Brandywine Realty Trust: High Risk, High Reward

Commercial real estate is in the dumps. Only a fool would argue otherwise. Rents are declining, and virtually every office and industrial REIT is heavily burdened with debt.

But that doesn’t mean that they are all going straight to zero. For one thing, the Wall St. Journal is reporting that bondholders are reluctant to push even the most troubled REITs into bankruptcy. Also, many REITs are actually remain in compliance with debt covenants. For now.

Investing in these REITs is a lot like the game of “chicken” where two cars head towards each other to see which will be the last to swerve. Investors will do OK— as long as the pattern of declining rents and defaulting tenants “swerves” before it destroys the balance sheet of these companies.

Investors are richly rewarded to play this game. They collect hefty dividends, usually 12-15% or more (as long as they last). There is also a fairly good chance that the stocks will appreciate if conditions flatten out.

I’m not invested in any of the REITs now, but am looking at a few. One smallcap REIT I am looking at is Brandywine Realty Trust (NYSE:BDN). Brandywine primarily owns class-A (nice) office buildings in suburban markets. That’s better in my book than downtown office buildings, or office parks.

On the upside, Brandywine is OK on its debt covenants, or at least it was as of the end of 2008. Brandywine also has made some progress rolling over mortgage obligations. For instance, Brandywine announced that it closed an $89M mortgage today. That’s a positive step, but its just a baby step. According to Yahoo!, Brandywine’s total debt is $2.75 billion.

Bottom line: I’m very tempted to play this for a bounce (not so much for the dividend, as I assume that will be cut). So far though, I’m on the sidelines. At the end of the day, Brandywine is a troubled company. It's just in a lot less trouble than many of its competitors.

DISCLOSURE: No position.

Comments

[mdpath:]

Damming with faint praise.

Apr 02 09:50 AM

[swaps:]

I foolishly bought into BDN at 17 and thought I was buying a bargain.

The total collapse of the banking model due to globalist wage deflation makes it tough for REITS to recover.

Apr 02 10:18 AM

[toomuchgas:]

I own the preferred and bonds (BBB-). They have some good tenants (like the IRS).

Apr 02 05:09 PM

[Cheshire Cat:]

They have $4 Billion in unencumbered real estate. Leverage of other properties looks just fine to me. At an 8%-8.5% cap rate they have $20+/shr in real estate.

May 08 09:21 AM

[H.J. Huneycutt:]

I'm looking into BDN right now. Their financials make them look appealing to me, but I'd have to disagree on your macro outlook as far as 'suburban office property' being better than 'downtown office property'. Back in 1948, everyone going on past history would've said the exact reverse thing and they wouldn't have made out nearly as well as those who invested in suburban properties.

The environment is once again changing. Commodity prices are going upwards and pushing people back inwards. Not all the suburbs are going to die out, but some of the outer suburbs will struggle mightily and inner city property is going to be the way to go again, I believe. Still, I'd look at the fundamentals behind each market before making any specific judgements. For instance, some cities do have reasonable public transit out into many of their more inner suburbs and those might very well prosper significantly.

In Northern Virginia, for instance, the DC Metro is being extended out to Tyson's Corner and it could remain relatively stable. Meanwhile, I expect places in the outer suburbs to suffer as gas prices continue to go upwards and policymakers are forced to try to deal with traffic nightmares and environment degradation resulting from the massive amounts of sprawl.

May 16 08:42 PM