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Liberty Property Trust (LPT)
Q3Â 2018 Earnings Conference Call
Oct. 23, 2018, 9:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good morning. My name is Denise, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Third Quarter 2018 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. (Operator Instructions) Thank you.
Jeanne Leonard, you may begin your conference.
Jeanne Leonard -- Vice President of Corporate Communications and Investor Relations
Thank you, Denise. Good morning, everyone. And thank you for tuning in at this early hour 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. Also in the room and available for questions is Chief Accounting Officer, Mary Beth Morrissey. Liberty has issued a press release detailing our results as well as our supplemental financial package. You can access these in the Investors section of Liberty's website at libertyproperty.com. In these documents, you will also find a reconciliation of non-GAAP financial measures to GAAP measures.
I will also remind you that some of the statements made during the 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.
William Hankowsky -- President, Chief Executive Officer and Chairman of the Board
Thank you, Jeanne. Good morning, everyone. We have two key topics to discuss with you this morning. Our results for the third quarter and strategic initiatives we're undertaking to move Liberty to a pure play industrial company. The continued strength in our industrial portfolio performance, particularly in the third quarter, further underscores the rationale for our strategic decision. The 5 million square feet of leasing for the quarter yielded strong same store results, our best industrial rent growth this year and a strong retention rate. Our core portfolio continues to provide performance exceeding our 2018 business plan and at the high end of our guidance range.
We also had strong capital activity, continue our suburban office sales with significant value harvesting and our Arizona sale and strong development activity with eight starts this quarter. All of this activity is occurring against the backdrop of a continued strong national industrial market, with 63 million square feet of absorption this quarter and another 10 basis point drop in vacancy. The markets are strong and our performance shows it. I'm going to turn it over to Chris and Mike to discuss the financials and capital activity, and I'll return to you at the end to share our thinking on the future. Chris?
Christopher Papa -- Executive Vice President and Chief Financial Officer
Thanks, Bill. FFO this quarter was $0.69 per share compared to $0.66 per share last year. Results were stronger than forecasted primarily due to higher same store NOI, the timing of the Phoenix office sale and a land sale gain. Industrial same store NOI was ahead of our expectations, growing 3.8% in the third quarter on a GAAP basis and 4.1% on a cash basis primarily due to rent growth of 17.5% on a GAAP basis and 7.7% on a cash basis. The strong results for the first nine months of the year and favorable outlook for the remainder of the year would lead to an expectation that industrial same store NOI growth will trend toward the upper end of our guidance range.
However, I will remind you that we have approximately 849,000 square feet of space leased to Kmart in one building in Central Pennsylvania with the lease expiring in late 2020. We also have one small 18,000 square foot lease in the Carolinas with Sears Home Improvement. These tenants were occurrent through the end of the third quarter, but their parents companies, bankruptcy filings could have an adverse effect on same store operating results going forward.
In the aggregate, our exposure to Sears Holdings represents approximately 1.3% of same store NOI, because the timing and impact of our operating results at this early stage is uncertain, we are maintaining our same store NOI guidance at 3.5% to 4% on a GAAP basis and 4.5% to 5% on a cash basis for the full year.
We have however raised our 2018 NAREIT FFO guidance to $2.07 to $2.09 per share. We're $2.64 to $2.66 per share before the $0.57 per share of charges that we recorded during the second quarter. This represents an increase of $0.035 per share on the midpoint of the range compared to last quarter's guidance. As Mike will discuss, our guidance does not include profits, we may realize from the sale of land development rights in the UK, nor does it include severance costs we may incur in the fourth quarter from our ongoing repositioning efforts with respect to our portfolio.
We expect that fourth quarter FFO will be impacted by the Phoenix portfolio sale at the end of last quarter and the forecasted Vanguard portfolio and other office sales this quarter. In two of those proceeds, the vast majority of which are held with 1031 exchange intermediaries are redeployed. There was a $0.01 per share of land sale gains in the third quarter, which are also forecasted not to recur.
Turning to the balance sheet, you'll notice an increase in prepaid and other assets as well as credit facility borrowings as of September 30th. Approximately $147 million of that increase represents a drawdown of short term borrowings to fund the UK acquisition that we closed subsequent to quarter-end on October 1st. Further assets will decreased by that amount in the fourth quarter as the acquisition has closed. And we also expect that credit facility borrowings will be repaid upon the closing of anticipated secured loans on the UK industrial portfolio in the fourth quarter which Mike will discuss in a moment.
Finally, we are not giving guidance today for 2019, but let me offer a few thoughts on how we're thinking about our capital plans for next year. Given the favorable outlook for industrial development opportunities, we currently assume that development starts could continue at roughly the same pace as this year. Capital recycling from sales of both office and industrial assets could be available to fund at least half the starts. Also anticipating that we will maintain our dividend policy of distributing between 75% and 85% of our AFFO, retained cash from operations could also be available to fund up to 15% of our development spend.
We already plan to make acquisitions that are tax-efficient as a result of 1031 exchanges and where the expected returns exceed other uses of our capital. As a result, acquisitions are likely to be substantially lower in 2019. We believe our capital plan will allow us to fund our development pipeline, which provides attractive returns relative to our cost of capital.
With that I will turn it over to Mike.
Michael Hagan -- Executive Vice President and Chief Investment Officer
Thanks, Chris. We have been very active executing on our capital recycling plan. We continue with the disposition of our suburban office portfolio by closing on the sale of our Arizona office portfolio. This portfolio consisted of 806,000 square feet of Class A 100% leased assets. The sale price was $255 million with the cap rate in the low 6s. A taxable gain of $101 million would have been realized if the proceeds have not been reinvested through 1031 activity.
