On Sep 24, 2013, we reinstated our long-term recommendation on Liberty Property Trust (LRY) at Neutral. The move depicts the company’s decent second-quarter results, strategic efforts to improve its core operations and a conservative balance sheet management. Yet, stiff competition, rising interest rates and a volatile office sector remain our plausible concerns.
Driven by improving market fundamentals, strong leasing and development activities, Liberty Property’s second-quarter 2013 FFO (funds from operations) per share of 66 cents surpassed the year-ago figure by 4.8%. However, it came in line with the Zacks Consensus Estimate as the positive impact was marred by a rise in operating expenses.
Nevertheless, we expect Liberty Property to benefit from its focus on metro-office, multi-tenant industrial and flex properties and markets that have strong demographic and economic fundamentals. Furthermore, with its solid portfolio repositioning program, the company is efficiently meeting the rising demand for premium quality industrial space.
In addition, this Pa.-based real estate investment trust (:REIT) aims to strengthen its balance sheet and liquidity position, which helps it fund investments. In relation to this, the recent senior notes offering and equity shares offering to finance the acquisition of the operating partnership of Cabot Industrial Value Fund III is noteworthy.
Yet, continued volatility in the office sector with job cuts and stiff competition from private and public companies remain our concerns. Also, Liberty Property’s large development pipeline and continuous acquisition spree involves significant upfront operating expenses with limited near-term profitability. Moreover, the rise in interest rates and the capital market volatility adversely affect the company’s funding expenses.
Over the last 30 days, the Zacks Consensus Estimate for 2013 FFO per share declined 1.9% to $2.59. Also, for 2014 it moved down 0.4% to $2.72 per share. The stock currently has a Zacks Rank #3 (Hold).
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Note: FFO, a widely accepted and reported measure of the performance of REITs is derived by adding depreciation, amortization and other non-cash expenses to net income.