near that scale of real estate next year and you won't be generating the same scale of gains. And as a result, you'll probably be somewhat less in the acquisition mode.

We clearly believe development is the place to be. And all we're doing right now is tactically making some decisions about what we should do when and right now, we think there is some few projects we were thinking of we shouldn't do right now, doesn't mean we're pulling away from development as a go-forward business piece of this company. It's a very integral piece of the company. Your point, though, so the last, I think, thought you had, was the degree we sell and to the degree we've taken care of 1031s, and we don't need that cash for development because the spend is down, it does give us an opportunity to think about the balance sheet. And so we always evaluate where -- there's always places capital can go and it might provide an opportunity to think about retiring debt or whatever.

So, yes, all of that is on the radar as good uses of capital.

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Craig Allen Mailman, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [26]

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That's helpful. And just on the developments you guys are delaying here. I mean is there any way to kind of go back and redesign for smaller buildings that kind of fit the demand profile?

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William P. Hankowsky, Liberty Property Trust - Chairman, President & CEO [27]

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Yes. Yes.

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Craig Allen Mailman, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [28]

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Is that -- okay. So that could be -- and are you guys doing that on all the developments you guys have kind of slated that are bigger box? Or are you guys rethinking just the strategy?

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William P. Hankowsky, Liberty Property Trust - Chairman, President & CEO [29]

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Yes. So, the answer is yes, you can rethink it. And you can assume that given our development expertise, we might well be doing that and thinking about that and what's the right way to go. You can also -- obviously, some of these sites are sites where there could be a build-to-suit opportunity. Somebody may need a large building like that. And actually in 2 of these instances, our buildings did -- we did look at build-to-suit opportunities and in one case, there's still one we're looking at. So they could come -- they could "come back" if that happens. But we might well decide what the right thing to do in the market today is in fact instead of doing one -- a single million square foot building, why don't we do 2 450s and do that. So we will absolutely think about that. Yes.

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Craig Allen Mailman, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [30]

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All right. And then I know you guys -- maybe sales trail off next year, but you got the Indy lease done, you got two kind of further out renewals in Central PA. When does the portfolio calling or risk management on the expiration schedule or just value maximization kind of kick in on the industrial side as you guys continue to maybe minimize dilution on redeploying to New Jersey and L.A. I mean is that -- are you guys thinking more and more about that?

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William P. Hankowsky, Liberty Property Trust - Chairman, President & CEO [31]

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We are absolutely thinking about that, very much so. I mean we're -- as you know, the business operations are always cyclical, so we're now actually gearing up for sort of our 2020 thinking or 2020 business plans and all of that. And clearly on a go-forward basis, we have an opportunity to do a couple of things. We have an opportunity -- and you cited them. To harvest value, we have an opportunity to do portfolio repositioning on the industrial side. That gets a better portfolio. We take those proceeds. We invest them in the development pipeline. That gets a better industrial portfolio. So go forward, that's the business you want to be in.

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Craig Allen Mailman, KeyBanc Capital Markets Inc., Research Division - Director and Senior Equity Research Analyst [32]

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And then just last one. I know you guys don't want to talk about the letter, but just on the other side, assume going concern, kind of where is the Board and your thinking from succession planning standpoint?

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William P. Hankowsky, Liberty Property Trust - Chairman, President & CEO [33]

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Sure. You -- I mean every Board -- and we have a very good Board, 9 very thoughtful independent directors -- understand that if not they're #1, one of -- they're top 2. And so I always think strategy and succession, the big 2 Ss our Board needs to focus on and so ours focuses on that. And it is an ongoing process. It is something they think about all the time. We've done it in the past with other positions here. I mean Chris joined just a few years ago. That was going outside to bring somebody -- talent into this company. We just recently announced a new General Counsel. That was, I think, existing talent that we have grown and then having somebody be able to take over. So our Board knows how to do both. They have the ability to do it and they think about it.

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Operator [34]

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Your next question comes from the line of Alexander Goldfarb with 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 [35]

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Two questions. First, Bill, on your comments on leasing and trying to get after leases that are expiring through 2021 and then pairing back development, you almost sound a bit more cautious on this call than previous. So just trying to see what's -- if there's other stuff that's going on in there. Just because the fundamentals remain very healthy, yes, there's been supply, but that's not new. I mean the big box oversupply has been out there for some time and it hasn't inhibited the fundamental tailwinds that industrial enjoys. So is there something else going on that's causing you to focus more on trying to get at leases that expire over the next 2 years or pairing back development?

