OREANDA-NEWS. Fitch Ratings has affirmed its 'BBB' Issuer Default Rating (IDR) for Liberty Property Trust, Inc. (NYSE: LPT) and its operating partnership, Liberty Property Limited Partnership (collectively, Liberty or the company). A full list of rating actions follows at the end of this release.

The Rating Outlook is Stable.

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.

Appropriate Leverage and Coverage
Fitch expects Liberty's leverage to be approximately 6x through 2017, a level that is consistent with a 'BBB' IDR. The expansion of Liberty's non-stabilized asset pool (primarily through development and, to a lesser extent, under-leased acquisitions) continues to weigh on the company's leverage, as does the company's plans to fund its 2015 development with the sales proceeds from higher yielding (albeit slower growing and more capital intensive) suburban office and high-finish flex industrial properties.

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 improve to the 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 average base rent (ABR) expire each year through 2020 with a maximum 14.4% of base rents expiring in 2017.

Fitch expects Liberty's average occupancy to increase by 1% to 2% during 2015, due to strength in its industrial portfolio, offset by modest occupancy losses in its office portfolio. During 2014, the company leased 25 million square feet and increased its occupancy to 93.1% for the wholly-owned portfolio from 91.4%.

Fitch expects Liberty's rents to grow by 2% to 3%, on average, during 2015 on a GAAP basis, with mid-to-low single-digit-negative suburban office lease spreads partially offsetting positive mid-single-digit industrial rent spreads and low-single-digit flex property spreads. During the year ended Dec. 31, 2014, straight line rents on renewal and replacement leases were on average 2.1% higher than rents on expiring leases.

Cycle-Tested Management
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 (A/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% capitalization rate.

Modest Internal Growth
Fitch anticipates only moderate (2%) same-store NOI growth during 2015, based on the occupancy and rent spread assumptions detailed above, despite strengthening industrial fundamentals. Fitch has assumed that growth improves to 3% in 2016 and 2017 based on further improvement in industrial property fundamentals and stabilization in suburban office in the context of Liberty's reduced exposure to that market given planned 2015 asset sales. 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.

Liberty faces a healthy but manageable amount of unsecured bond maturities during 2016 and 2017, which Fitch has assumed the company will refinance with new, lower cost, unsecured debt. Fitch has also assumed that the company pulls forward \$160 million of early 2016 mortgage maturities into late fourth quarter 2015 (when they become repayable without penalty) and that the company unencumbers the properties.

Development Risk Measured, Growing
Fitch views Liberty's increased development exposure as a modest net positive given favorable U.S. commercial real estate (CRE) industry fundamentals, but recognizes the risks that development can pose. Fitch expects Liberty to begin approximately \$500 million of new developments during 2015. Industrial properties will comprise the majority of Liberty's 2015 starts, with the balance representing build-to-suit and speculative office projects. Speculative projects will likely comprise 55%-60% of total starts this year. Asset sales (predominantly from within the company's remaining suburban office portfolio) will likely represent the company's principal source of development funding.

Liberty has expanded the scope of its development activities in tandem with the U.S. economic recovery. The company 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 million (2.3% of gross assets). Fitch expects the yields on Liberty's developments to range from 7%-9%.

Dividend Coverage Shortfall
Fitch expects Liberty's AFFO to approximate its common dividend in 2015. The company's AFFO payout ratio has generally exceeded 100% since 2007. Indeed, 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. Positively, the company continues to reduce its exposure to commodity suburban office properties in favor of less capital intensive industrial assets and metro/CBD office (i.e. Philadelphia and Washington, D.C.). Although the REIT model is not reliant on internally generated cash flow as a source of funds, Fitch generally views persistent dividend coverage shortfalls as a weakness in corporate governance that is evidence of a focus on shareholders over bondholders.

Preferred Stock Notching
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.