Our guidance for 2018 was sales of $700 million to $900 million. Year-to-date we have monetized $576 million of real estate. We currently have another $217 million under contract that we expect to close prior to year end. Once these sales are completed with a few exceptions, we would have sold all of our suburban office assets. In addition to this activity, we had commenced marketing our wholly owned DC assets, two properties totaling 438,000 square feet. It is possible that one or both of these assets are sold by year end. Therefore, we are revising our sales guidance for the year to $800 million to $950 million.
As we have said in the past, our acquisition activity would be driven by reinvesting our sales proceeds in a tax-efficient manner, seeking value-add opportunities that increase our market share in target markets. To that end, during the quarter, we acquired three industrial properties totaling 1.3 million square feet in Northern New Jersey, Central New Jersey and Dallas for $101 million. The Northern New Jersey acquisition is a well located property in the Meadowlands. The 64,000 square feet infill property is currently leased to a single tenant. The lease expires in 2020 and the rental rate is conservatively 10% to 15% below today's market rents.
The Central New Jersey building is well located at Exit 10 of the New Jersey Turnpike. This 348,000 square foot building is 44% occupied with very short term leases. We have an opportunity to enhance the value of this property through selected upgrades, and we're talking to several prospects interested in leasing the entire building.
The third property we acquired is a 900,000 square foot warehouse in South Dallas. We acquired this building vacant upon completion of construction by a local developer. It is all the current, state-of-the-art features including clear height, truck court depth and trailer storage. We are marketing the space and have proposals out to users' interest and then leasing the entire building. Upon stabilization of these assets, we expect the returns to be in the mid-5s.
Subsequent to the quarter-end, we acquired in an off-market transaction a seven building warehouse portfolio totaling 1.1 million square feet in the United Kingdom for GBP111 million, at a cap rate of 5.8%. As you are aware, Liberty has been operating in the UK since the late '80s. Our primary focus has been land development where we have obtained planning consent then sold parcels for residential use and the development of office and industrial buildings.
In 2005, we joint ventured most of our office assets, so our wholly owned office portfolio at this point consist entirely of two buildings totaling 99,000 square feet. Our industrial portfolio prior to this acquisition consisted of 1.6 million square feet, 209,000 square feet we developed and 1.4 million square feet, we acquired with the Cabot acquisition in 2013. With this acquisition our industrial portfolio totals 2.7 million square feet with another 365,000 square feet in the current development pipeline, and with land either owned or controlled, which we can develop an additional 641,000 square feet.
UK industrial demand is driven by the same factors in the US. E-commerce, 3PLs and few distribution make-up most of the demand for warehouse space. The national vacancy is approximately 7% and in addition market rental rates in the UK have grown in average of 5% per year over the last five years. We have also been experiencing significant rental rate increases, and we're renewing leases at double-digit increases.
As you're probably aware, the UK debt markets provide highly attractive financing options, which can provide a hedge for currency risk. To that end, we have an executed term sheet with a life company lender for 2.9 million square feet of the portfolio -- of the industrial portfolio. The loan will be at a 50% loan to value, currently estimated to be approximately GBP137 million with a 10-year interest-only term at 125 basis points over the 10-year swap rate. We estimate the rate of closing will be 2.9%. We expect to fund this loan in the next 30 days.
As I mentioned, one of our core historic business lines in the UK has been going through the planning consent as part of the development process. This has been a very profitable business for us. We recently received planning consent to develop residential units on a new tract of land and typically we would have proceed to put improvements in and sell smaller parcels to this land to residential developers.
Given our strategic focus on our industrial platform, we have decided to sell the development rights instead. We may close this transaction as early in the fourth quarter and recorded gain at that time. As Chris mentioned, this gain is not included in our FFO guidance.
Moving on to development, which is where we concentrate the bulk of our capital. During the quarter, we delivered three buildings totaling 803,000 square feet at an investment of $52.8 million. These properties were 65% leased at quarter-end, but subsequent leasing has increased the occupancy to 74%. The expected stabilized yield on these properties is 7.5%.
We started eight projects totaling 1.8 million square feet and an investment of $179 million. Half of these projects are build-to-suits and the percent pre-leased at quarter-end to 63%. Our projected yield on these projects is 7.1%. In addition, you will notice in the supplemental package that our scheduled fourth quarter deliveries are 100% leased, with the exception of one development in the Lehigh Valley. Subsequent to quarter-end, we signed a lease for 517,000 square feet of that space, and that lease will be commencing this week.
With that, I'll turn the call back to Bill.
William Hankowsky -- President, Chief Executive Officer and Chairman of the Board
Thanks, Mike and thanks, Chris. Let me talk about the future in light of these results, our views on the industrial markets and our strategic thinking and business planning for 2019. We expect our 106 million square foot industrial platform to continue to provide exceptional opportunities for growth and value creation. Therefore, based on our annual strategic review with the Board and Management, we've made the decision to focus all our time, energy and capital solely in the industrial space.
As you're aware, we've been methodically decreasing our office investment overtime, monetizing assets in a manner that best allows us to preserve and create portfolio value. As Mike discussed, we've commenced the marketing of our two wholly owned office properties in Washington DC. These assets are highly desirable properties and we believe that can be sold either late this year or early in 2019.
With the sale of our remaining suburban office in the fourth quarter and the Washington DC assets I just mentioned, our remaining office portfolio will consist of about 4.5 million square feet. Three-quarters of this platform is owned in joint ventures in which Liberty holds minority interest and they are governed by the respective venture agreements. These are high-quality assets located in Washington, Philadelphia and the United Kingdom.
As a result, on a pro forma basis, our office platform would represent approximately 9.6% of our NOI that would consist primarily of approximately $700 million to $800 million of high quality urban assets in Philadelphia. Specifically, the Comcast Center, the Comcast Technology Center, which are the most valuable properties in the Philadelphia metro, a high quality medical office property in Center City, Philadelphia with a long term lease to a major health system and 720,000 square feet of cutting edge office properties at the Philadelphia Navy Yard.
