We have recently changed our long-term recommendation for Liberty Property Trust (LRY), a leading real estate investment trust (REIT), from Neutral to Underperform, as we anticipate it to perform well below the broader market.
In the last 30 days, fiscal 2011 earnings estimates were lowered by 2 out of 13 analysts covering the stock, while none increased the same. For fiscal 2012, earnings estimates were also lowered in the last 30 days by 3 out of 15 analysts covering the stock, while none raised the same.
The magnitude of earnings estimates dipped by a penny each for fiscal 2011 and fiscal 2012 to $2.57 and $2.68, respectively, in the last 30 days. This represents an overall negative investor perception and brews speculation about the sustainability of the company on a long-term basis.
The continuous acquisition spree of Liberty Property also involves significant upfront operating expenses with limited near-term profitability. New properties usually take time to generate revenues, and will continue to drag down margins till they get established.
In addition, Liberty Property has a large development pipeline, which increases operational risks in the current credit-constrained market, exposing it to rising construction costs, entitlement delays, and lease-up risk.
However, Liberty Property operates in multiple markets, enabling the company to mitigate geographical risk. In each of these markets, the company offers an appropriate mix of office and industrial properties, sufficient to be recognized as a significant participant in the market.
Furthermore, Liberty Property is continuing its portfolio repositioning program as it focuses on higher growth markets characterized by better job and rent growth prospects. This could help instill some positive feeling about the company in the long run.
In addition, Liberty Property’s assets are located in prime business locations and are designed to accommodate various types of tenants and space requirements. Liberty Property specifically focuses on metro-office, multi-tenant industrial and flex properties and markets that have strong demographic and economic fundamentals, which increase the probability of a steady revenue stream for the company.
If the company can tide over the current deluge of negative investor confidence on the stock, it can well expect a steady reversal of fortunes.
Liberty Property presently has a Zacks #5 Rank, which translates into a short-term Strong Sell rating. However, we have a Neutral recommendation and a Zacks #3 Rank (short-term Hold) for Duke Realty Corp. (DRE), a competitor of Liberty Property.
DUKE REALTY CP (DRE): Free Stock Analysis Report
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