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William P. Hankowsky, Liberty Property Trust - Chairman, President & CEO [36]

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Yes. There's not -- I'm glad you asked the question to a degree -- to just clarify it, Alex. There's nothing going on that's macro that this is indicative of. I would say in both instances, I would use the phrase tactical. So the degree to which we believe that there were 3 particular buildings that we were going to build that were big, and we're going to build them in submarkets that are big box markets and those markets, at the moment, we feel have enough supply, and we don't want to be the sixth building or the seventh building.

And we've decided to defer those. And then as an earlier questioner asked, maybe we decided to do them with different product type. We're multi-tenant, less big box. So we'll evaluate that. But at the moment it has a tactical effect of delaying some development we thought we were going to do. It's not a comment on the market. In a macro sense, it's a tactical decision, submarket product type. With regard to expirations, we entered this year, it was kind of an interesting year for us. Our 2019 expirations were like 9.8% and our 2020 expirations were like almost 20%, they were like 89%. And so we had sort of this unusual laddering. It wasn't as normalized as it was. So in terms of just a lot of wood to chop, let's do -- let's try to spread it out and get it done over the next 24 months and make that happen.

And that's what we've been doing. And you can see that manifest itself in the leasing volumes and you see it manifest itself because I was focusing on expirations in the high retention rate. So it's simply getting work done and out of the way. Again, it's really not a -- it's about our portfolio and the idiosyncratic expirations schedule. It's not about some macro event.

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [37]

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Okay. And then my second question is, just following up on Craig's question on the developments in the boxes. Again, going back, the supply of this cycle has really been in the big box, the over 500 that sort of million square foot, whereas the smaller more infill has not seen the oversupply. So just sort of curious, as you guys are planning, I would have thought there would have been more of a focus to try and tailor Liberty's development more towards the smaller boxes that aren't seeing the huge amount of supply versus having big box on the drawing board that now you're deciding to pull. So just sort of curious how you guys think about development, and how that's changed over the past few years or if this quarter marks a shift and we'll see Liberty doing more 250,000, 350,000 square-foot boxes versus the bigger boxes.

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William P. Hankowsky, Liberty Property Trust - Chairman, President & CEO [38]

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Yes. Here, again, I think -- I mean it is what it is for the quarter, but I don't want it -- so when you look at our pipeline, if you take basically the average size of a building, the average size of the building in the pipeline, last I looked, it was about 220,000 square feet. The average Liberty building is like 190,000. So our bread and butter is multi-tenant. Our bread and butter will always be multi-tenant. We love it. It works well. And we'll produce it. We produce it down the pipeline. We've produced it for years, and we'll do it on a go forward. We've built big box. We've always said this where we think it's appropriate. We don't believe -- we don't see big box as the bread and butter of Liberty, so there's a few markets that are big box markets. We have sites that allow us to do it, and that's fine. And -- but as I said earlier to a different questioner, it is conceivable that we might revisit those and decide to do two multi-tenants instead of one big box. But it's -- again, it's sort of 3 projects. And it's an important thing we've made this decision. I think it's the right decision in terms of -- and we -- I think we said it when we gave guidance. When we give guidance, these are what we think is going to happen. They do not become, by rote, we're just going to do it, just because we put it out there. Every quarter we look at every assumption and whether it makes sense, and every -- project by project, we look at them. So again, I don't think it -- it doesn't change fundamentally how Liberty thinks about development.

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Alexander David Goldfarb, Sandler O'Neill + Partners, L.P., Research Division - MD of Equity Research & Senior REIT Analyst [39]

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Okay. No, I appreciate that. I was just -- it seemed more than coincidental that the curtailment of development also timed with the letter of a few weeks ago. So I didn't know if they were related and somehow Liberty was rethinking the external front or it's as you say, these 3 markets just have a lot of supply, and therefore, they're 3 projects that you don't need to go forward with.

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William P. Hankowsky, Liberty Property Trust - Chairman, President & CEO [40]

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I think, Alex, we're pretty good at running our business. We know how to run the business, and we're running the business. We take advice from lots of people but we're running the business, and we make decisions based on what our people in the field know, and they're the experts.

