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

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 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, 2011, net debt to recurring operating EBITDA was 4.6 times (x), compared with 4.8x and 4.6x as of Dec. 31, 2010 and 2009, respectively. LRY's risk-adjusted capital ratio was 1.05x as of Sept. 30, 2011, at a 'BBB' rating category stress level, essentially unchanged from Sept. 30, 2010.

Coverage metrics also remain appropriate for the rating category. For the 12 months ended Sept. 30, 2011, fixed-charge coverage was 2.3x, compared with 2.1x and 2.2x for the year ended Dec. 31, 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).

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 2.5x as of Sept. 30, 2011. This ratio is solid for the 'BBB+' rating category for office, industrial and flex assets.

Further supporting the ratings are LRY's smooth and manageable lease expiration schedule and tenant granularity. LRY has on average 12.4% of its net rent expiring annually between 2012 and 2016, with no year representing more than 13.3% of net rent. In addition, no tenant represents more than 4% of annual base rent, and the top 10 tenants only comprise 16.7% of base rent.

When including LRY's share of joint venture debt, the company has no more than 15.5% of its debt maturing in any year between 2012 and 2015. This manageable debt maturity profile leads to adequate liquidity, as the company's base case liquidity coverage ratio is 1.1x for the period from Oct. 1, 2011 to Dec. 31, 2013. 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 financial flexibility.

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 characteristics.

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 same-store cash NOI growth of 2.8% for the nine months ended Sept. 30, 2011 relative to the same period in 2010. However, 2011 same-store growth has benefited from several one-time items that, if excluded, would have reduced same-store NOI growth to approximately 1.8%.

Additionally, although LRY has a presence in several markets, the company derives 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 (55%) and industrial (45%) 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 concern.

LRY has managed its development activities such that the total estimated cost of its wholly owned development pipeline represented only 2.9% of total undepreciated assets as of Sept. 30, 2011. 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 expertise.

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', available on Fitch's Web site at www.fitchratings.com, 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 development.

Further, Fitch projects that the company's fixed charge coverage ratio will be in the low 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. This ratio is at the lower end of the 'BBB+' category.

The company's projected funds from operations after deducting recurring capital expenditures and straight line rents, or adjusted funds from operations (AFFO), are expected to 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.

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:

-- Total net debt to recurring operating EBITDA sustaining below 4.0x for several quarters (leverage was 4.6x as of Sept. 30, 2011);

-- Fixed charge coverage sustaining above 2.5x for several quarters (coverage was 2.3x for the 12 months ended Sept. 30, 2011).

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

-- Leverage sustaining above 5.5x for several consecutive quarters;

-- Fixed charge coverage sustaining below 2.0x for several consecutive quarters;

-- 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:

-- 'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis', Dec. 15, 2011;

-- 'Corporate Rating Methodology', Aug. 12, 2011;

-- 'Parent and Subsidiary Rating Linkage', Aug. 12, 2011;

-- 'Recovery Rating and Notching Criteria for Equity REITs', May 12, 2011;

-- 'Criteria for Rating U.S. Equity REITs and REOCs', March 15, 2011.

Applicable Criteria and Related Research:

Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229

Parent and Subsidiary Rating Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647210

Recovery Rating and Notching Criteria for Equity REITs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=628490

Criteria for Rating U.S. Equity REITs and REOCs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=610687

Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=656516

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