Liberty Property Trust (LRY)

Q2 2010 Earnings Call

July 27, 2010 01:00 pm ET


Jeanne Leonard - IR

Bill Hankowsky - Chairman, President and CEO

George Alburger - EVP and CFO

Mike Hagan - SVP and CIO

Rob Fenza - EVP and COO


Mitch Germain - JMP Securities

Alexander Goldfarb - Sandler O'Neill

Jordan Sadler - KeyBanc Capital Markets

Michael Bilerman - Citi

Ki Bin Kim - Macquarie

Sheila McGrath - KBW

Sloan Bohlen - Goldman Sachs

Brendan Maiorana - Wells Fargo

John Stewart - Green Street Advisors



Good afternoon. My name is Darla and I will be your conference operator today. At this time I would like to welcome everyone to the Liberty Property Trust second quarter earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. (Operator Instructions). Thank you. Ms. Leonard, you may begin your conference.

Jeanne Leonard

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

During this call, management will be referring to our quarterly supplemental information package and you can access this package, as well as the corresponding press release on the investor section of Liberty's website at

In this package and in the press release, you will also find the reconciliation of non-GAAP financial measures we referenced today to GAAP measures. I will also remind you that some of the statements made during this call will include forward-looking statements within the meaning of the Federal Securities Laws. Although Liberty believes that the expectations reflected in such forward-looking statements are based on reasonable assumptions, we can give no assurance that these expectations will be achieved.

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

Bill would you like to begin?

Bill Hankowsky

Thank you, Jeanne and good afternoon, everyone. Liberty had another strong performance this quarter particularly in light of the tepid economic environment we are in. FFO for the quarter with $0.67. We leased over 4.1 million square feet and our renewal rate was over 58%.

In combination, these factors raised occupancy by 50 basis points to 88.7%. The occupancy gain was led by our industrial portfolio, but we saw gains across all three property tax. As we have been saying for the last couple of quarters, we believe market rental rates have hit bottom. But as we have also said, they are staying there. So we continue to see rentals down as our new leasing meets these market rents, this quarter being the 2.4% decline. This decline, however, is less severe than we saw last year, which is a hopeful sign.

I am also pleased that last week we closed on our first value-add acquisition of the year, 228,000 square feet of industrial space in Houston. So this was a very solid quarter by Liberty in an unsettled economy. George, Mike and Rob will provide some additional color in a moment.

Let me spend a minute giving you our observations and perspective on the economy and the real estate markets. There is no question that economic metrics and perhaps more importantly people's perceptions are the things that are less positive today than they were in the first quarter.

Inventory build up and the playing out of the government stimulus efforts were the major drivers of the fourth quarter '09 and first quarter '10 GDP growth. These factors will not be available to influence GDP growth in future quarters. On the sentiment side, people all felt better in late '09 and early they are year.

The financial markets meltdown was averted, and these markets have reestablished themselves. The monthly negative economic reports were tempering. So everybody thought, the worst is over, 2010 will be a positive year. And now it's not as great as we expected, so people are disappointed and caution and concern are back.

Our sense is that people should not have felt as good as they did earlier this year and they shouldn't feel as bad as they do now, but we have said over the last several quarters, this is going to be a long and slow path up, and that's how it is playing out.

For real estate markets, this recent renewed caution has manifested itself with a decline in prospect activity in June from where it was in April and May, as well as another dose of delayed decision making. Nationally, we saw office and industrial vacancy each increase 10 basis points.

Absorption turned positive in office markets for the first time in six quarters and the majority of it was in the suburban markets. Industrial absorption is at an inflection point, with very national reports having absorption at plus or minus several million square feet. We still see industrial doing better than office in terms of deal flow and prospects in the markets.

To sum up, it will be a slow, long road back but we are on it and as this quarter showed, with Liberty gaining occupancy, while the national markets have modest declines, we think Liberty will be the leader in our markets on the road back.

We still expect to see our occupancy increase further between now and year end, but given the recent rise in tenant uncertainty and the decreased deal flow, we anticipate that this increase will be less than we had projected at the beginning of the year.

This sentiment change has also slowed decision making on the build to suit front, where we remain in active discussions but we have yet to ink a deal.

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