Liberty Property Trust Earnings Call NUGGETS: Lease Terms, Characteristics of Companies, Not Industries
On Tuesday, Liberty Property Trust (NYSE:LRY) reported its second quarter earnings and discussed the following topics in its earnings conference call. Take a look.
Ross Nussbaum – UBS: I want to talk about the renewals and particular your lease terms. I guess in the quarter it looked like it was about 2.9 years and that seems to be influenced by a couple of large leases you did in the Northeast that were even shorter than that. Can you talk about why the lease terms were so short this quarter?
William P. Hankowsky – Chairman, President and CEO: Your analysis is very accurate. In particular there was one very large 1 million square foot plus lease where the customer – we and the customer had a pretty robust dialog about what they might want to do, and in order to give you enough time for that all to happen, we extended them 22 months?
George J. Alburger, Jr. – EVP and CFO: Its 22 months.
William P. Hankowsky – Chairman, President and CEO: 22 months, and basically it left the lease to where it was. So that did – because we do it on a weighted average, Ross, and so it did bring down the average term of the leases, and it also brought down that number with bumps in them, escalations, because it was a 1 million square feet that for 22 months it doesn’t have a bump.
Ross Nussbaum – UBS: So what do you think is the ultimate resolution of that, because it’s obviously a big space?
William P. Hankowsky – Chairman, President and CEO: The resolution could be a stay in place, the resolution could be a –somewhat of a modification to the existing real estate or the resolution could be the need for additional real estate.
Ross Nussbaum – UBS: Related question, which of your renewal rate of the quarter of 60%, was improved from where you were in the first quarter, which is 55%, but still trailing where you were in the last couple of quarters of 2011, which was I think were all north of 65%. Is that something that, that grabs your attention that you’ve got fewer customers renewing this year versus last?
William P. Hankowsky – Chairman, President and CEO: All these numbers grab our attention, but there is another number we look at, and I know you know this, but just to everyone on the line. So, the numbers that are in the supplemental represent customers who stay in exactly the same space and renew with Liberty. So, if you stay with Liberty, but move to another building that’s not a renewal, if you shrunk the space that you dedicated is shown as not renewed and this is meant to help everyone that think about transaction costs and investment et cetera. Another statistic that we monitor internally from a management perspective is something we call the renewal rate or the retention rate, the retention rate, and what we look at there is whole is renewable, meaning that if somebody had a function that they decided to shut down, we didn’t lose them to our competitor, they just decided not to do this anymore or we moved them to another space and therefore they stayed in the Liberty family, they just went somewhere else, so we count that as retained, even though it’s not renewal in the supplemental definition. That number for the quarter was 92%, it’s the highest since we’ve been tracking it. So, what that leads us to conclude is that customers in Liberty’s portfolio who are staying in operation in the markets they are in, stay with Liberty. What we do see is some amount of — which I think you’ve heard others comment on some customers are contracting, so people may be in less space than they were before, but that it’s not like they went to a competitor or some people do have shut down operations. So, we do pay close attention to it, but we don’t feel we’re making any tactical mistakes in terms of how we are handling renewals because we are keeping the people that are available in our portfolio.
Ross Nussbaum – UBS: Final question on the build-to-suits that you’re now working on what are the targeted yields on this project?
Michael T. Hagan – EVP and CIO: They run the gamut I mean, I think that’s a good question also and we’ve talked about this in the past. So, right now the pipeline is like (99), but obviously that’s the average of a range. So, there are yields that are in eights and there are yields that are in the low double digits, and that’s candidly the range that these that, that pipeline looks like. So, some are decent single digits and some are low double digits, it’s kind of depends obviously term, credit, the nature of the asset, that kind of thing.
Ross Nussbaum – UBS: Last question from me. On EastGroup’s call last week, I think it was last week; they talked a little bit about seeing a slowdown in the last 30 to 60 days in leasing activity. Have you experienced any of that?
