The past decade hasn’t been kind to shareholders of Brandywine Realty Trust (BDN, Financial). After rising nearly 800% from its IPO in 1990 to its peak in 2007, shares have since fallen by over 50%. In the past 12 months alone, shares are down 13%.
What caused such a collapse, and does the massive pullback provide a buying opportunity?
The business
Brandywine is one of the largest, publicly traded real estate companies in the United States. Organized as a REIT, Brandywine develops, owns, leases and manages a portfolio comprising 280 properties and 33.4 million square feet.
70% of its net operating income is derived from its core markets including Philadelphia, the Pennsylvania Crescent area, Austin, and Northern Virginia. These markets are generally recognized as being high quality, providing higher rents and tenant stability. For example, major tenants include: the General Services Administration (1.5M sq. ft.), Lockheed Martin [LMT] (441K sq. ft.), Northrup Gruman Corporation (431K sq. ft.) and Wells Fargo [WFC] (423K sq. ft.). On average, over 90% of all its space is leased out at any given time.
Management
Gerard Sweeney is president, CEO and trustee of Brandywine, allowing him to make almost all operational decisions. Sweeney has served as president and CEO since 1994 and as president since 1988. He was elected trustee in 1994.
The management team owns roughly 2.5 million shares in total, representing about 2% of outstanding shares worth roughly $35 million. This level of ownership has held steady for most of the past decade.
Valuation
Fortunately, the next few years look to be much more stable than the past. After the financial crisis in 2008, the company had to face record numbers of expiring customer contracts. This was poor timing on not only macroeconomic factors, but also simply the company’s contract book.
2015 however looks to be one of the most lenient years, with less than 1 million square feet coming up for renewal. 73% of all square footage for next has already been renewed as well. Occupancy rates are expected to rise from the current 90.3% to 93.5-94.5% by the end of this year.
All of this should help solidify Brandywine’s financial base and give them the firepower to support growth projects and pay out a respectable dividend.
The company’s closest peers are Alexandria Real Estate Equities (ARE), Corporate Office Properties Trust (OFC) and Mack-Cali Realty Corp (CLI). After the financial crisis, BDN shares never recovered as much as some of its competitors. This has allowed BDN stock to trade at a lower P/B, with a higher dividend yield and lower debt levels.
Conclusion
While its property book requires more looking into, on a relative basis, BDN appears to be better positioned than its peers if the real estate market falters. Not only does it have more financial flexibility, but its valuation multiple does not need to compress as much to meet trough levels last seen in 2009. If you’re researching commercial REITs, BDN is a good place to start.
For more ideas like this one, check out GuruFocus’ 52-Week Low Screener or the rest of R. Vanzo’s Articles.
