NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB' credit rating to Liberty Property Limited Partnership's $400 million senior unsecured notes that priced on March 17, 2015. A full list of Fitch's ratings for Liberty Property Trust, Inc. (NYSE: LPT) and its operating partnership, Liberty Property Limited Partnership (collectively, Liberty or the company) follows at the end of this release.
On March 17, 2015, Liberty Property Limited Partnership priced $400 million aggregate principal amount of 10-year senior unsecured notes at a stated interest rate of 3.75%. The notes mature on April 1, 2025 and were priced at 99.644% of par value, resulting in a yield to maturity of 3.793%. The operating partnership plans to use the roughly $395 million of net proceeds for working capital and general corporate purposes, including repayment of borrowings under its $800 million credit facility.
KEY RATING DRIVERS
Fitch's ratings for Liberty reflect its appropriate leverage, fixed-charge coverage (FCC) and unencumbered asset coverage of unsecured debt (UA/UD) for a 'BBB' rated REIT with the company's asset profile. Moderate liquidity pressure, partly due to Liberty's growing but manageable development pipeline, and the persistent shortfall in the company's dividend coverage from adjusted funds from operations (AFFO) balance the ratings.
The Stable Outlook reflects Fitch's expectation that Liberty's credit metrics will remain consistent for the 'BBB' rating over the rating horizon.
Fitch expects Liberty's leverage to sustain in the low 6x range through 2016. The expansion of Liberty's non-stabilized asset pool (primarily through development and, to a lesser extent, under-leased acquisitions) has increased the company's leverage to a level that is consistent with a 'BBB' Issuer Default Rating (IDR).
The company's leverage was 5.9x during 2014, down from 6.5x in 2013 (6.2x pro forma for the annualized impact of acquisitions and divestitures) and 6x in 2012. Fitch defines leverage as debt, net of Fitch-estimated readily available cash over recurring operating EBITDA, including recurring cash distributions from joint ventures (JVs).
Fitch expects Liberty's fixed-charge coverage (FCC) to sustain in the mid-to-high 2x range, which is appropriate for the rating. The company's FCC was 2.6x during 2014 and 2.5x during 2013 and 2012.
Fitch calculates FCC as recurring operating EBITDA, including the agency's estimate of recurring cash JV distributions, less recurring capital expenditures and straight-line rents, divided by total interest incurred and preferred operating unit distributions.
Conservative Leasing Profile
Liberty's lease maturity schedule is reasonably well balanced through 2020. On average, leases representing 12.3% of the company's wholly-owned base rent (ABR) expire per year through 2020 with a max 14.4% of base rents expiring in 2017.
The ratings also reflect the strength of Liberty's management team, including senior officers and property and leasing managers. The company has successfully upgraded its portfolio by selling lower-growth assets, such as secondary-market suburban office and flex properties. Liberty has used the proceeds to acquire and develop industrial distribution assets, which have exhibited stronger demand characteristics and are less capital intensive.
Adequate UA/UD Coverage
Fitch estimates Liberty's unencumbered asset coverage of unsecured debt (UA/UD) at 2x as of Dec. 31, 2014. This level of coverage is adequate for the 'BBB' rating. Fitch calculates UA/UD under a direct capitalization approach of unencumbered net operating income (NOI) that assumes a stressed 8.5% cap rate.
Modest Internal Growth
Fitch anticipates only moderate same-store NOI growth during the next two years, despite strengthening industrial fundamentals. Fitch expects Liberty's same-store NOI to grow by 2% in 2015 and 3% in 2016, on a GAAP basis, as low-single-digit industrial SSNOI growth is partially offset by declines in its office portfolio due to negative leasing spreads. Liberty's SSNOI change was -1%, 1.3% and -0.8% in 2014, 2013 and 2012, respectively.
Moderate Liquidity Pressure
Fitch's stress case liquidity analysis shows Liberty's uses of cash exceeding its internally generated sources of cash for the period beginning Jan. 1, 2015 through Dec. 31, 2016. Fitch estimates the company's liquidity coverage at 0.8x on a pro forma basis reflecting the $400 million unsecured notes issuance - an improvement from 0.5x prior to the issuance. Unsecured bond maturities and development funding commitments are the principal uses of Liberty's cash during the next two years.
The company plans to sell $525 million to $625 million of primarily suburban office assets to help fund its growing development pipeline during 2015. Liberty's guidance does not contemplate any equity issuance during 2015.
Increased Development Risk
Fitch expects Liberty to begin approximately $500 million of new developments during 2015 with roughly two-thirds initiated on a speculative basis. Asset sales (predominantly from within the company's remaining suburban office portfolio) will likely represent the company's principal source of development funding.
Liberty had 4.3 million square feet of wholly-owned development under construction at the end of 2014, representing a total estimated investment of $465.1 million (6% of gross assets). The projects were 47.9% pre-leased and had remaining funding requirements of $179.5 (2.3% of gross assets).
Dividend Coverage Shortfall
Liberty's AFFO payout ratio was 104% during 2014 and 98.3% and 102.5% for the years ended Dec. 31, 2013 and 2012, respectively. Fitch expects the company's AFFO to roughly match its dividend payments during 2015.
Fitch currently rates Liberty as follows:
Liberty Property Trust
--IDR of 'BBB'.
Liberty Property Limited Partnership
--IDR of 'BBB';
--Unsecured revolving credit facility of 'BBB';
--Medium-term notes of 'BBB';
--Senior unsecured notes of 'BBB';
--Preferred operating units of 'BB+'.
The Rating Outlook is Stable.
The two-notch differential between Liberty'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', 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.
--SSNOI growth of 2% during 2015 and 3% during 2016;
--$100 million of acquisitions during 2015 and $0 during 2016;
--Dispositions of $575 million during 2015 and $500 million in 2016;
--Development starts of $500 million during 2015 and 2016;
--Development completions of $275 in 2015 and $400 million in 2016;
--No equity issuance over the rating horizon.
The following factors may result in positive momentum in Liberty's rating and/or Outlook:
--Fitch's expectation of leverage sustaining below 5.5x (leverage was 5.9x as of Dec. 31, 2014);
--Fitch's expectation of FCC sustaining above 2.5x (FCC was 2.6x during 2014);
--UA/UD sustaining above 2.3x (UA/UD was 2x as of Dec. 31, 2014).
The following factors may result in negative momentum in Liberty's rating and/or Outlook:
--Fitch's expectation of leverage sustaining above 7x for several quarters;
--Fitch's expectation of FCC sustaining below 2.3x for several quarters;
--Fitch's expectation of an AFFO dividend payout ratio sustaining above 100%.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Liberty Property Trust, Inc. Rating Navigator' (Feb. 26, 2015);
--'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis' (Nov. 25, 2014);
--'Recovery Rating and Notching Criteria for Equity REITs' (Nov. 18, 2014);
--'Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage' (May 28, 2014)..
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
Recovery Rating and Notching Criteria for Equity REITs -- Effective May 12, 2011 to May 3, 2012
Liberty Property Trust - Ratings Navigator