Liberty Property Trust’s plan to pay down debt has left analysts “befuddled” and a big investor “highly disappointed" that the largest real estate company based in the Philadelphia area sold new shares so cheaply in the middle of a commercial real estate boom.
Last week, the Radnor-based firm, best known locally for the Great Valley, Navy Yard, and Comcast office centers but more recently as a warehouse developer, raised $404 million by selling eight million new shares at $50.50 each. Like a homeowner cutting mortgage costs as interest rates fall, Liberty plans to spend most of the money buying back $350 million worth of 4.75% bonds due next fall.
The sale price is about where Liberty shares have lately traded (shares closed Monday at $51.31, up $0.82, or 1.62%), but below the $60 a share-plus that Bill Hankowsky, the former Philadelphia city official who has been chairman and chief executive of Liberty since 2003, has said the company’s assets are worth, complained Land & Buildings Investment Management LLC, a Connecticut company that owns about 1 percent of Liberty.
Although larger REITs trade at higher than the value of the properties they own, Liberty trades at a discount. Indeed, Land & Buildings founder Jonathan Litt told Liberty in a recent letter that his firm is aware that an unidentified buyer was willing to pay $60 a share to take over Liberty.
Buying down the bonds saves Liberty $16 million in interest payments. But the deal terms also value shareholders’ investment at a total of more than $1 billion less than Liberty would be worth to buyers at $60. And that’s a costly disappointment to investors who have been urging Hankowsky to boost its share value or let someone else try.
“Liberty’s net asset value is in excess of $60 per share, which is 20% above the equity issuance price of $50.50 per share,” Litt’s company concluded.
“The issuance is befuddling," wrote analysts at Green Street Advisors in a report to clients. The offering price is a steep discount "to the value implied” by other recent warehouse-portfolio sales.
Land & Buildings said it would keep talking to Liberty but will also “utilize any avenues available” to get a better price.
Litt made similar criticisms of Hankowsky’s administration in July. In reply, at the company’s summer quarterly conference call, Hankowsky defended his approach and his board.
Liberty has been selling office buildings in Philadelphia and the suburbs to raise cash. If management can fend off the activist shareholders, it may be in a position to make a large acquisition that could make it easier to keep Liberty independent in the future.
Meanwhile, Liberty has been conservative in its own development plans.
Pressed by analysts on the July conference call to explain Liberty’s abandonment of additional million-square-foot warehouse plans for Dallas, Atlanta, and Eastern Pennsylvania at a time when capital is cheap and demand has been high, Hankowsky said Liberty was shifting its plans toward smaller buildings: “Instead of doing a single million square-foot building, why don’t we do two 450,000s," or smaller “multi-tenant” buildings, he told investors.
“It seems more than coincidental” that the cancellations were “timed with the [July] letter” from Land & Buildings," pressed Alexander Goldfarb, an analyst at Sandler O’Neill + Co., New York.
“We take advice from lots of people, but we’re running the business,” Hankowsky said in his reply.