Brandywine Realty: Why This 13.4% Dividend Yield From Office Is A Buy

seekingalpha04-29

Brandywine Realty Trust is trading at a low 4.7x multiple to FFO due to concerns about rising office vacancy rates and a high Fed funds rate.BDN currently offers a 13.4% dividend yield that's 150% ...

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The national office vacancy rate stood at 18.2% at the end of March, up 120 basis points year-over-year. BDN's core portfolio at the end of the first quarter was 87.7% occupied and 89% leased, down from 88% occupancy and 89.6% lease rate in the prior fourth quarter. The 30 basis points dip in occupancy reflects 2023 lease expirations that weren't renewed. BDN's tenant rollover risk in 2024 is somewhat moderate, with leases that accounted for roughly 3.3% of their aggregate final annualized base rents as of the end of the first quarter and 4.4% of the occupied rentable square feet of its property portfolio set to expire through 2024. Data by YCharts BDN last declared a quarterly cash dividend of $0.15 per share, kept unchanged from the prior month, and $0.60 per share annualized for a 13.4% dividend yield. The REIT's trailing 12-month dividend yield at 14.6% reflects a quarter of when its distribution was $0.19 per share. The fear here is that the 21.1% dividend cut will be the first of many to come, with bears flagging office properties as distressed assets and the harbinger of possible doom for the US economy and banking system. BDN generated a first-quarter FFO of $0.24 per share, down 3 cents from its year-ago comp, to cover the current dividend by 160%. Hence, the reduced payout looks safe with its roughly 63% payout ratio, well below the 90% watermark for REITs. BDN is up roughly 10% on a total return basis since I last covered it, with its low multiple to FFO and well-covered dividend both forming drivers of bullish enthusiasm, even as angst over rising office vacancy rates continues to aggregate to create a murky backdrop for office REITs. Debt Maturities, Liquidity, And FFO Multiple Expansion BDN held a total debt balance of $2.19 billion at the end of its first quarter, with $340 million coming due through 2024 with a smaller amount of $70 million coming up for repayment in 2025. BDN had $96.9 million of cash and cash equivalents at the end of its first quarter and no outstanding balance on its $600 million unsecured line of credit. Management stated during their first-quarter earnings call that they anticipate maintaining a minimal balance on their line of credit and were able to enhance liquidity through a $400 million bond issuance on April 12. The proceeds from the issuance will be tapped to eliminate the 2024 debt maturity, with BDN now facing no material bond maturities until November 2027. The issuance was also upsized by $50 million, providing the REIT's near-term liquidity with more depth. Brandywine Realty Trust Fiscal 2023 Form 10-K BDN's risk profile and the safety of its current dividend payout are attractive against the marked extension of its debt maturity ladder and current liquidity profile. However, with the initial 2024 debt held at a weighted average interest rate of 3.8%, BDN will face a material increase in quarterly interest expenses. This is especially so following Moody's downgrade of the REIT's unsecured notes in September and an S&P downgrade in January to noninvestment grade speculative at \"BB\". These flagged secular headwinds are set to be compounded by a Fed set to keep base interest rates elevated for longer, rhetoric following consumer inflation that has remained sticky at well above their 2% target. S&P Global  The uncertainty is whether BDN is now trading too cheaply against its headwinds. The REIT recorded first-quarter revenue of $129.23 million, up 1.3% over its year-ago comp and a beat by $2.15 million on consensus estimates. This was driven by same-store net operating income that was up 2.2% on an accrual basis and 3.6% on a cash basis, with rental rate mark-to-market increasing by 14.9% on an accrual basis and 4.2% on a cash basis. The REIT also signed 357,000 square feet of new and renewal leases. The REIT's total leasing pipeline at the end of the first quarter stood at 4.9 million square feet. The REIT focused on development lease up and portfolio stability after its April debt issuance helped achieve its first objective of liquidity and a low balance on its line of credit. So I'm upping my rating on BDN with the low end of the REIT's full-year 2024 FFO guidance of $0.90 to $0.97 per share, able to cover its dividend by 150%. We should see BDN's yield begin to compress through an expansion of its stock price once the market realizes the current distribution is safe and against its currently low multiple to FFO.","kind":null,"is_publish_news":null,"is_publish_highlight":null,"is_publish_live":null,"is_publish_wemedia":null,"editions":null,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.22.4","shortVersion":"4.22.4","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2431835918"}