Morgan Stanley Ditches Liberty Property Trust, Plays These Industrials Instead

• Liberty Property Trust LPT shares have climbed 12 percent in the past one month, form a low of $30.79 on September 29.
• Morgan Stanley’s Vance H. Edelson downgraded the rating on the company from Overweight to Equal-weight, while maintaining the price target at $35.
• The downgrade reflects increased caution on US economic growth, which will require investors to exercise more discrimination when investing in industrial REITs, Edelson mentioned.

The earlier view of “rising tide lifts all ships” favored Liberty, given its fourth largest domestic warehouse portfolio, analyst Vance Edelson said. The company was then considered as “a cheaper way to play the attractive industrial REIT space.”

Edelson added, however, that a shift in the view as well as the dramatic reduction in growth forecasts for 2016 by Morgan Stanley’s econ team call for the downgrade in rating. He stated that concerns related to Liberty include:

1. Expectation of limited FFO and dividend growth until 2017
2. Late ramp of its development platform
3. Weaker industrial quality in terms of building age
4. Continued exposure to primarily-suburban office at 14 percent of the portfolio

Although Liberty announced its quarterly FFO per share marginally ahead of expectations and lifted its full-year guidance, Edelson pointed out that this was on account of “temporarily elevated lease termination fees and the impact of share buybacks.”

The company is expected to record modest FFO per share growth of an average of 3 percent 2016-2017, versus peers at 7-8 percent, and no dividend growth.

While saying that the industrial subsector continued to be “our team’s favorite out of the nine we cover,” Edelson stated that the following industrial REITs represented better plays:
Prologis Inc PLD – Among Morgan Stanley’s "Super Six" and “the group’s bellwether with global development opportunities.”
Duke Realty Corp DRE – Has a “clean story,” a high-quality portfolio, the ability to boost rents and is among the best medical office businesses.
Eastgroup Properties Inc EGP – Has a Sunbelt presence, consistently robust development and a reasonable valuation.