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This month's REIT focus from our commercial real estate newsletter, View of the Market, is on Brandywine Realty Trust (BDN), a publicly traded REIT engaged in the ownership, leasing and management of Class A & B, urban, town center and suburban office and mixed-use properties. BDN's properties are located in PA, Washington D.C., VA, NJ, DE, MD, CA and TX.

BDN owns 204 properties including 175 office buildings, 25 industrial/mixed use buildings and four development properties, containing 24.7 million square feet of space. The average occupancy as of 12/31/13 and year to date rental rate growth was 91.3% and .6%, respectively. In 2013, BDN's total leased sq. ft. and net absorption was 3.3 million and 289 thousand sq. ft., respectively. BDN's major tenants include, the General Services Administration (1.5M sq. ft.), Lockheed Martin (441K sq. ft.), Northrup Gruman Corporation (431K sq. ft.) and Wells Fargo Bank, NA (423K sq. ft.).

BDN owns a 98.8% economic interest and is the sole general partner in its UpReit general partnership, Brandywine Operating Partnership L.P. BDN was organized in 1986, is incorporated in Maryland and traded on the NYSE. BDN is based in Radnor, PA and its debt is rated Ba1 by Moody's. BDN has 156.7 million common shares outstanding and a market capitalization of approximately $2.2 billion.

Management

Mr. Gerard H. Sweeney is President, Chief Executive Officer and Trustee of BDN. Mr. Sweeney has served as BDN's President and Chief Executive Officer since August 8, 1994 and as President since November 9, 1988. Mr. Sweeney was first elected a Trustee on February 9, 1994. Mr. Howard M. Sipzner is Executive Vice President and Chief Financial Officer. Mr. Sipzner was appointed to his position in December 2006 and became an officer with BDN in January 2007. Mr. Thomas E. Wirth is Executive Vice President, Portfolio Management and Investments. Mr. Wirth joined BDN in December 2009 and directs portfolio management activities and participates with our regional and corporate executive team in formulating capital allocation tactics.

Financial Data

Select financial data for BDN as of the 9/30/13 10Q and supplemental data for the period 1/1-12/31/13 is as follows (in millions where applicable):

Real Estate Assets, Gross$4,779
Total Assets$4,558
Mortgages Notes Payable, Unsecured Loans and Credit Facility$2,377
Common Stockholders' Equity$1,901
Revenue$424
Net Income$16
Net Income Per Share$.11
Cash Flow from Operations$146
Unsecured Revolving Credit Facility ($600 with $1 used)$599
Market Capitalization$2,200
Property Debt to:
Gross Real Estate Assets49%
Market Capitalization108%
Enterprise Value54%
Dividend and Yield ($.60/sh.)4.3%
Valuation Methodology:
First Nine Months Revenue Per Above Annualized$565
Less: Operating Expenses Annualized (excluding depreciation, amortization & interest expense, plus G&A expenses and less other income)227
Annualized Net Operating Income 2013$338
Projected Inflation Rate at 3.5%x103.5%
Projected Forward NOI for Next Year$350
Projected Cap Rate7.5%
Projected Value of Real Estate Assets$4,667
Add: Net Operating Working Capital322
Construction in Progress (at book value)53
Land Inventory (at book value)94
Investment in Real Estate Joint Ventures (at book value)194
Total Projected Asset Value$5,330
Less: Total Debt Per Above(2,377)
Series E Preferred Stock (at $25 liquidation price)(100)
Projected Net Asset Value$2,853
Common Shares Outstanding 161.26M (156.7M common stock shares, 2.8M incentive plan shares and 1.76M operating partnership units)
Projected NAV Per Share$17.69
Closing Market Price Per Share on 2/14/14$14.13

The gross real estate assets, property debt, revenues, net income (loss), funds from operations, return on invested capital and dividends per share for the years 2009 through Q3 2013 are shown in the table below:

(millions except per share amounts)2009201020112012Q3 2013
Gross Real Estate Assets$4,881$4,977$4,928$4,877$4,779
Property Debt$2,455$2,431$2,393$2,465$2,377
Revenues$575$567$582$560$424
Net Income (Loss)($.24)($25)($13)($8)$16
Funds From OperationsNA$186$203$171$163
Return on Invested Capital (1)2.7%2.3%2.3%2.8%2.7%
Dividends Per Share$.60$.60$.60$.60$.15 (2)

(1) This ratio of operating income divided by stockholders equity plus property debt, measures the return the REIT is earning on its invested capital.

(2) Quarterly dividend.

As shown above, our net asset value per share for CDR is $17.69/sh. versus a market price of $14.13 per share. Current average cap rates for office properties per our experience and CBRE's Cap Rate Survey are in the 6% to 9% range, depending on the location, tenancy and quality of the property. We have used an average cap rate of 7.5% due to BDN's portfolio being primarily well located Class A & B office properties.

BDN's strengths include; solid management team, stable occupancy of 91.3%, diversified portfolio of office assets, low leverage at 54% of enterprise value, attractive dividend yield and stock price. Weaknesses include; only .6% rental rate growth YTD, minimal asset growth during the last five years and no dividend increase during the last five years.

We are highly recommending the purchase of the stock at the current price of $14.13 and the attractive dividend yield of 4.3%. BDN is one of the most undervalued office REITs we have analyzed and represents an excellent value play on the recovery in the office market due to an improving economy and accelerating job growth.

A five year price chart of BDN is shown below:

Source: REIT Focus: Brandywine Realty Trust