December 29, 2014 Liberty Property Trust Current Recommendation SUMMARY DATA NEUTRAL Prior Recommendation Underperform Date of Last Change 01/27/2014 Current Price (12/26/14) $37.95 Target Price $40.00 52-Week High $40.08 52-Week Low $32.77 One-Year Return (%) 15.36 Beta 1.04 Average Daily Volume (sh) 757,546 Shares Outstanding (mil) 149 Market Capitalization ($mil) $5,655 Short Interest Ratio (days) 3.43 Institutional Ownership (%) N/A Insider Ownership (%) 2 (LPT-NYSE) SUMMARY Liberty Property s third-quarter 2014 FFO per share beat both the Zacks Consensus Estimate and the prior-year quarter figure. Results reflect higher operating income that was, in turn, driven by a rise in rental revenues and higher operating expense reimbursement. Going forward, we believe that the company s repositioning efforts and divestiture of non-core assets would help it ride on the growth trajectory. Furthermore, the improving U.S. industrial market positions Liberty Property well for future growth. Yet, the company s large construction pipeline increases operational risks. Also, sluggish office space demand due to adequate space availability exerts pressure on rent and occupancies. Moreover, an anticipated rise in interest rates remains a concern. Risk Level * Low, Type of Stock Large-Blend Industry Reit-Eqty Trust Zacks Industry Rank * 58 out of 267 ZACKS CONSENSUS ESTIMATES Revenue Estimates (In millions of $) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) Annual Cash Dividend $1.90 Dividend Yield (%) 5.01 5-Yr. Historical Growth Rates Sales (%) -0.2 Earnings Per Share (%) -2.9 Dividend (%) 0.0 P/FFO using TTM FFO/ Share 15.6 P/FFO using 2014 Estimate 15.4 P/FFO using 2015 Estimate 14.5 Zacks Rank *: Short Term 1 3 months outlook 3 - Hold * Definition / Disclosure on last page 2012 167 A 164 A 168 A 144 A 643 A 2013 147 A 151 A 155 A 192 A 645 A 2014 198 A 193 A 198 A 202 E 791 E 2015 810 E Funds From Operations (FFO) per Share (Reported FFO) Q1 Q2 Q3 Q4 Year (Mar) (Jun) (Sep) (Dec) (Dec) 2012 $0.68 A $0.63 A $0.64 A $0.63 A $2.58 A 2013 $0.65 A $0.66 A $0.57 A $0.63 A $2.51 A 2014 $0.58 A $0.59 A $0.64 A $0.65 E $2.46 E 2015 $2.61 E Projected FFO/Share Growth - Next 5 Years % 6 2014 Zacks Investment Research, All Rights reserved. www.zacks.com 10 S. Riverside Plaza, Chicago IL 60606
OVERVIEW Based in Pennsylvania, Liberty Property Trust is one of the major real estate investment trusts (REIT) that provides leasing, property management, development, construction management, design management and related services for a portfolio of industrial and office properties. As of Sep 30, 2014, Liberty Property had 492 industrial and 187 office properties (totaling 91.4 million square feet) in operation, 22 properties under development and 1,424 acres of developable land. Also, the company had 48 industrial and 34 office properties (totaling 14.1 million square feet) in operation and 3 assets under development that are owned through joint ventures (JVs). In addition, as of that date, Liberty Property had an ownership interest through unconsolidated JVs in 431 acres of developable land for commercial use. REASONS TO BUY Liberty Property specifically focuses on metro-office, multi-tenant industrial and flex properties in markets that have strong demographic and economic fundamentals. Benefiting from this, the company has been experiencing a decent rise in total revenue over the past quarters. Specifically, the company boasts diversified office properties mainly in Metro Philadelphia, Washington D.C. and certain Sunbelt cities and has industrial tenant base nationally. Its tenants include several industryleading companies, thereby promising steady rental revenue, going forward. Amid growing demand for premium quality industrial space, Liberty Property is boosting the quality of its portfolio through repositioning activities. During the quarter, the company bought one distribution building at Charlotte, NC for $6.8 million. On the construction front, the company started development of 8 wholly-owned properties for a total estimated investment of $157.9 million, majority of which were industrial/distribution buildings. In fact, as of Sep 30, 2014, 120 million square feet were under construction in 24 Industrial markets, of which 40% is pre-leased. With the booming U.S. industrial market and growing demand for industrial properties, we believe that these initiatives are poised to strengthen the company s portfolio in upscale locations, going forward. Further, Liberty Property has been aiming at divesting its non-core properties including some suburban office properties and using the dry powder for gaining the preferred properties across the U.S. Moreover, fourth-quarter dispositions till Dec 16 amounted to $70.7 million of suburban office and non-core industrial properties (745,000 square feet). These activities are expected to enhance the company s focus on key markets and thereby help in upgrading its overall portfolio quality. Liberty Property s conservative stance on balance sheet lends it the financial flexibility to fund its development activities, meet operating and other expenses, reward shareholders and to make interest and debt payments. For the nine months ended Sep 30, 2014, net cash generated from operating activities rose to $250.3 million from $215.0 million for the nine months ended Sep 30, 2013. Further, in Mar 2014, the company replaced its existing $500 million credit facility which was due in Nov 2015 with a new $800 million credit facility with maturity date of Mar 2018. REASONS TO SELL As of Sep 30, 2014, nearly 16.2% of the total wholly-owned properties of Liberty Property are office assets (in terms of area). However, demand for office properties is highly correlated to job growth, and currently, persistent office space efficiency trends are continuing to limit any robust recovery in the office sector fundamentals. This could affect its top-line growth. However, the company is gradually shifting its focus towards industrial properties due to favorable demand supply conditions. Equity Research LPT Page 2
