Liberty Property Upgraded to Neutral

We have recently changed our long-term recommendation for Liberty Property Trust (LRY - Analyst Report), a leading real estate investment trust (REIT), from Underperform to Neutral as we anticipate it to perform in line with the braoder market. We also have a Neutral rating for Duke Realty Corp. (DRE - Analyst Report), one of the competitors of Liberty Property.

Liberty Property provides leasing, property management, development, construction management, design management, and related services for a portfolio of industrial and office properties. The company focuses primarily on prime suburban properties in the Southeast, Mid-Atlantic, and Midwest regions of the U.S. In addition, the company also owns certain assets in the U.K.

The company’s assets 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 ensure a steady revenue stream for the company.

The company operates in multiple markets, enabling it 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.

However, Liberty Property generates a significant amount of revenue from its office portfolio. Office demand is highly correlated to job growth. With fears of a double-dip recession looming large, operations in the company’s office portfolio is likely to suffer as most companies have shelved expansion plans and trimmed jobs.

In addition, the continuous acquisition spree of Liberty Property 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 before they break even.

Liberty Property also 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.