As you saw, with the sales of five Crescent Drive at the Navy Yard, and our Arizona office portfolio, we already begun monetizing our higher quality assets achieving significant gains and demonstrating the value we've created. Going forward, we plan to monetize all of these remaining office assets in a thoughtful, balanced approach based on the following principles.
One, sales will be consistent with our annual capital plan and proceeds will be allocated primarily to industrial development, which is providing attractive returns relative to our cost of capital in virtually all of our markets, and to a significantly lesser extent to select industrial acquisitions. Two, the sales will be based on maximizing real estate values for these assets and being opportunistic. This means, having the right real estate decisions shape our timing. We also strive to reserve capital by being tax-efficient whenever possible. Three, we plan to include on our annual asset sales program, the sale of industrial assets. Given current industrial valuations, this will allow us to both prove and harvest value opportunistically. These sales will be the second source of capital for our industrial development.
We expect aggregate office and industrial sales in the range of about $250 million to $400 million per year for the next several years. There is activity, we will be completing in our office portfolio. These activities include the sale of the remaining parcels in Camden and the completion of development of the Comcast Technology Center in 2019. At the Navy Yard, where our planning and development have contributed to the creation of a thriving new commercial sub-market in Philadelphia, we will complete our final office development project starting in the third quarter and delivering in 2020.
We will continue to lease and operate our million square foot portfolio here, while working with PIDC on an orderly transition. We are committed to the right long term strategy for the business, which we believe is a 100% focus in industrial real estate. So we will not be initiating any office developments on a go-forward basis. We believe this strategy will best position us to take advantage at the outstanding industrial portfolio we've built, while focusing future capital deployment in the most attractive risk-adjusted asset class.
We are focused on closing our GAAP to NAV and recognize that optimizing our allocation of capital requires flexibility as public and private markets fluctuate. We expect this activity and the capital activities we initiated in the 2018 will be somewhat dilutive to earnings in 2019 at much less than previous years. And we expect that when this activity is absorbed, we'll be in a position to grow FFO. The impact on AFFO however has been less dilutive, as we've transitioned our portfolio to a lower CapEx industrial assets, and we're pleased with the progress toward restoring dividend growth. On our fourth quarter earnings call, we'll provide a specific guidance and details regarding how this will get executed in 2019.
And with that, I'll now open it for questions.
Questions and Answers:
Operator
(Operator Instructions) Your first question comes from Craig Mailman with KeyBanc. Your line is open.
Craig Mailman -- KeyBanc Capital Markets -- Analyst
Hey, good morning, everyone. Bill, thanks for the update on kind of how you guys are thinking about dispos in '19, just curious as you guys look to prune the industrial portfolio, sort of, what's the criteria you are going to be using? Is it, may be prune some single tenant assets, any geographies? I just kind of curious, any color you can put around that.
William Hankowsky -- President, Chief Executive Officer and Chairman of the Board
Yeah. I think it'll be a combination of factors to be quite candid. And we've -- we had literally -- had a series of meetings on this the last couple of weeks, market-by-market. So you could have a situation, which I would call sort of optimizing value. It's a great asset, there is -- you could keep it long term, but you've got a unique leasing situation, you've just signed lease and it might make sense to harvest it. You could have a situation where there is a couple of assets in a sub-market that candidly long term, you don't want to be in that sub-market and it might make sense to sell those.
You could have a situation where -- and these could be across the portfolio, so I don't think we're talking about exiting a market, that's not what we're talking about. What we're talking about is going across the portfolio and some combination of assets we don't want to hold long term by location, age, characteristics and probably a bit of value harvesting where it's just an optimum time to take chips off the table.
Craig Mailman -- KeyBanc Capital Markets -- Analyst
And you had mentioned you kind of want to plough a lot of this back in to developments, these and some of the office sales, you guys are talking about in '19 versus more acquisitions. I mean are you going to -- how do you get around the tax issues, kind of assume some of these industrial assets are pretty good gains and even some of the developments you guys had in Philly and elsewhere.
William Hankowsky -- President, Chief Executive Officer and Chairman of the Board
Yeah. Yeah. You've hit on one of the issues we have. It's a balancing act. You are absolutely correct. So we're going to be looking at, I mean the number one place where obviously we've had tremendous success, I mean, we're now up to, I think there are 30 buildings now in the industrial -- in the development pipeline and it's north of $900 million of investment. I mean, it's a great time to be in that business. And as Mike walked you through, and I mean it's well leased, it's actually the highest pre-leasing we've had in while for the pipeline.
And so that's the first place you want to go, but there is this tax efficiency issue. Some of it we can absorb in the dividend, but not all of it. So we're going to be sort of thinking about that very thoughtfully, and occasionally we are able to buy a building that's in development in a market. So to some extent it's -- we can be tax efficient and yet pickup the development property in the market. So that's -- there was one in Dallas this quarter. So it's going to be very thoughtful. But the bottom line is that we don't think we need to do anywhere near the level of sales scale that we've done and therefore we won't have a bigger tax issue to deal with.
Craig Mailman -- KeyBanc Capital Markets -- Analyst
Okay. And then just, on some of the JVs, are there any mechanisms in place that make it difficult to unwind these, maybe Comcast in particular?
William Hankowsky -- President, Chief Executive Officer and Chairman of the Board
Well, each agreement has specifics that I'm not going to just -- like I walk through on this call, everyone on all the legalities, but each one, but there may be a lockout period, vis-a-vis some of them. There may be provisions about how you, the mechanisms that go back and forth, but look, I don't think we're worried about any of that. These are valuable assets, they're throwing off good returns. And we have good relationships with our partners, and when time is appropriate, actions are going to be taken. So it doesn't worry us, and I don't -- candidly, I don't think it should worry shareholders. I think, it will work out when it's supposed to work out.