As part of that, though the company is enhancing its portfolio mix through continued divestitures of office properties, the near-term dilution effect of such moves is unavoidable. Also, the company has a significant development pipeline (with expected development starts of $400 $600 million for 2015 and JV development starts of $50 million for 2015) that exposes it to various risks such as rising construction costs, entitlement delays and lease-ups. Considering the current economic environment, we anticipate that an interest rate hike may happen in the medium term which can pose a challenge for Liberty Property. This is because, in case of a hike in interest rates, the company s ability to refinance existing debt would be restricted while the interest cost on new debt would increase. This could adversely affect the company s financial results and consequently dent its dividend payout. RECENT NEWS Liberty Property Beats Q3 FFO, Revenues Miss Oct 21, 2014 Liberty Property reported third-quarter 2014 FFO of $0.64 per share, which surpassed the Zacks Consensus Estimate by $0.02 and the prior-year quarter figure by $0.07. Results were aided by higher operating income on a year over year basis. Total operating revenue of $198.4 million came in 27.7% above the year-ago quarter figure. However, it missed the Zacks Consensus Estimate of $201 million. Quarterly results reflect the impact of the company s strategic shift toward the industrial portfolio and consecutive curtailment of its suburban office properties. Quarter in Details Liberty Property accomplished lease deals for 7.1 million square feet of space, as compared to 7.2 million square feet leased in second-quarter 2014. However, as of Sep 30, 2014, occupancy at the in-service portfolio of the company spanning 105 million square feet climbed 60 basis points (bps) sequentially to 92.3%. For the quarter, same-store properties operating income declined 0.4% on a cash basis and 0.9% year over year on a straight-line basis. During the quarter, Liberty bought one distribution building, at 5039 Sirona Drive, in Charlotte, NC, for $6.8 million. This 152,000 square foot asset is 100% leased. On the construction front, the company brought 3 in-operation development assets (all 100% leased) for a total investment of $200 million. Additionally, Liberty Property started development at 8 wholly-owned properties for a total estimated investment of $157.9 million. Moreover, the company began construction at JV assets in the quarter under review. Finally, Liberty Property exited third-quarter 2014 with cash and cash equivalents of $39.1 million, down from $228.7 million as of Jun 30, 2014. Outlook Liberty Property reaffirmed its guidance for fourth-quarter 2014 and expects it to be in the range of $0.63 $0.66. Equity Research LPT Page 3
Dividend Update On Dec 11, 2014, Liberty Property declared the fourth-quarter 2014 dividend of $0.475 per share. The dividend is payable on Jan 15, 2015 to stockholders of record as of Jan 2. Recent Development Liberty Property Guides for 2014, 2015 Dec 16, 2014 Liberty Property has revealed its FFO per share outlook for both 2014 and 2015. For 2014, the company expects FFO per share in the range of $2.45 $2.47, while for 2015, the guidance ranges between $2.55 $2.65. Notably, the company s fourth-quarter results include around $2 million from gain on U.K. land sales, which was previously expected to take place in 2015. In addition to providing its outlook for 2014, Liberty Property disclosed its fourth-quarter 2014 activity. According to the company, its fourth-quarter acquisitions would aggregate $27.3 million and comprise a vacant distribution building (374,000 square feet) in southern California. Moreover, the company s fourth-quarter dispositions till Dec 16 amounted to $70.7 million of suburban office and non-core industrial properties (745,000 square feet). Fourth-quarter wholly owned development starts include 5 projects for $98 million, spanning 556,000 square feet and 55% pre-leased. Liberty Property Buys & Sells Assets to Boost Portfolio Nov 18, 2014 Liberty Property disclosed the acquisition and divestiture of industrial and office assets. In particular, the company bought a distribution facility for $27.3 million in South California and sold five industrial and one office asset for $70.7 million in Texas and Minnesota, respectively. The acquired distribution facility is located on 1920 West Baseline Road in Rialto, CA. The asset, spanning 373,771 square foot, is the second vacant distribution property acquired by Liberty Property in 2014. With this buyout, the company s presence in the industrial market of South California expanded to nine assets, stretching over 1.6 million square feet. Liberty Property currently has properties in Hawthorne, Ontario, Garden Grove, Moreno Valley, Simi Valley and San Fernando. On the other hand, the divestiture of five multi-tenant industrial properties, which are located in Houston, reduced Liberty Property s exposure in the region to approximately 6.3 million square feet. Moreover, the vended office asset is situated in Plymouth in Minneapolis. Note: Funds from operations, 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. Equity Research LPT Page 4
