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TLStockPicks (95.15)

Could I have done better?



April 08, 2009 – Comments (4) | RELATED TICKERS: BDN

It was only a little more than a week ago that I both made a CAPS outperform call and took a real money position in Brandywine Realty Trust (BDN) at $2.60.  As of today's close, this REIT, which focuses on A-class office properties in the Philadelphia area, is up about 40%, closing at $3.68.

I'm not bragging here.  (Ok, maybe a little.)  But I think I screwed up.  I found an opportunity that, after doing all of my research and due diligence, seemed pretty much like a once-in-a-lifetime buy, and yet I managed to only put in half of the money that I originally intended.  Yes, I know hindsight is 20/20, but there are many reasons why I considered this buy once-in-a-lifetime... and yes, I do understand that I'm only allowed to use that term once in my lifetime.

As you could imagine, BDN got killed along with every other REIT in the world the past few months.  6 months ago, this thing was in the high teens.  It then dropped like an baby boy's testicles.  Even in March, as the remainder of the stock market shot up, BDN kept sinking, highlighted by their announcement of lower quarterly dividends (went from 30 cents a quarter to 10 cents), which prompted a downgrade in Mid-March by BMO Capital, accompanied by the following analysis:

"BDN announced a $0.10/share 1Q09 dividend, paid in cash, versus the previous quarterly rate of $0.30/share. According to management, the $0.10 dividend is not to be viewed as the quarterly run-rate. Rather, BDN’s plan is to back load its dividends to the end of the year, and only pay out as much as necessary to maintain REIT status. The current forecast is for full-year taxable net income to total $1.20/share, but considering the body-language, we wouldn’t be surprised if the actual number comes in 10%-15% lower. Also, management seems much more open to using stock to pay the recurring dividend – not a complete reversal from their 4Q08 call, but a change nonetheless. We raised our rating to Outperform in February 2009 on the view that the dividend was safe and likely to be paid in cash. We no longer have that conviction, and are lowering our rating to MARKET PERFORM"

Even before this downgrade, BDN was sinking as the broad indices were rallying.  Then, right before the time of BMO's downgrade, the stock was at $3.50.  Two days later, it found a bottom at $2.50.  It proceeded to bounce up and down between 2.50 and 3.00 (brushing off an S&P upgrade in the process), and was at 2.50 as the end of the month approached--the timing being significant because the ex-dividend date was April 1st.  At the 2.50 level, my dividend alerts flashed, as that preannounced 10 cent quarterly dividend represented a 16% yield (40 cents on the year over $2.50=16%).

But wait... what did that downgrade note say?  Something about how that 10 cent yield was not actually a quarterly run-rate, but rather, a placeholder for now as BDN manages its cash and decides how much to distribute in the 4th Quarter to retain REIT status (90% of their income)?  So I could actually be getting more than 16%?? Sounds like a good deal.

So I started doing some research.   They have about 4.5B worth of property assets.  In 2004, BDN had 56% of today's net prop/plant/equip and earned 53% of today's revenue, while there were 63% of today's outstanding shares.  Share price then?  High $20's.  Hm.

The price seemed pretty cheap compared to historical levels... almost as if insolvency was priced in.  Then I read that they're planning to sell about 600M of their portfolio to deleverage and help pay down loans and build cash.  Looking back at the BMO analyst's note: their dividend plan may include stowing away their cash and paying out dividends in stocks instead.  Sure, there's dilution, but seems like they're doing a hell of a lot to keep away from widespread foreclosures.  Looks to me like they have a good plan to avoid that.  (Sidenote: commercial real estate defaults are about 1.5% right now.  Even in at the peak of the worst of times during the early 90's commercial real estate collapse, there was a 6.6% default with only a 1.6% chargeoff.  Indicated to me that commercial real estate firms 1) have a lot of negotiating power for forebearance, and 2) a good success rate in managing its defaults even during hard times.)

I kept digging.  Current assets covered current liabilities well enough.  The process of deleveraging had already begun.  Brandywine's management definitely seemed proactive and on top of things... oh and the insiders were buying too.  Also, the analysts had a consensus (including the BMO guy) of 4.00-4.50 as a 1y price target.  Forecasted FFO/Net Income made 2.50 look like a joke (according to BMO's $1.20 number, 2.50 was only 2.1x!  And I think real estate has much more reliable forward projections due to most of their revenues already being contractually set by leases).