Craig Mailman -- KeyBanc Capital Markets -- Analyst
And then just last one, you kind of mentioned, you guys are still very focused on closing the NAV gap here. And you guys are clearly at the widest at least on my numbers, but you're at the same time still talking about some FFO dilution in '19 related to sales, which has been sort of a consistent theme here. I guess, just at the Board level kind of what are the conversations going on really about maximizing or narrowing the NAV gap that goes beyond, just the continued execution of the plan that you guys have kind of effectuated here in the last couple of years.
William Hankowsky -- President, Chief Executive Officer and Chairman of the Board
Yeah. So just a couple of comments on that question. So one is, you would have a somewhat dilutive effect in '19 regardless of the fact that we've made the strategic decision, just be based on the basis of what Mike talked about which is that we've actually ramped up fairly significantly our dispositions in calendar '18. So we've --adding the DC assets as well as all the suburban product, I mean it's $800 million to $950 million. These are big numbers, which obviously have an impact on '19.
Secondly, as we've pointed out, though the impact is nowhere near as meaningful on an AFFO basis. And then you can see that actually in this supplemental package, when you look at the amount of transaction cost in CapEx that our industrial portfolio requires, it's just different. And therefore we're throwing off a lot more cash as well as all the bumps that are hindrance, et cetera, et cetera. So we feel very good about that as we look at '19. We have nothing to announce today, but we feel good about where AFFO is, and that could lead us to some thoughts.
With regard to the Board, as I mentioned, we have a strategy in place and annually we do a pretty exhaustive review of how does that all feel and where do we think that's going. And are there any adjustments we should make, and I would say that with regard to that, that was a absolute key ingredient vis-a-vis the decision to put ourselves on a pure play path and stop any future office development. Number one.
Number two is, we are always going to be alert to what's out there and how things are going. And we do think that this -- I mean we do think we have a terrific industrial platform. And we think our job is to operate it as effectively as we can and to grow it as effectively as we can and let the markets judge from there. And that's where our head is right now.
Craig Mailman -- KeyBanc Capital Markets -- Analyst
All right. Great. Thanks guys.
William Hankowsky -- President, Chief Executive Officer and Chairman of the Board
Thank you.
Operator
Your next question comes from John Guinee with Stifel. Your line is open.
John Guinee -- Stifel Nicolaus -- Analyst
Great. Talk a little bit about how you're going to handle this vis-a-vis your land bank. What do you think is an optimal strategy in terms of inventorying land?
William Hankowsky -- President, Chief Executive Officer and Chairman of the Board
Yeah. It's a good -- it's a great question in this environment, John. So obviously we are on the one hand, putting lots of land into production with eight starts in the quarter. On the other hand, there are absolutely places where you're land short. In other words, if we wanted to put another building in production, and certain markets we just don't have land. So we're also sort of looking for some, but there is -- our thought process would be to try to lower the absolute valuable land bank on a go-forward basis. And there is a couple of things we're working on that might be helpful in that regard.
But it -- and as you -- I mean, part of this is obviously, the big question which is, how much longer does the cycle go and not getting yourself caught with too many non-performing assets on the balance sheet. So we've got, I think, if I throw in JV land, it's about 1,100 acres or something like that 1,200 [ph] acres. And as I said, some markets we're fine, John and others we'll be looking, but it will be very selective. And one thing we're not in the mood to do right now is buy land that has a multi-year build-out. So it's much more of what we tend to talk around here is just in time land, something that would go into production within kind of a year or maybe you know there might be some permitting and planning consent, things like that. So, maybe it's 18 months, but very near term in its usability.
John Guinee -- Stifel Nicolaus -- Analyst
Great. Okay. Thank you.
William Hankowsky -- President, Chief Executive Officer and Chairman of the Board
Thank you.
Operator
Your next question comes from Alexander Goldfarb with Sandler O'Neill. Your line is open.
Alexander Goldfarb -- Sandler O'Neill -- Analyst
Hey, good morning. So, just a few questions here. First, Bill on the disposition, certainly appreciate that you guys are finally decided to fully exit office. But it sounds like it's going to linger over time as opposed to fully complete in 2019. So, just given that it still, yeah, it looks like $54 million of total NOI, which is still a big number. What are the thoughts instead of having investors go through more years of sort of flat earnings to just fully executing it in 2019, and that way, there is a base year of 2019, were then, all you have to do is just talk about the industrial stuff versus talking about future dispositions that dilute earnings?
William Hankowsky -- President, Chief Executive Officer and Chairman of the Board
Yeah. So I don't think the way you projected is the way it would play, Alex. So that's the most fundamental distinction. So as I mentioned a moment ago, obviously going from '18 to '19, given the sales activity in '18, you're going to have an impact on '19, that's kind of a given. But if we now say to ourselves, look we have this terrific portfolio of office assets. There's no urgency in terms of having to sell them, and we can -- and affect somewhat match fund, our development pipeline needs, then our expectation would be actually that FFO would grow like 2021-'22. Not feel an impact of dilution by this activity at all.
Because what you would be doing is, you would be selling and then you would be investing in the development pipeline that would be yielding new earnings. I mean, think of it as almost a production line. So we actually don't think that that's the way this would play over time. You'd have, next year is one year because of how much we did this year, but that is not how we play on a go-forward basis.
Alexander Goldfarb -- Sandler O'Neill -- Analyst
So you do subject to economic risk, as far as how long the cycle goes and timing of when it sells versus what the economy is like when you are recycling those proceeds.
William Hankowsky -- President, Chief Executive Officer and Chairman of the Board
I've faced that with the industrial business as well as the entire company, right? But think about what we've got here. You have assets whose average age is like five to six years old. You've assets whose average long term lease term is almost 13 years. You have that -- when you think of the credit quality of many of the people in these assets, I think we're OK, thinking that these assets will retain value overtime.