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Operator [41]

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

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

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Couple of quick questions. Bill, when you look at the Indy situation, a little bit like CapEx in the office world is these darn rent abatement incentives in the industrial development world. You think -- what are the markets where you have the tax abatement burn off and how that forces a reset on rents? What are the major markets where that occurs? And then how many of those situations do you think you have in your portfolio?

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

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Yes. There are -- it's a good question, John. As you know, there's various public incentives across various markets. It happens that this is situation where it's pretty -- the value is fairly large. It's as I said, kind of a $1 a square foot and it's kind of a cliff, it sort of happens. Other places have programs where it starts at 100%, goes 90%, 80%, and it steps down some way and it's sort of much more gradual and sort of almost gets absorbed, so to speak. So I can think of maybe 1 or 2 others where there is, I'll call it, significant size abatements that might have an impact, but it's not pervasive in any way. I think you're going at a basic question. And I think it's indicative of the real estate decision we made on this asset, which is we now have an asset that has long term, and maybe over time this is an asset you don't want to have this happen again.

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John William Guinee, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [44]

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Okay. And then second is, you've been running about 300 million in land, 15 million square feet of development rights in the wholly owned portfolio, now there's another 6 million in the joint venture portfolio. How much of that land is monetizable or the fundamentals make sense to put it into production in the near term? And how much of it is just fortunately or unfortunately more of a long-term asset that won't be put into production anytime soon?

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William P. Hankowsky, Liberty Property Trust - Chairman, President & CEO [45]

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Well, the way I would answer that is -- because I think there's sort of an in between catch to it, another kind of category. We have parks where we have -- so I can think of the Lehigh Valley. We have both Spring Creek and Allan. These are parks that we've designed that can handle 7 or 5 assets over time. You're not going to build -- well, let me read it. We would not tend to build those out all at once. So they're going to get build out over time. And so is it a building a year, therefore, they have 4, 5 years of build out. It's -- when you look at the site we bought in Houston at the port, that ended up being -- I guess we're building out 2 buildings there, Mike, and we built -- we started with one and this has been over like the last 4 years, so that took roughly a 4-year build out. So when I look at our -- we've got land in Orlando that we've been building out. I mean that JV relationship has been over a decade. So I mean we have -- so that's great, right? And on a rate basis pretty low since we -- when we cut the deal up a decade ago, which is great. So some of the -- that's -- we like that situation. We like the concentration of assets. It helps with moving tenants around. It helps with operations. So there could be land that has a time frame on it, but it's because it's sitting inside of a planned development that's going to happen over time. There may be a site -- there are few sites that maybe aren't ready right now for some reason, but probably most of what's there is usable in the near term, the next couple of years. I would say the vast majority of it. But it will be like [procuring]. It will be a -- but it's usable in the next several years.

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Operator [46]

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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 [47]

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Aside from the Indianapolis lease, cash re-leasing spreads, even though, I guess, it was within your expectation, seems somewhat low, especially to what your peers have reported over the last week or so. Are there any markets where rent growth has slowed a little bit over the last year or 2?

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William P. Hankowsky, Liberty Property Trust - Chairman, President & CEO [48]

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Not that I -- no. I would say no to that, Eric. Again, it may be the mix of the quarter a bit, but they're generally falling where -- I mean we're -- "we're getting market rents in these markets." And it may just be the mix for the quarter I think more.

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Eric Joel Frankel, Green Street Advisors, LLC, Research Division - Senior Analyst [49]

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Is Pennsylvania or -- I guess Central Pennsylvania rents have probably flattened a little bit there. Eastern Pennsylvania, I know you said fundamentals are good, but I'm curious with these early lease renewals that you highlighted in the press release are -- were those rents negotiated at a lower rate or...

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William P. Hankowsky, Liberty Property Trust - Chairman, President & CEO [50]

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No. No. So every lease has its own story, right, as you know well. But -- I mean we're getting market lease. I mean there's -- Lehigh Valley is a 5-KISS in a 6 per square-foot kind of market. We're getting good lease terms there. And depending on where that customer was, and how soon -- how long that lease was, there could be a fairly significant move, which would help obviously rent growth because it happened 8 years ago versus a lease that happened 3 years ago may have been a 3PL that now wants -- they renewed their contract that went for another 3 years, and that's going to give you probably -- you're going to get a rent increase, but it may not be the same lift. So it's a mix of -- it's probably as much the aging of the leases in terms of when they were done.

