Brandywine Realty Trust (BDN)

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Michael Francis

Thomas Gaffney

Brandywine Realty Trust is a diversified office and industrial real estate investment trust. The company develops and operates commercial properties in the largely suburban areas of western and northern Pennsylvania, New Jersey, California, Virginia, and Texas. As of 2006, Brandywine operated a total of 28.2 million square feet across its 284 office and industrial properties.^[1] Properties are largely two to three story buildings, generating revenue per square foot around $24.

Until its diversifying acquisition of Prentiss Properties Trust in 2006, the company operated much more exclusively in the Pennsylvania and mid-Atlantic markets. This helps to limit geographic real estate risk, but also may dilute the company's scale in a particular region and present operational challenges inherent entering new and unfamiliar markets.

The commercial real estate market is at the whim of the US economic cycle, both because of the impact of variables, such as interest rates, on the value of properties owned and the occupancy and rental rates of tenants, who are almost exclusively other businesses.

Financial Data

Below are relevant operating and financial data. The company has increased revenue rapidly over the previous several years, driven by increases in total square footage coupled with higher revenue per square foot.

Trends & Drivers

• Economic Cycles. The company is subject to risks associated with national and local economic cycles. The rate of economic growth, corporate profits, and employment can be predictive of success or failure since the company's tenants are largely corporate enterprises who ultimately, in general, occupy space and pay rent commensurate with the success of their own firms. Industry slowdowns, business relocations, changing demographics, and other macroeconomic variables can have important effects on the company and its ability to attract and retain tenants.

• Dependence on Pennsylvania. The company's portfolio consists largely of commercial real estate in Pennsylvania. While its acquisition of Prentiss Property Trust ushered the company into new markets and increased diversification, over 42% of Brandywine's properties are still located in the state, making the company heavily dependent on the economy of Pennsylvania and local real estate markets.

^[4]

• Benefits and risks of increased property diversification. Though concentration in a particular market exposes the company to greater risks associated with that region, it also allows the company to leverage its scale and expertise. The merger with Prentiss mitigates concentration risk but also means the company sacrifices the opportunity for greater scale in its larger markets like Pennsylvania. Additionally, operating in numerous regions makes operations increasingly difficult and logistically challenging, as managing properties in different markets means handling different challenges, employing more people than may otherwise have been necessary, etc.

• National and Local Job Market and Employment. The strength of the labor market is an important predictor for the company. Jobs fuel demand for office space, and strong job growth can drive higher occupancy rates and lead to increased office rental revenue. High unemployment and slow job growth, on the other hand, can hamper the commercial real estate market and, when job growth is negative, the company can experience falling occupancy rates and lower revenue per square foot, which leads to less efficient buildings as the utilization of the office space falls.

• Interest Rates. Rising interest rates have several effects on the company:

1. Other investments become more attractive, thereby hampering demand for apartment investors. This, in turn, decreases the market prices of the company’s properties.
2. Available and existing financing becomes less attractive. Getting favorable terms on any new debt to finance building purchases becomes more difficult. The company’s interest expense on its floating rate debt increases, pressuring margins and increasing financial risk.
3. The stock price can fall as investor’s demand a greater dividend yield. As a REIT, the company must distribute some 90%+ of its cash flow to shareholders in the form of a regular dividend. When interest rates rise, investors demand higher dividend yields on REITs, thereby driving down their stock prices.

Market Share

Market share is listed by 2007 revenues.^[5] In 2007, BDN held 7% of total U.S. office REIT market share, by revenues. There are 14 U.S. exchange traded REITs focusing on office properties.^[6] Of those, the top three Boston Properties (BXP), Brookfield Properties (BPO) and SL Green Realty (SLG) accounted for just over half of Market Share by 2007 revenus.

^[7]

• Boston Properties (BXP): BXP owns 138 properties in just five areas of the United States: Midtown Manhattan, Boston, Washington D.C., San Francisco, and Princeton, N.J. The company operates high end class A buildings and its largest tenants are the legal and financial service Industry. BXP also owns two hotels, an industrial center, and a land bank in the Northeast with 10 million square feet of space for development.^[8] As of May 21, 2008 BPO had a market cap of $11.85B.^[9]

• Brookfield Properties (BPO) BPO develops, owns and manages U.S. commercial office properties and develops residential land. The company's commercial property portfolio consists of interests in 109 properties totaling 73 million square feet, primarily located in New York, Boston, Washington D.C., Houston, L.A. and Toronto where its buildings can lease to a tenant base of government, energy and financial companies. As of May 21, 2008 BPO had a market cap of $8.25B.^[10]

• SL Green Realty (SLG) SLG owns and leases office space to corporations in Manhattan. The company owns more than 30 New York City office properties totaling over 22 million square feet.^[11] In 2007, SL Green cemented its position as the Big Apple's largest landlord when it acquired Reckson Associates Realty Corp. The transaction added a total of 9 million square feet to its portfolio, including over 5 million square feet of suburban offices and 4 million additional square feet of prime Manhattan office space.^[12] SLG faces a particular risk from the subprime crisis. By weakening the financial sector, the heart of the New York economy, it threatens to crimp demand for office space in the company's core market. As of May 21, 2008 SLG had a market cap of $5.71B.^[13]

Competition

Brandywine faces heavy competition within each of its markets. Commercial real estate operators compete for tenants, financing, and acquisitions of properties. They compete on several factors, including rents, services provided for tenants, and location. Competitors range anywhere from other REITs to pension funds to individual and foreign investors. Some competitors include:

• Vornado Realty Trust (VNO) is one of the largest owners and managers of real estate in the United States with a portfolio of approximately 64 million square feet located in the Washington D.C. and New York areas.^[14]
• Equity Office Properties Trust (EOP) is a privately held REIT headed by real estate tycoon Sam Zell. EOP owns more than 125 office buildings in about 15 metropolitan areas. EOP was recently acquired by the Blackstone Group for almost $40 billion after a fierce bidding war with Vornado in one of the largest private equity transactions ever.^[15]
• Boston Properties (BXP) owns primarily first-class office space, a hotel, and retail properties^[16] located mostly in Boston, Manhattan, San Francisco, and Washington DC.^[17]
• Brookfield Properties (BPO) owns nearly 50 million square feet in commercial properties across the US and Canada.^[18]
• Liberty Property Trust (LRY)

Below are comparisons of relevant operating information for similar commercial real estate investment trusts.^[19]

Footnotes

1. ↑ 2006 BDN 10-K, "Business," pg 5
2. ↑ 2006 BDN 10-K, "Selected Financial Data," pg 39
3. ↑ Compiled from 2006 BDN 10-K, "Business," "Selected Financial Data"
4. ↑ 2006 BDN 10-K, "Properties," pg 28-32
5. ↑ Google Finance
6. ↑ InvestinREITs.com
7. ↑ All Taken From Google Finance
8. ↑ BXP's Investor Relations Website
9. ↑ Google Finance
10. ↑ Google Finance
11. ↑ http://slgreen.com/about/ SL Green- About Us
12. ↑ http://slgreen.com/about/company-history/ SL Green- Company History
13. ↑ Google Finance
14. ↑ VNO company website
15. ↑ Yahoo Finance: Equity Office Properties Trust company overview
16. ↑ Boston Properties company website
17. ↑ Hoovers: Boston Properties company overview
18. ↑ Hoovers: Brookfield Property company overview
19. ↑ All data compiled from companies' annual reports.