William P. Hankowsky – Chairman, President and CEO: I don’t think so, not the way I understand it was characterized then. So, let me give – let me make four comments on that. One is obviously what we report in the quarter is what’s commenced, so there is lag effect to the supplemental. So, another number you might want to look at is what did we sign in the quarter and we signed 5.7 million square feet of leases, which is roughly the same number; it means coincidentally (it’s that) close. Meaning that these were very active months; a couple of million square feet a month, so that’s held okay, pretty good. We obviously also keep track of prospect activity, so we’re looking at – we have a fairly nice piece of software that tracks all this for us, and we’re looking at prospects, we’re looking at showings, we’re looking at proposals (ad), that kind of thing, and if you looked at it, it should be a nice step-down function. You need so many prospects to create so many showings, to create so many – et cetera. That step function has remained relatively the same. Rob gave you some commentary on certain markets. So some places feel better than others. There is no question about that. So, a Houston feels more robust than Richmond. So, I don’t want to say it’s the same in every market, but I think generally portfolio-wide, it feels roughly the same. We also made the comment – so, my third point – which is, I think the smaller local guys are more skittish than the bigger corporate guys. So there is a little bit of a differential behavior by nature of tenant. And I think they are more – and we’re all unfortunately now victims of a world – so my fourth comment – which is a world of sort of event risk and headline uncertainty. So, a couple of weeks ago we all thought Spain was solved, and yesterday the stock market thought Spain wasn’t solved, and that has real – I mean I have been with customers every time I tour, I was just at a roundtable last week with customers, and – I mean people are skittish, they read all this stuff, so there is a kind of heightened sense of angst. But in terms of just (wrong) flow, we don’t think it’s particularly pulled back. My last comment though, it is the summer, so it will slow up July and August; that’s normal seasonal, and in this environment, we’re worried about that’ll just come back after Labor Day or does it sit there waiting for the last chance. So – but that’s where it’s at.
Characteristics of Companies, Not Industries
Jordan Sadler – KeyBanc Capital Markets: Just wanted to follow-up on one of Rob’s comments about the strengthening in Philly and in Minneapolis as it relates to the office sector. Are those (locals) strengthening to the extent that you guys may consider speculative construction of office base in those markets yet?
William P. Hankowsky – Chairman, President and CEO: No, I wouldn’t say they are that robust. I mean we’ve got enough vacant space that we can deal with pretty much what people are talking about. I think these could be markets where – I mean just to be clear, I mean in Minneapolis we did make a value-add decision. So we acquired – the last quarter, Mike, or two quarters ago – three vacant buildings, because we thought there would might be deal flow that would be an opportunity. We bottom in the 40s, you might remember, Mike?
Michael T. Hagan – EVP and CIO: We did.
William P. Hankowsky – Chairman, President and CEO: So we think that’s a good economic play. So, we might look at something like that. Secondly, the one place where clearly we would consider inventory office product is the total of your Navy Yard. We’ve been very successful there. We’re pretty much leased up. There is a little bit of space we are dealing with. I’m not saying we are about to announce something, but that is a place where we have obviously considered inventory development and it’s worked out well for us. But generally, out of the ground, new inventory, none on our radar right now.
Jordan Sadler – KeyBanc Capital Markets: And then just circling back to the pervious discussion on the (indiscernible) versus maybe the smaller guys, what is the – is there a sort of industry or few industries where you’re seeing the strength or how you’d characterize it and talk a little bit talk some of the markets, but any consistency among industries?
William P. Hankowsky – Chairman, President and CEO: That’s a good question; I think it’s more the characteristic of the companies than it is the industries. So, it’s people in healthcare or financial services or dealing with the health industry, but the larger guys, I think feel, there is going to be a lot for them to do in the future and they need to make decisions to do it. There is large consumer product, logistics kind of folks, whose names you would know, who would say I need to put a building or I need a space or a certain characteristic in the market because I’ve made a decision that’s part of my logistic solution. I’m going to create efficiency and savings today doing that. So, I’m going to do it, sign a long lease to make that happen. I think the one place where I would put the softness even with big guys is defense and folks, sort of folks related to that space, obviously all anxious about where government spending is going, so we’ve seen clearly a softening there, but that’s probably the only industry specific I think I could say right now in the soft side. Characteristics of the companies than it is by industry.