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Eric Joel Frankel, Green Street Advisors, LLC, Research Division - Senior Analyst [51]

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Okay, okay. And look, I obviously -- but I understand that the letter is a sensitive subject, but just given the large transactions that have taken place over the last few months or so, can you compare just the quality of your portfolio to what's traded in the pricing, just to give a sense for everyone?

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William P. Hankowsky, Liberty Property Trust - Chairman, President & CEO [52]

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Well, I'm not going to comment on everything that trades because a little bit in the eye of the -- look, we have a great portfolio, you know that. We've got an average age that's like 16 years or something. It's one of the younger portfolios. It's in -- we think in terrific markets. We think it's high quality. We think it's valuable. We think we're doing the right thing for shareholders by helping in the industrial business and adding to that portfolio and building and developing. So we think we have a terrific portfolio, and it's responsive to our customers who enjoy renting it from us. And we think it's responsive to our shareholders in terms of creating value. I'll leave it at that.

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Eric Joel Frankel, Green Street Advisors, LLC, Research Division - Senior Analyst [53]

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Okay. And then finally, just given the Central PA supply, is it fair to say that the Kmart Sears building, that you don't expect that to be leased by the end of the year? And that's not included in your guidance?

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William P. Hankowsky, Liberty Property Trust - Chairman, President & CEO [54]

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Yes. Two different questions. But that's okay, it's all together. It is not in the guidance. I'll start with the last one. It is not in the guidance. So when we revised -- when they rejected, and we revised guidance in the first quarter, we took them out through the year. That building, they rejected it May 1. There is -- because it's a bankruptcy, you don't quite get the restoration provisions you might get from a normal tenant. So there is racks and conveyor systems and some other stuff that we're salvaging and that work is going on. The building will be physically available on October 1. It's a good asset in a big industrial market. But as you point out, it's also competitive market. So we don't assume it, but we are showing it to prospects and maybe something happens, and we get some rent this year, but it's not in guidance.

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Eric Joel Frankel, Green Street Advisors, LLC, Research Division - Senior Analyst [55]

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Okay. A final question, just for the record, with Comcast, any additional commentary you like to add just in terms of what the sale processes or the dissolution of your partnership at some point?

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William P. Hankowsky, Liberty Property Trust - Chairman, President & CEO [56]

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No. I mean these -- we've made the decision not to be in this business. These are noncore assets. We've got a terrific partner. We've got partnership agreements. And what will happen over time, we'll see.

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Operator [57]

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

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Michael William Mueller, JP Morgan Chase & Co, Research Division - Senior Analyst [58]

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Couple of questions. So after the $200 million of asset sales that are lined up for the fall, how much is left after that to close out that wholly owned program?

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Michael T. Hagan, Liberty Property Trust - Executive VP & CIO [59]

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We expect $300 million in the fall, just to make sure that number is correct. And that all trades -- we'll be looking at somewhere between 500,000 and 600,000 square feet of real estate that we'd still try to dispose of.

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William P. Hankowsky, Liberty Property Trust - Chairman, President & CEO [60]

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And if it all happened, Mike. But if it all happened you'd be in that...

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Michael T. Hagan, Liberty Property Trust - Executive VP & CIO [61]

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$700 million to $800 million range.

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

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$700 million to $800 million range. Yes.

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Michael William Mueller, JP Morgan Chase & Co, Research Division - Senior Analyst [63]

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Good point. Got it. Okay. And then I know it's next year, but at this point as you sit there today, does it feel like you would have a more normalized development start number next year, or do you think there's a shot it could be muted again?

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

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I think someone earlier asked about our land bank. We have a nice land bank. We have opportunities. I think can Liberty do $500 million in starts in a year? Absolutely. We've done it several times in the past. I think that -- so we have capacity, both in terms of land and in terms of personnel. Land is getting to be the big issue in development, so we don't have it in every market we'd like to have it necessarily. So we're also doing that, which is finding out time to find opportunity in various markets. So I think it's going to be a combination of our success in doing that. It's going to be a combination of where the dynamics of the market are. So I'm not giving you guidance, but if the market is there and if we have the opportunity, we could do a number that was more like what we entered this year with next year. But we'll see how it all plays.

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Operator [65]

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We do have a follow-up question from Caitlin Burrows with Goldman Sachs.