Alexander Goldfarb -- Sandler O'Neill -- Analyst
Okay. And then the second question is, where do we stand as far as the Comcast overruns? And then second, just given the back-to-back Comcast and Camden, which certainly surprise folks on last quarter's call, what changes have you guys made, now that you've had sort of 90 days with that out there? What internal changes have you guys made in reflection of both of these events?
William Hankowsky -- President, Chief Executive Officer and Chairman of the Board
Well, several questions here which is OK, let me try to sort through them. With regard to the Comcast tower, the facts are, on the one hand roughly where they have been, but obviously updated. And what I mean by that is, there continues to be completion of the project. The office building is effectively done from our perspective. Comcast has been moving in an orderly way and our north of a thousand people in the building. You might have seen that was a public opening of the lobby just in the last week. And more folks will be moving in through the rest of calendar '18. So that's functioning, and obviously rent paying, et cetera. So it's off the pipeline.
We are -- the execution of completing the hotel and the lobby entrance and other aspects of the building continues. So more is done today than last time we spoke. We remain in dialog with the contractor in terms of where things stand and where things might go. There is a mediation mechanism that might be utilized by the parties. But we're -- that's where we are. I don't have any further information for you at this time.
With regard to the activity that occurred, I think that -- we are all over that project, and what happened on that project is, and I don't want to get into it in great detail, but I do -- we do not believe that anything that happened on the Comcast project was a result of the Liberty team not doing their job. In fact, they've done an incredible job to deliver an incredible product, which is something everybody will be proud of, customer, us, the City of Philadelphia, et cetera.
And the Camden situation, again is a situation which was driven fundamentally by timing and expectation and there continues to be parties who may be interested in land there. And we're going to continue to execute against that. So that's where we stand.
Alexander Goldfarb -- Sandler O'Neill -- Analyst
But what about changes internally as far as capital allocation and processes with given these two back-to-back?
William Hankowsky -- President, Chief Executive Officer and Chairman of the Board
Alex, I don't mean to be, you did listen to my remarks, right? We are out of the office business and into entirety, so capital allocation has been decided.
Alexander Goldfarb -- Sandler O'Neill -- Analyst
Okay. Fair enough. Thank you, Bill.
Operator
Your next question comes from Karin Ford with MUFG [ph] Securities. Your line is open.
Karin Ford -- Mitsubishi UFG Securities -- Analyst
Hi, good morning. You do have a medium to long term time horizon. It sounds like for the asset sales, several years here. And you also have a desire to primarily to deploy into development. If, as you mentioned the development cycle, if that starts to turn before you're done selling. Can you just talk about what plans would be going forward with that?
William Hankowsky -- President, Chief Executive Officer and Chairman of the Board
Sure. It would probably vary. We might decide to sell regardless and simply complete the process. And that could result in -- there's lots of things you do with the capital, maybe pay down debt, maybe you'd might generate a special dividend. I mean, you would see what would happen. But you're asking a good question in the sense that the sales process is in extremely linked to the pipeline. We think that there's good clarity and transparency on that for the next couple of years, just given where the cycle is. On the industrial side, i.e., there will be a demand for capital and therefore, feeding that would make sense.
But, and by the way, the pace of this, we'll be opportunistic. So if there is -- if we can, we can build a little bit more buildings next year, we may sell somewhat more, two years from now. So, but we will continue the path there. They are related, they make sense to be related, it's a good plan going forward, but we're not going to be married to something, we'll be agile and opportunistic.
Karin Ford -- Mitsubishi UFG Securities -- Analyst
Great. Makes sense. My second question is, I think for Chris. I'm just trying to understand the 3Q '18 industrial, same store numbers. It did decelerate from last quarter, which we talked about, I think on the last call, some of that related to occupancy, but you did still have positive rent growth trends. If I'm doing my math right, it looks like same store cash rental revenue grew about 3% this quarter versus about 5.5% last quarter. 90 basis points of that is the occupancy comp, but what do you think comprises the remaining 60 basis point slowdown?
Christopher Papa -- Executive Vice President and Chief Financial Officer
Well, we anticipated that we would see somewhat of a slowdown due to a couple of move-out. So we had some downtime in the couple of assets, namely in Washington. I believe it was the UK. We're able to offset some of that by some early renewals. We had some other extensions that come up during the quarter. So we were able to offset most of what we anticipated there. We were actually able to beat our own forecast.
If you break down the same store growth on a cash basis to 4.1% in the quarter, effectively 2.4% of that represents the annual bumps that you'll see in the portfolio. About 1.5% on a cash basis was rental increases on turnover, then you had about 10 basis points of occupancy left. So that essentially accounted for the makeup of the change quarter-over-quarter.
Karin Ford -- Mitsubishi UFG Securities -- Analyst
Great. And then my last question just on the industrial acquisition in the UK. How are you thinking about possible risk about under Brexit? And how big would you want your industrial exposure to be in the UK?
William Hankowsky -- President, Chief Executive Officer and Chairman of the Board
As Mike walked you through it, I mean, we now have, between that acquisition, what we've developed, what we acquired earlier and what's conceivably able to be built. We'd have about 3.7 million square feet there. It's a -- part of what we have learned in 30 years in the UK is, it is very difficult to develop there. Our planning consent regardless of the product type is just difficult, which provides candidly a tremendous damper on supply. So markets remain generally always tight.
It's a robust economy, there is actually some aspects to which Brexit may actually increase the need for warehousing space, because to the degree there is any potential slowdown in how trade could get accommodated back and forth, you may need to have actually higher inventories than you have today. There's a little bit of that seeming that happened in the market.
