N@N

Fitch Affirms Liberty Property Trust's IDR at 'BBB+'; Outlook Stable

^{Published on 2011-01-12 07:36:33 - Market Wire}
 

NEW YORK--([ BUSINESS WIRE ])--Fitch Ratings has affirmed the credit ratings of Liberty Property Trust (NYSE: LRY) and its operating partnership, Liberty Property Limited Partnership (collectively, Liberty Property Trust or the company) as follows:

Liberty Property Trust

--Issuer Default Rating (IDR) at 'BBB+'.

Liberty Property Limited Partnership

--IDR at 'BBB+';

--Unsecured revolving credit facility at 'BBB+';

--Medium-term notes at 'BBB+';

--Senior unsecured notes at 'BBB+';

--Preferred operating units at 'BBB-'.

The Rating Outlook is Stable.

The rating affirmations evidence the company's moderate leverage, consistent coverage of fixed charges, and solid unencumbered asset coverage.

Leverage remains appropriate for Liberty's IDR and is up slightly when compared with Dec. 31, 2009 levels. As of Sept. 30, 2010, net debt to recurring operating EBITDA was 4.8x, compared with 4.7x as of Dec. 31, 2009. The company's risk-adjusted capital ratio was 1.1x as of Sept. 30, 2010 at a 'BBB' rating category stress level, slightly improved from Dec. 31, 2009.

Coverage metrics also remain appropriate for the rating category. For the 12 months ended Sept. 30, 2010, fixed-charge coverage (defined as recurring operating EBITDA less recurring capital expenditures and straight-line rents, divided by total interest incurred and preferred operating unit distributions) was 2.1x, compared with 2.1x and 1.9x for the years ended Dec. 31, 2009 and 2008, respectively.

The company has demonstrated prudent balance sheet management by maintaining a ratio of unencumbered operating real estate, valued at a stressed 9% capitalization rate, to net unsecured debt of 2.4x as of Sept. 30, 2010. This ratio is solid for the 'BBB+' rating category for office, industrial and flex assets. In addition, Liberty has managed its development activities such that the company has no wholly owned or joint venture development pipeline as of Sept. 30, 2010, down from 3.9% of total undepreciated assets as of Dec. 31, 2009.

Further supporting the ratings are the company's manageable lease expiration and debt maturity schedules. Liberty has on average 12% of its net rent expiring annually between 2011 and 2015. The company has no more than 14% of its debt maturing in any given year between 2011 and 2015. In addition, the company's current ratios under its unsecured credit facility and senior unsecured note financial covenants do not hinder its financial flexibility.

The ratings also point to the strength of the company's management team, including senior officers and property and leasing managers.

Offsetting these rating strengths are expectations of declining fundamentals, as measured by same-store net operating income (NOI). Liberty experienced a same-store cash NOI decline of 2.1% for the quarter ended Sept. 30, 2010 relative to the same quarter in 2009, the fourth consecutive quarter of year-over-year same store NOI declines. Fitch expects that same-store NOI will decline further in both 2011 and 2012 as above-market rents continue to roll down to market.

Although the company has a presence in several markets, the company derives a large percentage of its wholly owned rental revenue from the Pennsylvania/New Jersey region, which accounts for 43% of annual net rent. One mitigant to this geographic concentration is that wholly owned rent derived by property type across the company's consolidated portfolio is relatively evenly split between office (56%) and industrial (44%). In addition, Liberty's long-term presence in, and local knowledge of, markets that make up a large portion of the company's portfolio offset some of the geographic concentration concern.

The company's cash flows after deducting recurring capital expenditures and straight line rents, defined as adjusted funds from operations (AFFO), have been exceeded by common and preferred unit distributions during 2010, placing pressure on the company's ability to internally generate liquidity. While this was driven in part by one new 2Q'10 lease for which the company incurred significant capital expenditures, the AFFO payout ratio will likely remain high well into 2011. Absent other mitigating circumstances, a prolonged AFFO payout ratio in excess of 100% could have negative rating implications.

The two-notch difference between the company's IDR and preferred stock rating is consistent with Fitch's criteria for corporate entities with an IDR of 'BBB+'. Based on the criteria report, 'Equity Credit for Hybrids & Other Capital Securities', the company's preferred stock is 75% equity-like and 25% debt-like since it is perpetual and has no covenants but has a cumulative deferral option. Net debt plus 25% of preferred stock to recurring operating EBITDA was 5.0x at Sept. 30, 2010, up from 4.9x at Dec. 31, 2009.

The Stable Rating Outlook is based on Fitch's expectation that, despite softening property fundamentals, the company will maintain leverage and coverage metrics near current levels and cautiously manage its exposure to speculative development. The company currently has no development pipeline, demonstrating limited risk appetite and prudent balance sheet management.

In addition, the Stable Rating Outlook is driven by Liberty's liquidity profile. For the period Oct. 1, 2010 to Dec. 31, 2012, the company's sources of liquidity (cash, availability under the company's unsecured revolving credit facility and Fitch's expectation of retained cash flows from operating activities after dividends and distributions) covered uses of liquidity (pro rata debt maturities and Fitch's expectation of recurring capital expenditures) by 0.8x. While this liquidity coverage ratio is weak for the rating category, Fitch believes that the company will be able to refinance upcoming unsecured indebtedness given the company's demonstrated ability to access various forms of capital over the past two years.

Further, Fitch projects that the company's fixed charge coverage ratio will be in the low 2.0x's for both 2011 and 2012, given a small decline in same-store NOI over the next two years. This ratio is consistent with a 'BBB+' IDR.

The following factors may have a positive impact on the company's ratings and/or Outlook:

--Total net debt to recurring operating EBITDA sustaining below 4.0x for several quarters (leverage was 4.8x as of Sept. 30, 2010).

--Fixed charge coverage sustaining above 2.5x for several quarters (coverage was 2.1x for the 12 months ended Sept. 30, 2010).

The following factors may have a negative impact on the company's ratings:

--Leverage sustaining above 5.5x for several quarters.

--Fixed charge coverage sustaining below 2.0x for several quarters.

--A sustained liquidity shortfall.

--An AFFO dividend payout ratio sustaining above 100%.

Headquartered in Malvern, PA, Liberty is a $5.9 billion (total undepreciated book capital as of Sept. 30, 2010) owner, manager and developer of suburban office and industrial properties located predominantly throughout the Mid-Atlantic, Southeastern and Midwestern states. Liberty's 79.8 million square foot portfolio includes more than 735 properties.

Additional information is available at '[ www.fitchratings.com ]'.

Applicable Criteria and Related Research:

--Corporate Rating Methodology, Aug. 16, 2010;

--Criteria for Rating U.S. Equity REITs and REOCs, April 16, 2010;

--Equity Credit for Hybrids & Other Capital Securities - Amended, Dec. 29, 2009;

--Rating Hybrid Securities, Dec. 29, 2009;

--Recovery Rating and Notching Criteria for REITs, Dec. 23, 2009.

Applicable Criteria and Related Research:

Corporate Rating Methodology

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646 ]

Criteria for Rating U.S. Equity REITs and REOCs

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=510465 ]

Equity Credit for Hybrids & Other Capital Securities - Amended

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493112 ]

Rating Hybrid Securities

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493086 ]

Recovery Rating and Notching Criteria for REITs

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=492828 ]

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: [ HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS ]. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE '[ WWW.FITCHRATINGS.COM ]'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE.