Moody's Affirms Senior Unsecured Rating of Liberty Property Trust (LRY)

January 8, 2014 12:46 PM EST Send to a Friend
Moody's Investors Service, ("Moody's") affirmed the Baa1 senior unsecured rating of Liberty Property Trust (NYSE: LRY). The rating outlook is stable.

The following ratings were affirmed with a stable outlook:

Liberty Property Trust: (P)Baa2 preferred shelf.

Liberty Property LP: Baa1 senior unsecured; (P)Baa1 senior unsecured shelf; (P)Baa2 subordinate shelf.

RATINGS RATIONALE

According to Moody's, Liberty's solid credit profile and robust metrics, coupled with an experienced and conservative management team, place the REIT firmly in the high Baa rating category. Furthermore, Moody's believes that Liberty's recent purchase of the Cabot assets was credit positive in several ways, including funding a substantial portion with equity (which will keep overall leverage low), meaningfully increasing size and geographic diversity, as well as growing the industrial component of the overall portfolio.

Chief among Moody's concerns relating to Liberty is the firm's high debt relative to EBITDA, which was 6.8x at 3Q13 (net debt/EBITDA was a more reasonable 4.3x owing to a high cash balance as a result of capital raising activity). Moody's anticipates that this figure will drop meaningfully over the next year and that management intends to operate at a level at least below 6x. Other challenges for Liberty include geographic concentrations and negative rent momentum in certain segments.

The stable outlook reflects Moody's expectation that Liberty will grow prudently, maintain a conservative financial profile and improve occupancy.

Moody's believes ratings improvement would be unlikely in the intermediate term; however, an upgrade would likely result from increased geographic diversification such as no single market were greater than 10% of base rent as well as increased size approaching $10 billion in gross assets, while at least maintaining most credit metrics at current levels, in particular fixed charge coverage of 3x or higher and debt and preferred equity relative to gross assets near 40% or lower. Finally, debt relative to EBITDA would also need to be closer to 5x or lower.

Negative ratings pressure would result from a reversal in the company's conservative financial strategy such that Liberty operated persistently with debt/EBITDA above 6.5x, debt and preferred equity approaching 50% of gross assets or fixed charge coverage below 2.4x. Additionally, substantial re-leasing pressures, possibly resulting in material declines in NOI would also place negative pressure on the rating.

In its most recent action with respect to Liberty Property Trust, Moody's raised the REIT's senior rating to Baa1 from Baa2 and revised the outlook to stable from positive on October 14, 2011.


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