But as Mike indicated, when you think of the core drivers of that demand. Consumer e-commerce, where the e-commerce level in the UK is twice, what it is in the US as a percent of retail sales, food, 3PLs, all of that demand is just there. So we are very comfortable and it's a dynamic strong industrial market. In terms of scale, we view it as one as just like any other market. We're not trying to be the biggest there -- we think, but on the other hand, it's a big market. So we clearly could grow this portfolio and we'll do that as it makes sense going forward.
Karin Ford -- Mitsubishi UFG Securities -- Analyst
Great. Thank you for the color.
William Hankowsky -- President, Chief Executive Officer and Chairman of the Board
Thanks.
Operator
Your next question comes from Michael Bilerman with Citi. Your line is open.
Michael Bilerman -- Citigroup -- Analyst
Hey, good morning. It's Michael, I'm here with Manny. Bill, just to start -- the development start yields came down 50 basis points on the high-end page 36 in the sup, so 25 basis points at the midpoint. Can you talk about what sort of driving the decreased yields and what the outlook is for the, call it, starts for 2019 in terms of yield expectations?
William Hankowsky -- President, Chief Executive Officer and Chairman of the Board
Yeah. There's a little bit, Mike -- part of it is mix. So in terms of our general value creation proposition it remains actually fairly constant, which is to say, you're doing 125 basis point, 150 basis point or better basis point spread between what you're building at, and what you could sell at in the markets we're in. So there's a pretty decent spread that can increase. So it's a question of -- is it -- have we added a few more buildings in Southern California versus buildings in Orlando. And so -- just the -- the yield numbers are like that.
One other thing, I'd point out and it's evidence this quarter as it has generally most quarters, when you look at our deliveries versus our starts, the deliveries tend to get delivered at a higher yield than the starts. And that's as, I just always remind folks that part of our underwriting is a 12-month lease-up period for the inventory product and to degree we achieve that sooner, these yields would go up. So it is -- I don't want to bet on, I don't want to predict it, but I think it is probable that you're going to actually see deliveries higher than the range we gave you for starts, just as a reference point.
Going into '19, Michael, we all know what's out there. We got somewhat rising construction costs, you've clearly have increased costs for land. And in land, I'm covering both raw land, the permitting approval process, it might be site work all of that just because the easy land sites have been done. I am sure you're dealing with somewhat harder land sites, but of course as we also all know, rent has basically kept pace with that. So I would anticipate, again not giving guide, I would anticipate our yields in '19 would be probably where we think they are right now.
Michael Bilerman -- Citigroup -- Analyst
Okay. And then when you talked about the remaining office sales, you talked about $700 million to $800 million of remaining urban, was that just your share for the joint ventures or in totality for both the wholly owned as well as the joint venture which obviously makes up three-fourths of the total?
William Hankowsky -- President, Chief Executive Officer and Chairman of the Board
It's our share. It's our share, Michael.
Christopher Papa -- Executive Vice President and Chief Financial Officer
Yeah. It's the wholly owned plus our share of the JVs.
Michael Bilerman -- Citigroup -- Analyst
Right. So as you think about that $700 million to $800 million, then I can appreciate your comments, clearly, a quality of that office product that remains is very different from a lot of the suburban higher cap rate that you've been selling. And so therefore the dilution in terms of reinvesting those proceeds, should be lower than what it was over the course of the past few years, but there is a timing mismatch, right. And that's what I'd like to better understand, because as you take those proceeds and you reinvest in development, you lose the NOI immediately from selling income producing assets, and then it's going to take some period of time, 12 months, 18 months, 24 months depending on what your lease-up is for those development income that come into play.
And so as we think about, it sounds like you want to sort of model $250 million to $300 million per year. So call it another two to three years of sales. The pick-up in FFO maybe more delayed given that mismatch between development and dispositions. Is that a fair way to think about it?
William Hankowsky -- President, Chief Executive Officer and Chairman of the Board
I think about it slightly. I understand the point, which is, logical point. But I think about it slightly differently, another way to think about it, Michael is effectively, it's a production line. So you're right, you commence products today and it may take 8 to 12 months to build it, and then maybe it takes six months to lease it and before it's income producing. So there is that pool, but to some extent, that's -- that's kind of coming off the line and that's how we're doing it.
To the degree, then we're replenishing the line by sales. I think it is what it is on a constant basis, because then they get delivered and new ones get started. So the fact that when we deliver, we tend to deliver these in the 70%, 80%, 100% leased. And in fact this quarter, four of the starts were build-to-suits, and when they get delivered, there -- there will be no downtime with them. So it's also a little bit of mix, build-to-suits back. But it's fairly a constant situation, so it's no more or less impactful that it would be on a -- just as production line.
And to degree, we match fund which is to say, not selling more than necessary to pay for it. We actually haven't put more out. And you made a terrific point at the beginning of the question, which is when you look at -- and I'm -- we are not giving cap rates on these sales, but you're absolutely right. These will be clearly much lower cap rates than you've seen historically, and that match against what the yield is in the pipeline could be, in fact attractive. It might not even be delivered.
Michael Bilerman -- Citigroup -- Analyst
Right. What I guess is -- the one, the complicating factor which we don't have all the details on is, in some cases joint venture interest could come at a discount to wholly owned valuations. And if there is any sort of triggers in the joint venture agreements that allow for a preferential majority owner to have a right to the 20%, could dilute what otherwise would have been a full building sale.
William Hankowsky -- President, Chief Executive Officer and Chairman of the Board
Yeah. Again these -- there are a series of agreements, but I would tend to say, these agreements are thoughtful agreements done by thoughtful real estate people, that provide mechanisms to provide appropriate value to each party in the JVs. And I'll just sort of leave it at that. And so I wouldn't worry too much about that.
Michael Bilerman -- Citigroup -- Analyst
Okay. Two other quick questions, Chris you mentioned Kmart, 1.3% with the majority leasing and in 2020 [ph] and that you didn't lift the same store because of that uncertainty. I assume for the fourth quarter, it will -- if indeed they reject those leases, until paying rent for the fourth quarter, it's about 25 basis points or 30 basis points impact. So, are we -- to take from that, that you would have increased same store by that amount or that effectively you reserved that amount of income in 4Q FFO. I'm just trying to better understand what's going on.
