Liberty Property Trust’s strategy to benefit from the industrial real estate boom by growing its industrial platform in top tier markets and financing the same through disposition of office assets is apt. While such efforts are likely to drive long-term growth, the near-term dilution impact of such moves on earnings cannot be bypassed.
Per a report from CBRE Group (CBRE - Free Report) , rent growth is projected at 5% in 2020, and will be driven by newer product and infill industrial space in supply-constrained markets. Also, increasing e-commerce penetration as well as need for last-mile and same-day delivery options has been driving demand for industrial/warehouse spaces.
This is likely to boost demand for light-industrial warehouses of less than 120,000 square feet. Also, with space being significantly limited in the smaller-size section, growth in rent is projected to continue in 2020.
This, in turn, is likely to continue spurring demand for industrial/warehouse spaces, enabling industrial landlords like Liberty Property, Prologis Inc. (PLD - Free Report) and Duke Realty Corp. (DRE - Free Report) among others, to enjoy a favorable market environment.
As for Liberty Property, the company has been gaining the preferred properties across the United States. This helped the company enjoy healthy occupancy and rent growth in 2019.
This apart, it has a strong balance sheet, superior capital access and enjoys ample liquidity. This provides the company financial flexibility to pursue growth endeavors, reward shareholders, and make interest and debt payments.
Last October, Liberty Property entered into a definitive merger agreement with Prologis to be acquired by the latter in an all-stock transaction, valued at roughly $12.6 billion, including the assumption of debt. The deal is anticipated to close in first-quarter 2020 and is expected to create immediate cost synergies of nearly $120 million.
Shares of this Zacks Rank #3 (Hold) company have gained 17.4%, over the past three months, outperforming the industry’s rise of 0.2%.You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
The company has realized proceeds of $188.2 million from the disposition of eight properties in first-half 2019 and $197.3 million from sale of six properties in the next. Moreover, subsequent to the third-quarter end, it sold another office property and 17 acres of adjacent land for $28.6 million. While these transactions are in line with its portfolio-streamlining efforts, the dilutive impact on near-term earnings is a concern.
Further, as recovery in the industrial market has continued for long, vacancy rates have been at low levels. Amid these, achieving absorption gains will be challenging and net absorption will be lower relative to previous years.
These apart, with new deliveries slated to be made available in the market in the near term, supply of industrial space is expected to shoot up, resulting in lesser scope for rent and occupancy growth. This will likely impact the company’s business adversely.
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