Fitch Ratings has affirmed the following ratings for Liberty Property Trust (Liberty; NYSE: LRY):
Liberty Property Trust
--Issuer Default Rating (IDR) at 'BBB+'.
Liberty Property Limited Partnership
--IDR at 'BBB+';
--Medium-term notes at 'BBB+';
--Senior unsecured notes at 'BBB+';
--Preferred operating units at 'BBB-'.
In addition, Fitch has assigned a 'BBB+' rating to Liberty Property Limited Partnership's unsecured credit facility.
The Rating Outlook is Stable.
The rating affirmations evidence Liberty's moderate leverage, consistent coverage of fixed charges, and solid unencumbered asset coverage.
Leverage remains appropriate for Liberty's IDR and is down slightly when compared with Dec. 31, 2008 levels. As of Sept. 30, 2009, net debt to recurring operating EBITDA was 4.8 times (x), compared with 5.6x as of Dec. 31, 2008. Liberty's risk-adjusted capital ratio was 1.10x as of Sept. 30, 2009 at a 'BBB' rating category stress level, slightly improved from Dec. 31, 2008.
Coverage metrics also remain appropriate for the rating category. For the 12 months ended Sept. 30, 2009, fixed-charge coverage (defined as recurring operating EBITDA less capital expenditures and straight-line rents, divided by total interest incurred and preferred operating unit distributions) was 2.1x, compared with 1.9x and 1.7x for the years ended Dec. 31, 2008 and 2007, respectively.
Liberty has demonstrated prudent balance sheet management by maintaining strong coverage of unsecured debt. Fitch calculates that Liberty's ratio of unencumbered operating real estate, valued at a 9.0% capitalization rate, to net unsecured debt was 2.5x and 1.9x as of Sept. 30, 2009 and June 30, 2008, respectively. In addition, Liberty has managed its development activities such that its wholly owned development pipeline represents 3.2% of total undepreciated assets as of Sept. 30, 2009, down from 6.0% as of Dec. 31, 2008.
Further supporting the ratings are Liberty's manageable lease expiration and debt maturity schedules. Liberty has on average 12% of its net rent expiring annually between 2010 and 2014. Excluding the maturity of Liberty's unsecured credit facility in 2011, it has no more than 19% of its debt maturing in any one year between 2010 and 2014. In addition, Liberty's 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 Liberty'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). While Liberty generated cash-basis same-store NOI growth of 0.4% for the quarter ended Sept. 30, 2009 relative to the same quarter in 2008, Fitch expects that cash same-store NOI will decline in both 2010 and 2011.
Additionally, although Liberty has a meaningful presence in several markets, a large percentage of its wholly owned rental revenue is derived from the Pennsylvania/New Jersey region, which accounts for 45.3% of annual net rent. One mitigant to this geographic concentration is that wholly owned rent derived by property type across Liberty's portfolio is relatively evenly split between office (56.8%) and industrial (43.2%). In addition, Liberty's long-term presence in and local knowledge of markets which make up a large portion of its portfolio offset some of the geographic concentration concern.
The two-notch difference between Liberty Property Limited Partnership's IDR and its preferred operating units rating is consistent with Fitch's new hybrid securities rating criteria, 'Rating Hybrid Securities' dated Dec. 29, 2009. The preferred operating units have a cumulative coupon deferral option exercisable by Liberty Property Limited Partnership and thus have readily triggered loss absorption provisions in a going concern (i.e. without triggering a general corporate default and without effect on senior obligations).
The Stable Rating Outlook is based on Fitch's expectation that, despite softening property fundamentals, Liberty will maintain leverage and coverage metrics near current levels and cautiously manage its exposure to speculative development. Liberty's development pipeline is 63% leased as of Sept. 30, 2009, which provides a buffer against declining fundamentals once these development properties enter the stabilized portfolio. Fitch projects that Liberty's fixed charge coverage ratio would be approximately 2.2x for both 2010 and 2011, given a 2% decline in same-store NOI over the next two years, offset by NOI from development properties and lower refinancing costs on Liberty's near-term unsecured debt maturities.
In addition, the Stable Outlook is driven by Liberty's liquidity profile. For the period Sept. 30, 2009 to Dec. 31, 2011, Liberty's sources of liquidity (cash, availability under Liberty's revolving credit facility and expected retained cash flows from operating activities) is expected to cover uses of liquidity (debt payments and expected development and recurring capital expenditures) by 1.0x, assuming Liberty's unsecured credit facility is reduced by one-third upon maturity in 2011. The primary use of liquidity is approximately $415 million of unsecured senior note maturities over the next two years. While this liquidity cover ratio is average, Fitch believes that Liberty will be able to refinance upcoming unsecured indebtedness given Liberty's demonstrated ability to access various forms of capital over the past two years and the strength of the unsecured bond markets.
The following factors may have a positive impact on Liberty's ratings:
--Total net debt to recurring operating EBITDA sustaining below 4.5x for several quarters (leverage was 4.7x for the 12 months ended Sept. 30, 2009).
--Fixed charge coverage sustaining above 2.4x for several quarters (coverage was 2.1x for the 12 months ended Sept. 30, 2009).
The following factors may have a negative impact on Liberty's ratings:
--A liquidity shortfall
--Leverage sustaining above 5.5x for several quarters.
--Fixed charge coverage sustaining below 2.0x for several quarters.
Headquartered in Malvern, PA, Liberty is a $6.1 billion (total undepreciated book capital as of Sept. 30, 2009) owner, manager and developer of suburban office and industrial properties located predominantly throughout the Mid-Atlantic, Southeastern and Midwestern states. Liberty's 77 million square foot portfolio includes more than 700 properties.
Relevant Fitch Criteria available at 'www'fitchratings.com' include:
--'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);
--'Corporate Rating Methodology' (Nov. 24, 2009);
--'Updated Criteria for U.S. Equity REIT Risk-Adjusted Earnings' (Aug. 10, 2009);
--'Updated Criteria for US Equity REIT Capital Standards' (Nov. 11, 2007);
--'Criteria for Rating U.S. Equity REITs' (Aug. 9, 2007);
--'Parent and Subsidiary Rating Linkage' (June 19, 2007).
Additional information is available at 'www.fitchratings.com'.
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Fitch Ratings, New York
Steven Marks, 212-908-9161
Kimberly
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or
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Email: brian.bertsch@fitchratings.com