Christopher Papa -- Executive Vice President and Chief Financial Officer
Sure. If we do not have any impact from those, we were trending toward the upper end of our previous range that we provided and the range that we maintained. So we said 3.5 to 4, on a GAAP basis 4.5 to 5 on a cash basis, absent any impact from those leases we were been trending toward the upper end and we probably would have adjusted same store guidance.
However, given the fact that this could be roughly 1.3% of same store, we decided to leave it as is and I think you're correct, that affect related to the quarter itself, as it pertains to the year would be roughly a quarter of that amount.
Michael Bilerman -- Citigroup -- Analyst
And then, is there any reserve that you've put into FFO for this rent? Have you eliminated it from like if they don't -- if they don't reject those leases, should FFO will be higher. Just want to make sure I understand what is embedded in guidance?
Christopher Papa -- Executive Vice President and Chief Financial Officer
We have reserved a small amount of the straight line rent receivable, it wasn't this quarter, it was prior. So we've been essentially booking that as we've been collecting the cash. They occurrent through the end of this, of this past quarter and we could just continuing to monitor those leases, they're using the space. And is really, we have -- at this point, we don't have any indication, what their intentions are. So it's just something we'll have to continue to monitor. And if, in fact they do decide to reject the leases, we will have to just make appropriate allowances accordingly.
William Hankowsky -- President, Chief Executive Officer and Chairman of the Board
Just to amplify that Mike. 100% occupied filled with merchandise, trucks are going in and out all the time. So, but we all know what the issue is, the issue is, is that a going -- as long as it's a going concern, that warehouse is piece of their distribution system. If in fact they start bringing in business, obviously the whole thing less affected.
Michael Bilerman -- Citigroup -- Analyst
Last question, Bill, just in terms of the UK and I appreciate you've been there for 30 years. You've also been in the office business for a very long time and you made the decision to strategically, exit that to focus on industrial. You're not -- you're not a global landlord, you have no desire to be a global landlord. You've created value in the UK, it's only 2.5% maybe 3% even if you build out what's going on.
Is that really necessary to have within the company, if you're not going to compete globally. And being honed in on this, industrial focus, maybe just being a US focused centric landlord. And I recognize you can get good financing over there and you're -- you got 50% proceeds and it's a 2.9%. And I get that, but I think about the comment you made about time, energy, efficiency right in terms of where you want to devote your time. How does the UK make any bit of sense if you're not going to be global and really try to focus in on the US.
William Hankowsky -- President, Chief Executive Officer and Chairman of the Board
Yeah. So I think your question would be relevant, if it was new to us, because then you'd have to devote time to understand it. But I think as you said in your question, I mean we've got a 30 year plus long experience there. So we understand how to do business there, we have brand identity there. As Mike said, the deal with -- was brought to us was an off-market deal because people know we're there. We know how to get planning consent, we understand the process extremely well. We have developed there, so we totally know how to build and do product there.
There is absolutely a cross-sell opportunity to our existing customer base. In fact, several of our US customers lease space from us in the UK. So we think, it's -- there is no extraordinary need for extra time. There is no extraordinary learning curve. And in fact what we're actually doing is capitalizing on the experience. We think it makes total sense. It's not a distraction, it's part of the core business.
Michael Bilerman -- Citigroup -- Analyst
Right. I just view -- more so you could have said the same thing about all the office stuff that you're eventually exiting. You know it well, you know the markets. So I can dial back to a lot of these conference calls where you talked to strategically about your holdings, Navy Yard, the stuff you developed and ultimately making the decision to now complete the exit over time next couple of years, the office business. And so that was really the -- compare and contrast I was making relative to the UK, which I get it, you have experienced -- you have knowledge. I'm just not sure that you're getting the value for a relatively small position in the UK, relative to the distraction, that there maybe for investors. So --
William Hankowsky -- President, Chief Executive Officer and Chairman of the Board
Well, I would hope that people wouldn't find it quote unquote, a distraction. If you look at the rent gains that have occurred in that portfolio as we've rolled tenants over the last 18 months. I mean you're talking 12%,15%.20% rent rolls. This is an extremely attractive place to be in the industrial business, it is extremely transferable, our skill set. So we're taking both what we know about industrial and then applying it to what we know about the UK, not a distraction at all.
Michael Bilerman -- Citigroup -- Analyst
Okay. Thank you.
William Hankowsky -- President, Chief Executive Officer and Chairman of the Board
Thank you.
Operator
Your next question comes from the line of Eric Frankel with Green Street Advisors. Your line is open.
Eric Frankel -- Green Street Advisors -- Analyst
Thank you. I think most of my questions have generally been asked, but just on the Kmart lease, Chris, do you think that lease is below or above market in terms of rental rate?
Michael Hagan -- Executive Vice President and Chief Investment Officer
Hey Eric, it's Mike Hagan. I think that rent leases about that market right now. I don't think you're going to see an upswing or downswing if we had to release that space.
Eric Frankel -- Green Street Advisors -- Analyst
Okay. Thanks. And I obviously understood -- all the related issues in terms of recycling capital from your disposition, but any concerns that says it's such a competitive market in terms of investing in the US, the timing that's an issue when you're trying to reinvest the disposition proceeds that you're stretching little bit on acquisition prices. It's obviously hard to tell if you're underpaying, overpaying, but from what we've heard, you guys are fairly aggressive in a lot of the markets in which you're active at this point?