VALUATION The shares of Liberty Property currently trade at 15.4x the Zacks Consensus Estimate for 2014 FFO per share, a 15.8% discount to the industry average. On a price-to-book basis, the shares trade at 1.7x, a 22.7% discount to the industry average. Therefore, the valuation looks attractive both on price-to-ffo per share and price-to-book basis. Our 6-month target price of $40.00 equates to 16.3x the Zacks Consensus Estimate for 2014 FFO per share. Combined with a quarterly dividend of $0.475 per share, this price target implies a projected total positive return of 7.9% over that period. This is consistent with our Neutral recommendation on the shares. Also, the stock currently carries a Zacks Rank #3 (Hold). Key Indicators P/FFO F1 F2 Est. 5-Yr FFO Gr% P/CF 5-Yr High 5-Yr Low Liberty Property Trust (LPT) 15.4 14.5 6.0 18.5 15.6 16.8 10.7 Industry Average 18.3 15.9 7.9 19.3 17.6 30.5 10.8 S&P 500 17.7 16.6 10.7 16.0 19.1 19.6 12.0 W. P. Carey Inc. (WPC) 16.0 17.6 10.6 23.0 18.0 18.3 7.7 Senior Housing Properties Trust (SNH) 12.6 12.1 2.7 12.0 12.8 16.1 11.8 Alexandria Real Estate Equities, Inc. (ARE) 18.6 17.2 7.2 19.2 18.9 18.2 10.5 BioMed Realty Trust Inc. (BMR) 13.8 15.3 11.8 14.3 14.3 17.8 8.7 TTM is trailing 12 months; F1 is 2014 and F2 is 2015, CF is operating cash flow P/B Last Qtr. P/B 5-Yr High P/B 5-Yr Low ROE D/E Last Qtr. Div Yield Last Qtr. EV/EBITDA Liberty Property Trust (LPT) 1.7 2.3 1.3 3.4 1.0 5.4 20.7 Industry Average 2.2 2.2 2.2 321.5 0.7 4.3 41.4 S&P 500 7.2 9.8 3.2 23.3 NA 1.9 NA Equity Research LPT Page 5
Earnings Surprise and Estimate Revision History Equity Research LPT Page 6
DISCLOSURES & DEFINITIONS The analysts contributing to this report do not hold any shares of LPT. The EPS and revenue forecasts are the Zacks Consensus estimates. Additionally, the analysts contributing to this report certify that the views expressed herein accurately reflect the analysts personal views as to the subject securities and issuers. Zacks certifies that no part of the analysts compensation was, is, or will be, directly or indirectly, related to the specific recommendation or views expressed by the analyst in the report. Additional information on the securities mentioned in this report is available upon request. This report is based on data obtained from sources we believe to be reliable, but is not guaranteed as to accuracy and does not purport to be complete. Because of individual objectives, the report should not be construed as advice designed to meet the particular investment needs of any investor. Any opinions expressed herein are subject to change. This report is not to be construed as an offer or the solicitation of an offer to buy or sell the securities herein mentioned. Zacks or its officers, employees or customers may have a position long or short in the securities mentioned and buy or sell the securities from time to time. Zacks uses the following rating system for the securities it covers. Outperform- Zacks expects that the subject company will outperform the broader U.S. equity market over the next six to twelve months. Neutral- Zacks expects that the company will perform in line with the broader U.S. equity market over the next six to twelve months. Underperform- Zacks expects the company will under perform the broader U.S. Equity market over the next six to twelve months. The current distribution of Zacks Ratings is as follows on the 1139 companies covered: Outperform - 15.8%, Neutral - 78.0%, Underperform 5.9%. Data is as of midnight on the business day immediately prior to this publication. Our recommendation for each stock is closely linked to the Zacks Rank, which results from a proprietary quantitative model using trends in earnings estimate revisions. This model is proven most effective for judging the timeliness of a stock over the next 1 to 3 months. The model assigns each stock a rank from 1 through 5. Zacks Rank 1 = Strong Buy. Zacks Rank 2 = Buy. Zacks Rank 3 = Hold. Zacks Rank 4 = Sell. Zacks Rank 5 = Strong Sell. We also provide a Zacks Industry Rank for each company which provides an idea of the near-term attractiveness of a company s industry group. We have 264 industry groups in total. Thus, the Zacks Industry Rank is a number between 1 and 264. In terms of investment attractiveness, the higher the rank the better. Historically, the top half of the industries has outperformed the general market. In determining Risk Level, we rely on a proprietary quantitative model that divides the entire universe of stocks into five groups, based on each stock s historical price volatility. The first group has stocks with the lowest values and are deemed Low Risk, while the 5 th group has the highest values and are designated High Risk. Designations of Below-Average Risk, Average Risk, and Above-Average Risk correspond to the second, third, and fourth groups of stocks, respectively. Coverage Team QCA Lead Analyst Analyst Copy Editor Content Ed. 11C Kalyan Nandy Moumita C. Chattopadhyay Sanjoy De Anuja Mitra Moumita C. Chattopadhyay Equity Research LPT Page 7