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Liberty Property Q1 FFO a Penny Short

Zacks Equity Research

Liberty Property Trust’s (LPT) first quarter 2014 funds from operations (:FFO) of 58 cents per share fell a penny short of the Zacks Consensus Estimate and came 7 cents below the prior-year quarter figure.

Results reflect the impact of the company’s strategic shift towards the industrial portfolio from office assets and consecutive disposition of its suburban office and flex properties during December and January.

Nevertheless, total operating revenue during the quarter came in at $197.6 million, up 34.3% year over year and exceeded the Zacks Consensus Estimate of $192 million.

Quarter in Detail

Liberty accomplished lease deals for 5.3 million square feet of space. As of Mar 31, 2014, the occupancy at the in-service portfolio of Liberty – spanning 101.5 million square feet – decreased 60 basis points (bps) to 91.0% from 91.6% sequentially.

Moreover, same-store properties’ operating income declined 1.4% on a cash basis and 1.8% on a straight-line basis from the year-ago quarter.

Portfolio Restructuring Activity in Q1

During the quarter, Liberty bought 2 properties for $37.6 million. This included a 523,000 square foot distribution facility (vacant) in California's Inland Empire and a 90,000 square foot distribution facility (fully-leased) in Greenville, S.C.

On the other hand, the company carried on with its disposition activities and sold 6.6 million square feet of suburban office and flex properties (159 acres of land and 97 operating properties) in two phases.

In the first stage, which closed in Dec 2013, the company sold 49 properties and 140 acres of land aggregating 4.0 million square feet of leasable space for $367.7 million. In the final phase in Jan 2014, the company disposed the rest of the 19 acres of land and 48 properties spanning 2.6 million square feet of leasable space for $329.6 million. Apart from these, the company disposed a southern California distribution building for $5.0 million.

Among its development activities, the Comcast deal is noteworthy.  Liberty collaborated with Comcast Corporation (CMCSA) for a 1.5 million square foot office and hotel property in Philadelphia. The joint venture, in which Liberty has a 20% stake, will develop this property with a projected investment of $900 million. This development is expected to start in summer 2014.


Liberty exited first-quarter 2014 with cash and cash equivalents of $370.6 million, up from $163.4 million as of Dec 31, 2013. Notably, the company replaced its existing $500 million credit facility due Nov 2015 with a new $800 million facility that matures in Mar 2018 (has options to extend for another year). This helped the company in managing its financial flexibility and lowering the cost of borrowing.

2014 Outlook

Liberty expects its 2014 FFO per share in the range of $2.45 – $2.55. The Zacks Consensus Estimate of $2.52 per share also falls within this range.

Our Take

While the earnings miss is definitely not encouraging, we believe this real estate investment trust (:REIT) has the potential to excel in the years ahead. The company’s repositioning efforts through strategic acquisitions, JV investments and dispositions would help it ride on the growth trajectory.

In particular, the Cabot buyout accomplishment and the Comcast deal are expected to enhance the company’s growth prospects. It also lowered its cost of borrowing with a new, expanded line of credit.  Furthermore, the improving U.S. industrial market positions Liberty Property well for future growth.

Yet, the near-term dilution effect of such repositioning moves is unavoidable while an expected rise in interest rates in the long term adds to the woes of this Zacks Rank #3 (Hold) stock.

We now look forward to the results of other REITs such as Mack-Cali Realty Corp. (CLI) and Ventas, Inc. (VTR) that are scheduled to report this week.

Note: FFO, a widely used metric to gauge the performance of REITs, are obtained after adding depreciation and amortization and other non-cash expenses to net income.

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