Liberty Property (LPT) Q4 FFO Tops, Gives Sears Impact Update

Liberty Property Trust (NYSE:LPT) reported fourth-quarter 2018 NAREIT funds from operations (FFO) per share of 74 cents, which surpassed the Zacks Consensus Estimate of 63 cents. Total quarterly operating revenues of around $180.3 million also outpaced the Zacks Consensus Estimate of $162.2 million.

The company’s FFO per share improved year over year from the 68 cents per share recorded in the comparable period last year. Total operating revenues marginally climbed from the prior-year figure.

Per management, the fourth quarter marked a notable period from a strategic perspective. The company accomplished the sale of bulk of its suburban office properties, streamlined the business by expanding and recapitalizing its U.K. industrial platform, as well as resorted to monetization of the rights to a U.K. mixed-use land holding for a substantial gain.

It plans an aggressive push toward concluding its repositioning efforts and issued the Sears bankruptcy impact. The company also expects to complete the disposition of its entire wholly-owned office assets within the next 18 months.

Moreover, the company expects same-store property level operating income for industrial properties to be up 2.5-3.5% on a GAAP basis and 3.75-4.75% on a cash basis in the current year. However, this projection reflects continued occupancy of one property leased to Sears that is bankrupt.

If the lease in terminated by Sears, and the space vacated by first-quarter end, and if Liberty Property is unable to release the space in the current year, the company estimates that this could impact same-store NOI by as much as 1% and the FFO per share by around 3 cents per share.

As such, shares of Liberty Property hit a 52-week high of $47.83 on Feb 5, but crawled back to $47.13 at the close of the trading session, denoting a 0.23% decline from the previous day.

Quarter in Detail

During the reported quarter, Liberty Property accomplished lease deals for 5.4 million square feet of space. As of Dec 31, 2018, occupancy at the company’s in-service portfolio, spanning 106.1 million square feet, shrunk 30 basis points (bps) sequentially to 96.3%.

Liberty Property’s industrial portfolio, spanning 100.9 million square feet of area, had occupancy of 96.3% at the end of the fourth quarter, marking a contraction of 20 bps from the previous quarter. Industrial rents escalated 13.1% on a U.S. GAAP basis on retention and replacement leases commenced during the quarter.

Same-store operating income for the industrial portfolio increased 3% on a cash and 2.2 % on a GAAP basis from the prior-year quarter.

Portfolio Activity

During the December quarter, Liberty acquired nine industrial properties, aggregating 1.6 million square feet, for $204.8 million.

At the same time, the company also sold nine operating properties totaling around 905,000 square feet and development rights to a 500-acre mixed-use site in the U.K. for $284.2 million.

The company brought into service five industrial properties, spreading 1.7 million square feet of space and 65.6% occupied as of the end of the quarter, for a total investment of $133.8 million. Liberty Property commenced development on six industrial properties during the quarter, aggregating 1.3 million square feet of space at an estimated investment of $141.5 million.

Balance-Sheet Position

Liberty Property exited 2018 with cash and cash equivalents of around $84.9 million, up from $11.9 million recorded at the end of December 2017.

Outlook

For 2019, Liberty Property guides FFO per share of $2.53-$2.65. The Zacks Consensus Estimate for the same is currently pinned at $2.58. Notably, for FFO purposes, the company made the Sears-related assumption and reduced FFO by about 3 cents per share relating to that assumed move out as of Apr 1, 2019.

The company projects asset sales of $600-$650 million and acquisitions of $300-$350 million. Further, it expects to commence development of $475-$550 million in wholly-owned properties.

The company expects same-store property level operating income for industrial properties to grow by 2.5-3.5% on a GAAP basis and 3.75-4.75% on a cash basis, assuming continued occupancy of the Sears space. The company has guided for industrial rental growth of 13-15% on a GAAP basis, and 3 -5% on a cash basis.

Our Take

The better-than-expected performance of Liberty Property in the fourth quarter is encouraging. Banking on the strong fundamentals of the industrial real estate market, the company is focusing to expand its industrial portfolio through strategic acquisitions and development projects. Furthermore, it is disposing non-core office properties to pursue such expansion opportunities. Such efforts to refine portfolio and capitalize on value-creation opportunities are expected to drive the company’s long-term growth.

Nonetheless, large scale dispositions will likely have a dilutive impact on the company’s earnings in the near term. In addition, with rising supply of industrial real estate space, there is lesser scope for robust rent and occupancy growth. Also, concerns remain regarding the course of action taken by Sears, which is presently in bankruptcy, toward occupying of space in Liberty Property’s asset.

Currently, Liberty Property carries a Zacks Rank #4 (Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

We now look forward to the earnings releases of other REITs like Medical Properties Trust, Inc. (NYSE:MPW) , Macerich Co. (NYSE:MAC) and Ventas, Inc. (NYSE:VTR) , which are slated to report their quarterly numbers this week.

Note: Anything related to earnings presented in this write-up represent funds from operations (FFO) — a widely used metric to gauge the performance of REITs.

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