TLStockPicks (91.54)

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."