Brandywine Realty Trust: Lock in a 9.3% dividend opportunity (NYSE:BDN)

Dilok Klaisataporn

https://seekingalpha.com/article/4525693-brandywine-realty-trust-2022-q2-results-earnings-call-presentation

Benefits of Brandywine in Philadelphia (Investor Presentation)

Shares of Brandywine Realty Trust (NYSE: BDN) has plunged 41% this year due to the impact of inflation on the REIT and fears of a coming recession. As trust faces some strong headwinds at the moment, it was sold off to the extreme. It trades at a low price-to-FFO ratio of 6.1 over 10 years and offers a high 10-year dividend yield of 9.3%which is well hedged, with a payout ratio of only 56%. Therefore, investors who can patiently wait for inflation to subside are likely to be highly rewarded in the years to come.

The reasons for the plunge

Inflation has soared to a 40-year high this year due to unprecedented fiscal stimulus packages offered by the government in response to the pandemic as well as Russia’s invasion of Ukraine. Consequently, the Fed is raising interest rates aggressively in an effort to bring inflation back into its normal range.

Higher interest rates are likely to significantly increase Brandywine’s interest charges. Indeed, the company recently lowered its forecast for its annual FFO per share from $1.37 to $1.45 to $1.36 to $1.40 due to its forecast for higher interest expense over the course of the year. of the next quarters. It is important to note that Brandywine is highly leveraged, with a leverage ratio (net debt to EBITDA) of 7.4. Additionally, its net debt (according to Buffett, net debt = total liabilities – cash – receivables) is $2.1 billion, or 150% of the stock’s market capitalization. As some of Brandywine’s debt will mature in the coming years, the company will need to refinance that debt at higher interest rates.

Fortunately, management has recently stated that it intends to sell some non-core assets to reduce the debt burden and mitigate the effect of higher interest rates. It should also be noted that the effect of higher interest rates on net income is limited, since it is estimated at $0.03 per share for this year. In summary, Brandywine’s debt load is high but appears manageable due to the REIT’s high-quality properties.

Brandywine generates 74% of its operating income in Philadelphia, which provides some key advantages to the REIT.

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BDN Competitive Advantages (Investor Presentation)

For example, Philadelphia attracted $8.1 billion in venture capital deals last year, the 5e highest performance in the whole country. Additionally, 80% of biotechnology companies in the United States have offices in Philadelphia. All of the features of Philadelphia mentioned in the slide above make Brandywine have a pretty resilient real estate portfolio.

Another reason for Brandywine’s downfall is the impact of inflation on the stock’s valuation. High inflation significantly reduces the present value of future cash flows and therefore puts pressure on the price/FFO ratio of most REITs. This is certainly true for Brandywine, which is currently trading at a price/FFO ratio of just 6.1, a decade low.

However, it is essential to maintain a long-term perspective. The Fed is doing its best to bring core inflation to its target rate of around 2%. Thanks to the Fed’s aggressive stance, inflation should begin to decline next year. When that happens, Brandywine’s stock will benefit from a strong tailwind, as it will likely return to its normal valuation level. To provide perspective, Brandywine traded at an average price to FFO ratio of 10.9 During the last decade. If the stock’s FFO multiple returns from 6.1 to 10.9 over the next three years, the stock will benefit from an annualized valuation of 21%.

Finally, Brandywine’s stock fell for another reason, namely the fears of the investment community that the Fed’s aggressive interest rate hikes could cause a recession. If these fears turn out to be true, Brandywine should suffer a drop in its FFO per share. However, even if the economy falls into recession, experience has shown that the economy has always recovered strongly from such a downturn. Investors should not stay away from equities due to fears of a recession, as it has proven impossible to predict recessions. In fact, the market has already widely priced in a recession in Brandywine stock.

Overall, Brandywine’s stock is under pressure due to strong headwinds, but all of these negative factors may prove to be temporary. Whenever these headwinds subside, Brandywine’s stock should enjoy a strong rebound of relief.

Dividend

Due to its steep decline this year, Brandywine currently offers a high 10-year dividend yield of 9.3%. When a stock offers such a high yield, it usually signals that a dividend cut may be imminent. However, this is not the case for Brandywine. Granted, the stock has a solid 56% FFO payout ratio. In addition, analysts expect essentially flat FFO per share next year and 6% growth in 2024. If correct, Brandywine’s payout ratio will improve even further. here 2024.

It’s also worth noting that management recently said the dividend was well covered. While such assurance from management is not always a guarantee, the recent condemnation from Brandywine management undoubtedly bodes well for dividend security. It’s also important to realize that the exceptional dividend yield makes it easier for investors to patiently wait for a rally in the stock, especially given the current highly inflationary environment.

Risks

As mentioned above, Brandywine has a high debt load. Consequently, the stock will remain under pressure in the event of a recession. In such a scenario, the REIT will likely experience a decline in its FFO per share but it is likely to weather such a decline with ease thanks to its rather resilient cash flow.

Another risk is the unlikely scenario of persistent inflation. If high inflation remains in place for years, Brandywine stock should remain under pressure. Fortunately, given the Fed’s continued efforts to control inflation, such an adverse scenario is unlikely to materialize.

Final Thoughts

Due to high inflation and fears of a coming recession, Brandywine stock became exceptionally cheap. Investors have the rare opportunity to buy this REIT at a low 10-year valuation and lock in a high 9.3% 10-year dividend yield that is well covered by cash flow. The only caveat is that a great deal of patience may be required, especially if a recession sets in or excessive inflation persists beyond this year. Therefore, only investors who can tolerate short-term pain and remain focused on the long term should consider buying this stock.

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