Summary
- Brandywine Realty Trust underwent substantial dispositions recently.
- Such dispositions have not had a material impact on the company's financials.
- Brandywine carries a lot of debt, and look for the company to continue deleveraging its balance sheet.
- The stock looks to be fully valued.
Investment Thesis
The purpose of investing is to maximize alpha, generate excess returns above expected returns, while minimizing risk. There are many ways to quantify/qualify risks. Upon analyzing Brandywine Realty Trust (NYSE:BDN), I am convinced that the risks associated with the company, such as lack of growth drivers, high leverage, and lack of FFO growth, outweigh the positives. Brandywine's current price factors in nearly all growth that can be forecasted, thus I see downside risk in the company. Until the company reaches a safer leverage multiple and develops a stronger pipelines of projects, I am convinced the market is correct to and will continue to price this REIT at a significant discount to peers.
Introduction
Founded by current President and CEO Jerry Sweeney in 1994, Brandywine Realty Trust is a real estate investment trust focused on the ownership and development of Class A office and mixed-use properties. As of March 31, 2019, the company owns 96 properties containing about 16.9M net rentable square feet with another 234.7 acres of undeveloped land. Through 10 unconsolidated JVs, the company maintains stakes in another 5.8M net rentable square feet of office space, 2.7 acres of development land, and a residential tower with 321 units.
Brandywine's operations are segmented into five markets:
- Philadelphia CBD (Central Business District),
- Pennsylvania Suburbs (Chester, Delaware, and Montgomery counties),
- Metro Washington D.C. (Northern Virginia, D.C., and southern Maryland),
- Austin, Texas, and
- Other (Camden County - New Jersey, New Castle, Delaware).
Backstory
In Q4 of FY'15, BDN began a capital recycling program. Prior to the program, Brandywine owned 23M square feet, which quickly dwindled to 18.2M square feet by the end of Q1 of FY'16. The intent of the program was to dispose of the company's non-core assets and focus on markets that management feels have long-term tailwinds and can take market share through experience and knowledge. Furthermore, the program is aimed to deleverage the company, as is the case most times a company starts rapidly selling assets.
The first major disposition was actually a swap that totaled $395.5M, which reduced square footage owned by 1.2M square feet at a cap rate of 5.2%. The company sold its Cira Square property, three office properties in Carlsbad, CA, 1.6 acre undeveloped plot in Wilmington, DE, and a flex property in King of Prussia, PA. BDN recognized $114M in gains and paid off $212.9M in mortgage debt. When all was said and done, the company received $124.5M in proceeds.
Then came a disposition of six office properties in Mount Laurel, NJ, totaling 560k sqft. for $56.5M. Upon that sale, the company then refinanced a mortgage on its One Commerce Square, reducing the interest rate by 203bps and extended the mortgage maturity to April 2023 from January 2016. The $65.8M in net proceeds from this were used to reduce debt and fund development projects.
These divestitures are a couple of the more notable ones.