Jordan Sadler – KeyBanc Capital Markets: You haven’t really seen a lengthening in the leasing cycle or the sales cycle on, just more broadly or generically at all?
William P. Hankowsky – Chairman, President and CEO: Well, I want to be careful what timeframe you’re asking the question. If you’re asking has it changed in the last 30 or 60 days, my answer would be, no I haven’t seen a change in the last 30 or 60 days. If you’re asking me is it different today than it was in 2006 and 2007, there is no question; the answer is it’s different. So, today I think is a more deliberative environment generally. I think the cycles are just generally longer. They are not done till they are done, so you can have work very hard on something and it’s going to the Board or it’s going to the CFO or that kind of phraseology that back in ’06 and ’07 you looked at it as a rubber stamp. Today, it is conceivable that it gets postponed, turndown, modified so it is a generally different environment, but there is nothing that’s happened real recently, difference is general generally different.
Craig Mailman – KeyBanc Capital Markets Inc.: It’s Craig Mailman for Jordon. Just curious, just given the talks you guys have with the build-to-suit pipeline just want the sense of maybe how big you think the development pipeline gets in the next two to three quarters and maybe for George I know on bond deal you guys have a good amount of liquidity here and basically full access of line. So how do you think about where your cost of capital is today versus maybe pre-funding some of this?
Michael T. Hagan – EVP and CIO: I’ll do it this way, why don’t I respond on the pipeline, and I’ll let George talk a little bit about capital thinking. So the answer is it could vary considerably. So, you could run the gamut from the pipeline currently at $310 million with a couple coming next quarter. Rob talked about the Aetna build-to-suit that we did sign; it will physically start this quarter. So, maybe you pick up $20 million, $30 million, $40 million, $50 million, and you just start to — George also talked about we’ll be delivering every quarter. So, it’s a gradual uptick, kind of add a net adding, but there are transactions we’re looking at that are very big, to be candid. So, if one of them happened, you could have – suddenly you could be adding, 50 million, 60 million, 80 million, 100 million to pipeline versus so kind of double this gradual pace, and it could sort of kind of jump on you, go from 300 to 400. Now, in the current environment, with all this event risk and uncertainty and people being – the pipeline that Rob described, it might not happen. I’m probably less worried that a competitor gets it and probably more worried that somebody makes the decision, now is not the time. But assume people want to proceed, then I think you could have a range for the pipeline from nice gradual uptick to kind of a step function where it kind of moves up one quarter, gradual for a couple more, moves up again, and maybe are in the 400-ish kind of number going – on a run rate basis going into ’13 or something like that. Now, if that latter happens, George?
George J. Alburger, Jr. – EVP and CFO: Craig, let me answer to that. And if that latter happens, understand, if it’s an initiated development project, it takes a while for the spend to catch up with what’s initiated. But there is a lot of moving pieces on our capital plan as it is. I mean Mike held forth on what our range is for acquisition and what our range is for dispositions, and we could be on the high side of one of those elements, on the low side of the other or vice-versa. So, that can dictate a little bit of what capital needs are. And we have a very good balance sheet. So, we’re pretty facile right now in dealing with a lot of those needs, and if we did have to go to the capital markets, it’s a terrific capital markets environment. I mean we did a 10-year deal in the beginning of this month, and since that time 10-year treasuries have probably tightened 20 plus basis points. I mean we can probably be below 4% now. We are at 4%, if you will. So, we of course have our maturity in August, but we’re in a good situation to deal with that. We’ve redeemed a couple of hundred million, $230 million worth of preferreds this year. So, clearly our balance sheet has more capacity for preferreds and you’ve seen some of the dividend rates that are out there in the preferreds, and we could be at the 6% area. So, that’s a capital source that’s available to us. So, like I say, there is more moving pieces than just the development pipeline, but I think we are in pretty good shape to be able to have capital markets if we need to.