On Nov 28, we downgraded our long-term recommendation on Liberty Property Trust (LRY) from Neutral to Underperform following disappointing third-quarter 2013 results and a guidance cut. In addition, continued volatility in the office sector with job cuts pose a menace to the company’s top-line growth.
Why the Downgrade?
Liberty Property came up with lower-than-expected third-quarter results with funds from operations(:FFO) of 57 cents per share missing the Zacks Consensus Estimate of 61 cents as well as the year-ago figure of 64 cents.
Lower-than-expected growth in the top line, Cabot buyout related expenses, share dilutions and high termination fees were major dampeners. Also, increase in operating expenses and decline in occupancy levels were the headwinds. We believe that in the backdrop of a protracted economic recovery, top-line growth would remain restrained in the coming quarters.
Currently, weak growth in jobs and persistent office space efficiency trends are still hindering the pace of growth of office sector fundamentals, thereby affecting demand for Liberty Property’s properties. Furthermore, the company’s continuous acquisition spree involves significant upfront operating expenses with limited near-term profitability. In relation to that, Liberty Property lowered its 2013 FFO per share guidance, keeping in mind the effects of the recent Cabot Fund acquisition.
Moreover, Liberty Property has a significant development pipeline ($136.2 million worth of developments in progress at the end of third-quarter 2013) that exposes it to various risks such as rising construction costs, entitlement delays and lease-ups.
Over the last 30 days, the Zacks Consensus Estimate for 2013 FFO per share remained stable at $2.50. For 2014, it moved down 3.4% to $2.57 per share. The stock currently has a Zacks Rank #3 (Hold).
Other Stocks to Consider
However, some better-ranked REIT-Equity Trust – Other stocks include National Health Investors Inc. (NHI), Getty Realty Corp. (GTY) and Sabra Health Care REIT, Inc. (SBRA). All the stocks carry a Zacks Rank #1 (Strong Buy).
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.