The office and industrial real estate investment trust (REIT), Liberty Property Trust (LRY), reported third-quarter 2013 funds from operations (FFO) of 57 cents per share. This missed the Zacks Consensus Estimate of 61 cents as well as the prior-year quarter figure of 64 cents.
The quarterly results were affected by costs related to the buyout of Cabot Industrial Value Fund III Operating Partnership, L.P, share dilutions and higher termination fees.
However, total operating revenue during the quarter came in at $183.4 million, up 9.4% from $167.7 million in the prior-year period but fell short of the Zacks Consensus Estimate of $186 million.
Inside the Headlines
Liberty Property continued strong leasing activity in the third quarter, with about 8.7 million square feet of leased space. With this, the company set a new leasing record.
As of Sep 30, 2013, the occupancy at the in-service portfolio of Liberty Property – spanning 83.7 million square feet – declined 220 basis points (bps) to 90.6% from 92.8% sequentially. This was due to the timing of the initiation of some lease agreements. Nevertheless, on a signed basis, the in-service portfolio was 92.4% leased at the end of the quarter.
On the other hand, in third-quarter 2013, same-store properties’ operating income upped 1.8% on a cash basis and 1.0% on a straight-line basis from the year-ago quarter.
Portfolio Restructuring Activity
During the said quarter, Liberty Property acquired a Phoenix, Ariz.-based industrial building for $27.9 million. The untenanted property (at the time of acquisition) spans 593,600 square feet of leasable space.
The company also brought 4 development assets (35% occupied as of Sep 30, 2013) into operation with a total investment of $163.2 million. The asset, spanning 2.5 million square feet of leasable space, generates a current yield of 5.1% and a stabilized yield of 8.9%.
Moreover, Liberty Property commenced construction at 1 distribution building in Aberdeen, Md. with an estimated cost of $50.3 million. The property, which is 100% pre-leased to a high-end tenant, spans 945,720 square foot.
Cabot Fund Acquisition
Subsequent to the quarter end, the company sealed the buyout of the operating partnership of Cabot Industrial Value Fund III for around $1.475 billion. Notably, Liberty Property announced the acquisition during the third quarter of 2013.
A number of transaction related items impacted the third-quarter 2013 results. These include an equity offering of 24.2 million common shares; issuance of 4.40% senior unsecured notes worth $450 million; and acquisition expenses worth $2.7 million (included in third-quarter general and administrative expenses) and fees worth $4.2 million (included in third-quarter interest expense).
Liquidity
As of Sep 30, 2013, Liberty Property had cash and cash equivalents of $1.1 billion, compared with $61.7 million as of Jun 30, 2013.
Guidance
Management at Liberty Property anticipates the Cabot Fund acquisition related expenses and associated shares dilution to affect the near-term earnings. Consequently, it lowered its guidance for full-year 2013 FFO in the range of $2.48–$2.50 per share, from the previous guidance of $2.60–$2.70.
Also, keeping the effect of the Cabot Fund acquisition in mind, Liberty Property projects fourth-quarter 2013 FFO per share in the range of 62–64 cents.
Our Viewpoint
Although one-time expenses and short-term shares dilution were a drag on the third-quarter earnings, the strong leasing and portfolio repositioning activities helped Liberty Property sail over the tides. Going forward, we expect the company’s aim to boost its industrial portfolio, by increasing its dominance in 14 of its existing markets, to bode well for long-term growth.
Further, to lower its exposure to suburban office properties, Liberty Property anticipates shedding its interests in these assets, with around $650–$750 million worth of dispositions to occur in the upcoming 1 to 3 quarters. We expect these strategic initiatives to add to Liberty Property’s growth going forward.
Liberty Property currently carries a Zacks Rank #3 (Hold).
Further, we look forward to the results of other REITs that are scheduled to release third-quarter 2013 results on Oct 24. These include Mack-Cali Realty Corp. (CLI), Rayonier Inc. (RYN) and Taubman Centers Inc. (TCO). Mack-Cali and Rayonier will report before the market opens, while Taubman will report after the closing bell.
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.
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