Fitch Rates Liberty Property Trust's $300MM 3.375% Senior Notes Due 2023
'BBB+'; Outlook Stable
NEW YORK -- December 06, 2012
Fitch Ratings assigns a 'BBB+' rating to the $300 million aggregate principal
amount of 3.375% senior unsecured notes due 2023 issued by Liberty Property
Limited Partnership, a subsidiary of Liberty Property Trust (LRY). The notes
were issued at 99.903% of par value to yield 3.386%.
Net proceeds of the offering are expected to be used to repay a portion of the
indebtedness outstanding under the company's $500 million credit facility, as
well as for general corporate purposes.
Fitch currently rates LRY and its subsidiary as follows:
Liberty Property Trust
--Issuer Default Rating (IDR) 'BBB+'.
Liberty Property Limited Partnership
--Unsecured revolving credit facility 'BBB+';
--Medium-term notes 'BBB+';
--Senior unsecured notes 'BBB+';
--Preferred operating units 'BBB-'.
The Rating Outlook is Stable.
The ratings evidence LRY's moderate leverage, consistent coverage of fixed
charges, and solid unencumbered asset coverage.
Leverage remains appropriate for LRY's IDR. As of Sept. 30, 2012, net debt to
trailing 12 months (TTM) recurring operating EBITDA was 5.6 times (x),
compared with 5.0x, 4.8x and 4.6x as of Dec. 31, 2011, 2010 and 2009,
Coverage metrics also remain appropriate for the rating category. For the TTM
ended Sept. 30, 2012, fixed-charge coverage was 2.3x, compared with 2.4x, 2.1x
and 2.2x for the years ended Dec. 31, 2011, 2010 and 2009, respectively. Fixed
charge coverage is calculated as recurring operating EBITDA less recurring
capital expenditures and straight-line rents, divided by total interest
incurred and preferred operating unit distributions.
Further supporting the ratings are LRY's smooth and manageable lease
expiration schedule and tenant granularity. LRY has on average approximately
12.6% of its net rent expiring annually between 2013 and 2017, with no year
representing more than 14.8% of net rent. In addition, no tenant represents
more than 4% of annual base rent, and the top 10 tenants only comprise 17.2%
of base rent.
When including LRY's share of joint venture debt, the company has no more than
21.1% of its debt maturing in any year between 2013 and 2016. This manageable
debt maturity profile leads to adequate liquidity, as the company's liquidity
coverage ratio, pro forma for the senior notes offering, is 1.7x for the
period from Oct. 1, 2012 to Dec. 31, 2014. Fitch calculates liquidity coverage
as the company's sources of liquidity (cash, availability under the company's
unsecured revolving credit facility and expected retained cash flows from
operating activities after dividends and distributions) divided by uses of
liquidity (pro rata debt maturities, expected recurring capital expenditures
and expected development expenditures).
The company should be able to refinance upcoming unsecured indebtedness given
the company's demonstrated ability to access various forms of capital over the
past two years. In addition, the company's ratios under its unsecured credit
facility and senior unsecured note financial covenants do not hinder its
The ratings also point to the strength of LRY's management team, including
senior officers and property and leasing managers. The company has
successfully disposed of lower-growth assets such as secondary market suburban
office and flex properties and has acquired or is in the process of developing
industrial distribution assets, which have exhibited stronger demand
Offsetting these rating strengths are expectations of continued soft
fundamentals, as measured by same-store net operating income (NOI). Fitch
expects that same-store NOI growth will be flat to slightly negative in 2012
given the challenging leasing environment. LRY experienced flat same-store
cash NOI growth for the nine months ended Sept. 30, 2012 relative to the same
period in 2011.
Additionally, although LRY has a presence in several markets, the company
derives approximately 47% of annual net rent from the Pennsylvania/New Jersey
region. One mitigant to this geographic concentration is that wholly owned
rent across the company's consolidated portfolio is relatively evenly split
between office (52%) and industrial (48%) property types. In addition, LRY's
long-term presence in and local knowledge of markets that comprise a large
portion of the company's portfolio offset some of the geographic concentration
LRY has managed its development activities such that the total estimated cost
to complete for its wholly owned development pipeline represented only 1.5% of
total undepreciated assets as of Sept. 30, 2012.
While not currently a rating concern, Fitch would view negatively a material
increase in speculative development, particularly if it were focused on the
office sector and/or geographic regions outside of management's area of
Fitch expects the company's projected funds from operations after deducting
recurring capital expenditures and straight line rents, or adjusted funds from
operations (AFFO), may be exceeded by its common and preferred unit
distributions during 2012. This will place pressure on the company's ability
to generate internal liquidity. An AFFO payout ratio in excess of 100% could
have negative rating implications.
The two-notch differential between LRY's IDR and preferred stock rating is
consistent with Fitch's criteria for corporate entities with an IDR of 'BBB+'.
Based on Fitch Research on 'Treatment and Notching of Hybrids in Nonfinancial
Corporate and REIT Credit Analysis', dated Dec. 15, 2011, these preferred
securities are deeply subordinated and have loss absorption elements that
would likely result in poor recoveries in the event of a corporate default.
The Stable Rating Outlook is based on Fitch's expectation that, despite soft
property fundamentals, the company will maintain leverage and coverage metrics
near current levels and cautiously manage its exposure to speculative
Further, Fitch projects that the company's fixed charge coverage ratio will be
in the low- to mid-2.0x's for both 2012 and 2013, given a modest decline in
same-store NOI over the next two years, amplified by increased recurring
capital expenditures, but offset by lower fixed charges due to the redemption
of higher-cost preferred stock. This ratio is appropriate for the 'BBB+'
Positive rating momentum over the near term is unlikely. However, the
following factors may have a positive impact on LRY's ratings and/or Outlook:
--Fitch's expectation of net debt to recurring operating EBITDA sustaining
below 4.0x for several quarters (leverage was 5.6x as of Sept. 30, 2012);
--Fitch's expectation of fixed charge coverage sustaining above 2.5x for
several quarters (coverage was 2.4x for the TTM ended Sept. 30, 2012).
The following factors may have a negative impact on LRY's ratings and/or
--Fitch's expectation of leverage sustaining above 5.5x for several
--Fitch's expectation of fixed charge coverage sustaining below 2.0x for
several consecutive quarters;
-- Fitch's expectation of a sustained liquidity shortfall;
--A sizable increase in speculative development;
--An AFFO dividend payout ratio exceeding 100%.
Additional information is available at 'www.fitchratings.com'. The ratings
above were solicited by, or on behalf of, the issuer, and therefore, Fitch has
been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Recovery Rating and Notching Criteria for Equity REITs' (Nov. 12, 2012);
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Criteria for Rating U.S. Equity REITs and REOCs' (Feb. 27, 2012);
--'Parent and Subsidiary Rating Linkage' (Aug. 8, 2012).
Applicable Criteria and Related Research:
Parent and Subsidiary Rating Linkage
Recovery Ratings and Notching Criteria for Equity REITs
Corporate Rating Methodology
Criteria for Rating U.S. Equity REITs and REOCs
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