William Hankowsky -- President, Chief Executive Officer and Chairman of the Board
Yes. I think, Eric, this is in part a function of scale and volume. So clearly in a year, we're selling $800 million to $950 million, which is our revised disposition guidance. We are generating fairly large numbers of capital gains and puts us in a position where it to degree, we want to be tax efficient. That's a lot of wood to chop. In a year, we're going to significantly cut that number down, maybe by two-thirds and you'll have much less that you're going to have to deal with.
I think the ability to be quite selective, and I think Mike and his team have done extraordinary job finding opportunity of value that opportunity and some of that as you, if you look at the previous quarter, where either or a lease can roll. We can put somebody in at market rents, where we compiled building. So we don't need to find a lot of them for that, want to deal with the tax-efficiency aspect. Number two, to do them in a way that is that makes sense for the use of that capital.
Eric Frankel -- Green Street Advisors -- Analyst
Okay. And then just to clarify this $800 million estimated value for your pro rata office, the CBD office. Can you just clarify what that includes. That includes the DC office asset that you tend to sell in the near future.
William Hankowsky -- President, Chief Executive Officer and Chairman of the Board
No.
Eric Frankel -- Green Street Advisors -- Analyst
Or is that just Philadelphia and your --
William Hankowsky -- President, Chief Executive Officer and Chairman of the Board
Yeah. That's fine. It's fundamentally Philadelphia. It's fundamentally, our Philadelphia assets, it's not the DC asset.
Eric Frankel -- Green Street Advisors -- Analyst
Okay. Sounds good. Thank you.
William Hankowsky -- President, Chief Executive Officer and Chairman of the Board
Thank you.
Operator
Your next question comes from the line of Blaine Heck with Wells Fargo. Your line is open.
Blaine Heck -- Wells Fargo -- Analyst
Thanks, good morning, Bill or Mike. Sorry if I missed this, but it looks like you guys have a big building coming into service in the fourth quarter here that's got no pre-leasing, in Mertztown, PA. Can you talk about the situation there, maybe any prospects you have and whether the lack of leasing thus far is a function of the location, the size or just competition within the sub-market. Just a little color on that would be helpful.
Christopher Papa -- Executive Vice President and Chief Financial Officer
Blaine, we actually executed a lease for 517,000 square feet of that space and that lease commences next week. And there's prospects for the balance of it that we're very comfortable with.
Blaine Heck -- Wells Fargo -- Analyst
Okay, sounds good. But for the balance we should expect that to deliver vacant in 4Q and provide a little bit of a headwind to occupancy?
William Hankowsky -- President, Chief Executive Officer and Chairman of the Board
I think that's a conservative way to do it. There's opportunities leased the balance of the space and it very well could be leased in the fourth quarter?
Blaine Heck -- Wells Fargo -- Analyst
Okay, fair enough. Sounds good. And just thinking about dispositions and the increasing guidance. We've seen a decent jump in the tenure here recently. It's down today but is it too recent for you guys to have any evidence of how it's affecting things on the ground or do you expect any trouble getting the dispositions if the rise continues, expect to see any change in investor's mindset?
Christopher Papa -- Executive Vice President and Chief Financial Officer
Blaine, I've always thought that the interest rates are sensitivity in dispositions right now as it relates to suburban assets product that's multi-tenanted, short-term leases. There's very high correlation. I think the closer you get to core longer term leases, credit tenants, they're still market out there for that. And while they're -- there's less -- there's some sensitivity but there is less sensitivity to it. And I believe, if you look at the remaining office portfolio that we had, it's going to fall more into that latter bucket. So I'm not necessarily worried about small move in interest rates and being able to execute those sales.
Blaine Heck -- Wells Fargo -- Analyst
Makes sense.
Christopher Papa -- Executive Vice President and Chief Financial Officer
And in terms of the rate, a view for the year, Mike. I'm trying to memorize it, 217 is under contract or correct. So it's under contract and then you are actively marketing the DC one. So, you know, yeah.
Blaine Heck -- Wells Fargo -- Analyst
Got it. Thanks, guys.
William Hankowsky -- President, Chief Executive Officer and Chairman of the Board
We feel pretty good about it. Yeah.
Operator
(Operator Instructions) Your next question comes from John Guinee with Stifel. Your line is open.
John Guinee -- Stifel Nicolaus -- Analyst
Great. Talk a little bit about sort of the rightsizing that you've been alluding to in terms of possible severance costs et cetera?
William Hankowsky -- President, Chief Executive Officer and Chairman of the Board
Yeah. It's probably, I would think of it is probably a couple of pennies, John.
John Guinee -- Stifel Nicolaus -- Analyst
In the fourth quarter?
William Hankowsky -- President, Chief Executive Officer and Chairman of the Board
That's right.
John Guinee -- Stifel Nicolaus -- Analyst
Great. Thank you.
William Hankowsky -- President, Chief Executive Officer and Chairman of the Board
Thank you.
Operator
There are no further questions. At this time, I turn the call back over to the presenters.
William Hankowsky -- President, Chief Executive Officer and Chairman of the Board
Well, thanks everybody for listening in. Appreciate doing a little bit earlier in the morning, and talk to you at NAREIT.
Operator
This concludes today's conference call. You may now disconnect.
Duration: 58 minutes
Call participants:
Jeanne Leonard -- Vice President of Corporate Communications and Investor Relations
William Hankowsky -- President, Chief Executive Officer and Chairman of the Board
Christopher Papa -- Executive Vice President and Chief Financial Officer
Michael Hagan -- Executive Vice President and Chief Investment Officer
Craig Mailman -- KeyBanc Capital Markets -- Analyst
John Guinee -- Stifel Nicolaus -- Analyst
Alexander Goldfarb -- Sandler O'Neill -- Analyst
Karin Ford -- Mitsubishi UFG Securities -- Analyst
Michael Bilerman -- Citigroup -- Analyst
Eric Frankel -- Green Street Advisors -- Analyst
Blaine Heck -- Wells Fargo -- Analyst
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