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Caitlin Burrows, Goldman Sachs Group Inc., Research Division - Research Analyst [66]

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Just on the disposition topic, I was wondering, I know you just kind of talked about it, but given where you were in the first half of volumes target for the back half of the year, it does seem like you're expecting a pickup in that rate. And I know you had previously talked about even if you could get ahead of kind of what you were targeting for the year, that you would. So just wondering what's driving your disposition piece at this point. Is it interest or pricing or something else?

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Michael T. Hagan, Liberty Property Trust - Executive VP & CIO [67]

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Caitlin, I think what we try to do is find the right buyer for the right deal, which then maximizes the price and for each one of these transactions and that's really what's taking some time here. All this real estate isn't necessarily homogenous, and so we're looking to couple it in the right components that makes sense from an execution perspective and also like I say maximizing the pricing.

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Caitlin Burrows, Goldman Sachs Group Inc., Research Division - Research Analyst [68]

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Got it. Okay. And then it did look like, in the earnings release, that you guys sold 3 industrial properties in July. So I was just wondering what it was about those properties that made them disposition candidates.

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Michael T. Hagan, Liberty Property Trust - Executive VP & CIO [69]

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They were actually user sales. And so we had a situation where one tenant wanted to renew -- [supposed] to buy and that's what we executed on.

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Operator [70]

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(Operator Instructions) Your next follow-up question comes from the line of Emmanuel Korchman with Citi.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [71]

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It's Michael Bilerman here with Manny. Bill, I wanted to dive a little bit deeper on succession. Look, I recognize you are in your late 60s. How should shareholders think about the timing of CEO succession, but also whether this is primarily an internal exercise with the internal candidates versus external? And if it is external, is there a process already underway to identify potential candidates? And part of the reason I'm asking is if we step back, we've obviously seen a number of CEO changes within the industrial REIT space as well as the office space. And sometimes those have been internal and sometimes they've been external, right? You look at PSB with Joe Russell and Maria, that was internal. EastGroup with David Hoster to Marshall Loeb, that was from outside. Duke, you had Denny transferring to Jim, which was internal, but Jim had been hired previously. FR, you had Bruce to Peter Baccile, that was from the outside. And then you had Highwoods just announce, that was internal. Alexandria and Mack-Cali [on C] Cousins. So there's certainly been a lot of activity with a lot of your REIT brethren that you've grown up with as a CEO. So can you give us a little bit more meat on the bone in terms of how you are thinking about your own succession in terms of your retirement, but how the Board is thinking internal versus external?

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

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Yes. The simple answer, Michael, is no. I can't give you more. And I think you know that. So I'm here, and we have laid out a pretty robust strategy, the kind of pure play. We've got a lot of things on our plate. I'm very engaged with that and very excited about that and very challenged by that. And so that's where we are right now. You've absolutely hit it on the head laying it out and I mentioned earlier, so there is opportunities to think about internal talent. There's opportunities to think about external talent. Our Board is very thoughtful about all that. And our Board will do the right thing for shareholders at the right time. And I'm going to leave it at that.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [73]

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So it sounds like there's not necessarily a process underway today, or you don't want to comment on that?

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

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Michael, I've said what I'm going to say on the topic. You should be careful about drawing inferences about anything, right? I don't believe everyone you cited by the way gave out lots of headlines about it ahead of time. People tend to tell the world about this when it is appropriate to tell the world, and we will do the same.

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Michael Bilerman, Citigroup Inc, Research Division - MD and Head of the US Real Estate and Lodging Research [75]

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Yes. No. They're all different scenarios. They're all from those times, there were -- people were hired in numbers years before and they came -- and some were named President before, so there's all different ways of going about it. In some cases there was an announced plan that -- you think about Alexandria, Joel came out and said, we were embarking on a CEO succession that will be named by this time, and then it came out, right? So I think the color and reason why their questions are coming is you have seen a lot of change within the industry as executives rotate off.

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

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Absolutely. Because that's what happened. By the very nature of a good governing Board and a good run company.

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Operator [77]

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Presenters, I'm not showing any further question at this time. You may continue.

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

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Well, great. Thanks, everybody, for listening in. We appreciate it. And we'll talk to you in 90 days. See you.

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Operator [79]

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Thank you. And that concludes today's conference call. Thank you, all, for participating. You may now disconnect.