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Why It’s Wise to Hold Liberty Property (LPT) Stock for Now


Liberty Property Trust LPT is shifting its focus toward industrial properties due to favorable demand-supply conditions. The company plans to fund investments in industrial assets through proceeds from dispositions of office properties. Its premium quality industrial properties, situated at key locations, are likely to drive long-term growth by leveraging on the e-commerce boom and supply-chain strategy transformations.

However, the near-term dilution effect from asset dispositions cannot be bypassed. Moreover, rate hike remains a concern for the company.

The fundamentals of the industrial market remain solid, backed by growing demand for industrial properties amid manageable supply, which has led to strong rent growth, high occupancy and development opportunities. Therefore, given its premium quality industrial portfolio in upscale locations, pro-business environment and continued e-commerce demand, Liberty Property is poised to gain. In fact, the company’s industrial portfolio, spanning 94.2 million square feet, enjoyed occupancy of 97.0% at the end of fourth-quarter 2017, marking an expansion of 70 bps from the prior quarter. Moreover, industrial rents escalated 14.8% on renewal and replacement leases signed during the quarter.

Further, Liberty Property has been aiming at divesting its non-core properties and is using the dry powder for gaining preferred properties across the United States. The company is specifically aiming for growth of its industrial platform and it is financing that through the disposition of office assets. The company particularly plans to dispose of its remaining sub-urban office properties in 2018. In numbers, the company expects dispositions of at least $600-$800 million in 2018, with the majority being suburban office properties. On the other hand, the company aims to fortify its national industrial platform through acquisitions of $400-$600 million of industrial properties in key markets and commence $500-$600 million of development projects. These measures are likely to help the company achieve a favorable portfolio mix.

Early in February, the company reported fourth-quarter 2017 funds from operations (FFO) per share of 68 cents, which surpassed the Zacks Consensus Estimate of 65 cents. Total operating revenues of around $192.8 million for the quarter also outpaced the Zacks Consensus Estimate. Results reflected a high occupancy level and growth in rents.

Amid these, shares of Liberty Property outperformed the industry it belongs to in the past six months. The company’s shares declined 7.1% compared with the industry’s decrease of 11%.

Nonetheless, the company is gradually shifting its focus toward industrial properties due to favorable demand-supply conditions. As part of that, the company is enhancing its portfolio mix through continued divestitures of office properties. In fact, the company expects dispositions of at least $600-$800 million in 2018, with the majority being suburban office properties. While such efforts are a strategic fit for long-term growth, the near-term dilution impact of such moves on earnings is unavoidable.

Additionally, the recovery in the industrial market has continued for long and chances of any striking decrease in availability rates are less. Hence, any robust improvement in the performance of Liberty Property is unlikely. Also, supply is likely to increase in the upcoming quarters and somewhat adversely affect the growth tempo of this real estate category.

Moreover, the rise in interest rate 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.

Liberty Property currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Stocks to Consider

Investors interested in the real estate industry can consider some top-ranked stocks like HFF, Inc. HF, The RMR Group Inc. RMR and CBRE Group, Inc. CBG. While HFF and RMR Group sport a Zacks Rank of 1, CBRE Group carries a Zacks Rank #2 (Buy).

HFF’s earnings per share estimates for 2018 were revised 22.6% upward to $2.88 over the past month. The stock has gained 5.2% during the past three months.

RMR Group’s earnings per share estimates for the current year inched up 84.2% to $6.08 in a month’s time. Its shares have gained 13.8% over the past three months.

CBRE Group’s Zacks Consensus Estimate for 2018 earnings per share was revised 7% upward to $3.04 over the past month. The company’s share price has risen 7.5% in three months’ time.

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

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