BDN: 12% Yield and Steep Discount to $9.48 BV
BDN: 12% Yield and a Steep Discount to $9.48 BV
Price $6.15 Dividend Holding December 29, 2022
- 12.2% Distribution Yield from Brandywine Realty Trust (REIT).
- 61% Funds from Operations Distribution Coverage
- Occupancy is improving with a 1.2% quarter-over-quarter increase to 90.8%.
- 8.1-year average lease term assures rent durability.
- 9.4% average increase in cash rents since 1Q22.
- 70% tenant retention for FY22 10% higher than expected.
- Risk is persistent softness in commercial real estate market that cannot be offset by superior execution.
Investment Thesis
Brandywine Realty Trust (BDN) is one of the largest REITs in the northeast United States, focusing on Philadelphia, Washington D.C., and the Austin markets. BDN develops and manages urban-centric mixed-use portfolios and has a strong tenant industry mix minimizing exposure to sector-focused downturns. The 54% decline in the price of BDN has pushed the yield to over 12% and made the valuation compelling. BDN is a publicly traded REIT and must pay at least 90% of its income out as a distribution; this is not a qualified dividend. With a grudging recovery in the commercial real estate sector underway as COVID-19 concerns wane, BDN is a compelling income investment with a potential price recovery opportunity in our opinion.
Estimated Fair Value
Estimated Fair Value = E23 FFO (Funds from Operations) times Price/FFO
EFV = E23 FFO X P/FFO = $1.25 X 8.0x = $10.00 per share
Properties
FY22 recovery post COVID-19 recession with year-end occupancy expected to reach 91-93% and targeted 8-10% cash rent increases. This combination will increase same-building net income by around 2%. BDN has an 11 million sqft mixed-use land bank that can be developed. Presently 42% of BDN real estate is office space, 29% is residential, 16% is laboratory, and 13% is other.
| Region | % of Total Sqft | % of Net Income | % Leased |
|---|---|---|---|
| Philadelphia, PA | 20.60% | 24.40% | 98.10% |
| Philadelphia (University City), PA | 14.10% | 21.50% | 96.50% |
| Suburbs, PA | 29.10% | 28.80% | 94.30% |
| Austin, TX | 20.40% | 19.50% | 86.80% |
| Washington, DC | 5.70% | 3.30% | 75.10% |
| Other | 4.30% | 2.10% | 73.70% |
Returns on real estate are measured in cash yield (also known as cash-on-cash return). It is a measure of the annual cash flow before taxes, divided by the total cash invested into the property.
Development highlights include a JV (Joint Venture) development project in the University City area, including 200,000 sqft of laboratory space and 326 residential units. This project is a JV between BDN and two Universities, Maryland and Drexel
This $287 million investment is expected to have a 7% cash yield. A similar mixed-use development in King of Prussia, PA is expected to cost $83 million and have an 8% cash yield.
Financial Performance and Market Dynamics
FY22 capital usage of $57 million for development and $20 million for maintenance.
Longer-term goals in the pipeline are expected to provide $165 million in incremental net income by 2026. 3Q22 Debt to EBITDA was 7.2x and is expected to fall to 6.8x by the end of the year with a target of 6.0x. Clearly, the current leverage is too high, and the costs of refinancing has gone up with interest rates over the past couple of years. The leverage and refinance risks need solid operation fundamentals to prevent the risks from being realized.
E22 FFO (Funds from Operations) is sitting at $1.40 per share with expectations of dropping to $1.25 for 2023. The reason for this decline is primarily due to an increase in interest expense and finishing costs for current projects. We believe the compelling valuation, 61% FFO distribution coverage and 12.6% yield, and superb execution combine to make BDN a reasonable income holding.
| Brandywine Realty Trust (BDN) | Piedmont Office Trust (PDM) | Hudson Pacific Properties (HPP) | Paramount Group (PGRE) | Office properties Income Trust (OPI) | Easterly Government Properties (DEA) | |
|---|---|---|---|---|---|---|
| Dividend Yield (FWD) | 12.30% | 8.90% | 10.30% | 5.20% | 14.60% | 7.20% |
| Price-to-Sales (TTM) | 2.9 | 2.1 | 1.4 | 1.8 | 1.3 | 4.5 |
| EV-to-Sales (FWD) | 6.3 | 5.7 | 6.9 | 7.1 | 5.6 | 9.9 |
| EV/EBITDA (FWD) | 11.0 | 10.6 | 13.5 | 12.6 | 8.5 | 16.2 |
| Price-to-Book (TTM) | 14.2 | 15.1 | 14.8 | 13.9 | 8.2 | 16.9 |
| Price-to-Cashflow (TTM) | 0.7 | 0.7 | 0.5 | 0.4 | 0.5 | 1.1 |
| Return on Equity (TTM) | 1.70% | 2.20% | 0.20% | 0.40% | 0.30% | 1.80% |
| Return on Total Capital (TTM) | 1.30% | 1.40% | 1.20% | 1.20% | 1.80% | 1.80% |