$2.50 didn't make sense to me, at least not until I realized the possibility that I might've just found something completely undervalued.  Really extremely undervalued.  And I made the decision that it's definitely worth taking a flyer on BDN to at least to grab the dividends and see what happens.  So I looked at my Scottrade account, and I had enough money sitting around to make it a solid position of my portfolio.  Prepared a limit order.  Clicked "OK".  Clicked "Review Purchase".  Hovered over "Confirm".  Hesitated.  Took my "shares-to-buy" down by 50%.   Tried again.  Succeeded.

And BDN took off.  Ex-dividend hit with no impact to stock price, investors ignored a Moody's credit downgrade, and then a Citigroup upgrade helped boost it close to $4.  Sure, I'm happy.  But I have no clue what to do with the rest of the money that's sitting in my account.  In the words of Warren Buffett, "I managed to absolutely minimize the profits."

4 Comments – Post Your Own

#1) On April 08, 2009 at 11:41 PM, Mary953 (84.30) wrote:

You found a possibility.  You explored, investigated, researched, and decided that at each step of the way the prospect did deserve further study.  You knew what to look for, searched, and found it.  You knew how to analyse what you found and did so.  In the end, you chose to risk your capital and chose to hesitate just long enough to adjust your purchase to fall within the acceptable risk parameters for your situation (aka - Can I sleep at night?  There is only one possible way that you could make this story of extreme tenacity, diligence, and success into a failure and that would be if you decide to mourn the fact that you were not born with the ability to see into the future.  Enjoy the fruits of your labors and allow me to add a rec to an astute investor.  And as I am not nearly as capable with financials as you, do you think that the stock is still a good buy, even if only for dividends, or has this ship sailed?

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#2) On April 09, 2009 at 11:01 AM, TLStockPicks (95.15) wrote:

Thanks Mary,

I wrote you a really long reply and then CAPs ate it somehow, so here are my shorter thoughts about buying into BDN now:

I like analyzing trades both on the short-term timing and long-term value.  I believe in the long term value from what I know about BDN's management, office property quality and location, rent roll, and cash management policies, and I believe the dividends are not just sustainable, but also understated (due to their anticipated "true up" after 4Q).  The big risks are contained to whether their office tenants will keep renewing down the road (i think so) and whether they will go broke/lose a bunch of their assets due to foreclosure (I think not).

But as far as the timing now?  Not a big fan.  (I'm not into chart reading on my timing analysis... I look at a bunch of other random things instead). It hit the more bullish analysts' 1y target today of 4 bucks, leaving little upside from their views.  Two things usually happen when it passes consensus 1y estimate: 1) analysts raise estimated prices while keeping eps rev and all other estimates the same, and do not move their buy-hold-sell ratings, which usually ends up having a small-medium upward effect on price, or 2) analysts lower their buy-hold-sell ratings and hold estimated 1y price constant, which has a BIG downward impact on price, especially with a stock this volatile.  Also, back to the "understated" yields, the .10 cent quarterly dividends now represent about 10% annual divs, which I think is the equilibrium for the risk/reward given what other REITS are dishing out.  Although I believe that at the end of the year that number will be adjusted upwards, we're a little far away from that happening, and I think that investors won't be as attracted now that yields aren't eye-bulging double digits.

So I can't say that it's a screaming buy at this time; maybe wait to see what happens after the quarterly call, when the analysts have a few more numbers to play with?

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#3) On April 09, 2009 at 11:49 AM, Mary953 (84.30) wrote:

In any case, you did a great job.  Count this as one of the winners that you are justified in bragging about!  :)

And thanks for the information.  I will email it to myself and leave it in the in-box which is proviing a fairly good way to leave a reminder note.

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#4) On April 09, 2009 at 12:30 PM, Tankportfolio (< 20) wrote:

I bought 64,909 shares May 29th @ $2.59 it's now @ $4.07 thats up was an original purchase of $168,114.31 now valued atn$264,179.63 and collecting a .10 div for another $6491.00 right off the bat....That's balling fellows....lots of value in a really down market 

for sound REITS,MLS and closed end funds...the dividends serve as a practicl hedge against a certain amount of volatility.

Here is a link to my Portfolio...everything in it now is a a REIT,MLS or closed end fund with dividends.....with the exception of VMC it is a major asphlt manufacturer that I am speculating to do very well with the stimulus spending.


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