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Liberty Property Trust  ­– a real estate investment trust (REIT) – reported first-quarter 2013 FFO (funds from operations) of 65 cents per share, beating the Zacks Consensus Estimate by 2 cents. However, this compared unfavorably with the prior-year quarter figure of 68 cents. The results were attributable to consistent performance of the overall portfolio as well as strong leasing and development activities. However, increase in operating expenses acted as a headwind.

Following the earnings announcement, shares of Liberty Property reached a new 52-week high of $42.05, above its previous 52-week high of $41.45 on Apr 2.

Inside the Headlines Numbers

Total operating revenues during the reported quarter came in at $176.6 million, up 5.8% from $166.9 million in the prior-year period. It also came ahead of the Zacks Consensus Estimate of $173 million.

At the end of the quarter, the occupancy at the in-service portfolio of Liberty Property – spanning 80.6 million square feet – increased 50 bps (basis points) to 92.6% from 92.1% sequentially. The company witnessed strong leasing activities in the quarter with about 5.4 million square feet of leased space.

The operating income from same-store properties jumped 0.3% on a cash basis and 1.0% on a straight-line basis from the year-ago quarter.

Portfolio Restructuring Activity

Liberty Property witnessed a continuous demand for premium quality industrial space from large corporate users and build-to-suit opportunities for both industrial and office users. Although the company acquired no properties during the quarter, it brought 1 development property into operation. The asset, spanning 208,000 square feet of leasable space was 100% leased as of Mar 31, 2013. In addition, the property generates a current yield of 10.8%.

Moreover, Liberty Property started developing 3 properties in Houston, Texas for an estimated construction cost of $69.7 million. The properties under construction include 1 build-to-suit office (spanning 201,000 square foot) for The Vanguard Group and 2 inventory industrial buildings (spanning 230,000 feet).

Additionally, Liberty Property divested 1 asset, spanning 441,000 square feet of leasable space (100% leased at the time of the sale) for $74.7 million.

Subsequent to the end of first quarter, Liberty Property unveiled its plan to begin construction at 2 industrial buildings (stretching 244,000 square feet) in Hanover, Md. The construction cost of the asset is estimated to be $25 million.

Moreover, the company declared that it has inked a deal to offload a Philadelphia-based office property (spanning 215,000 square foot) – Three Franklin Plaza – for $29.0 million. Liberty Property expects the transaction to close in the third quarter of 2013.

Liquidity

As of Mar 31, 2013, Liberty Property had cash and cash equivalents of $54.4 million compared to $38.4 million in first quarter of 2013. The company sold 642,000 shares under its equity program during the quarter and generated net proceeds of $24.3 million.

Guidance

Management at Liberty Property remains upbeat regarding the company’s performance in 2013, on the back of its strong performance in the first quarter. Consequently, it reiterated its guidance for full year 2013 in the range of $2.60–$2.70.

Our Take

After posting decent fourth-quarter 2012 results, Liberty Property came up with better-than-expected first-quarter 2013 results. The impressive performance came on the back of the company’s ongoing portfolio repositioning activity to focus on markets having better job and rent growth prospects. Moreover, the strengthening of industrial markets fundamentals escalated the company’s occupancy level. In addition, Liberty Property’s relatively healthy balance sheet with adequate liquidity puts the company at ease. We expect these factors to add to Liberty Property’s growth in the coming quarters.  

However, the continuous development activity of Liberty Property involves significant upfront operating expenses, which remains a drag on its profitability in the near-term.

Further, we look forward to the results of other REITs that are scheduled to release their first-quarter 2013 results tomorrow on 25th April, after the market closes. These include Duke Realty Corp. (DRE - Analyst Report), CBRE Group Inc. (CBG - Analyst Report) and Taubman Centers Inc. (TCO - Analyst Report).

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

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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