Brandywine Realty Trust (NYSE: BDN) is one of 22 real estate investment trusts (REITs) currently focused on the office sector. That gives investors lots of options if they want to add an office REIT to their portfolio. Here's a closer look at what Brandywine brings to the table and whether that makes it worth adding to your portfolio.
What sets Brandywine apart from other office REITs?
Most office REITs choose to concentrate on particular markets or property types so that they stand out from the pack. Brandywine focuses on a few key metro areas: Austin, Texas, Philadelphia, and Washington, D.C. The REIT owns an urban, town center, and transit-oriented portfolio comprising 174 properties with 24.5 million square feet of space.
The company gets 75% of its net operating income (NOI) from the Philadelphia market, 22% from Austin, and the rest from Washington, D.C., and other noncore markets.
That focus on Philadelphia is worth noting. On the one hand, it's not a major gateway city nor a rapidly expanding market like those in the Sun Belt region. However, it is becoming a hub for the life science sector. Brandywine has been taking advantage of this opportunity by converting, developing, and redeveloping office properties to meet the needs of the fast-growing life science industry.
One notable development is Schuylkill Yards -- the company's 14-acre, $3.5 billion innovation neighborhood in partnership with Drexel University. It recently secured a financial partner to support the construction of a 570,000 square foot mixed-use tower.
The $287 million investment will see it add 326 ultra-luxury rental residences, 200,000 square feet of life science/innovative office space, and 9,000 square feet of retail, and 29,000 square feet of indoor/outdoor amenity space.
The company also has a growing presence in the Austin market, the fastest-growing metro area in the country. The expansion and relocation of several companies -- including notable names like Tesla and Oracle -- have contributed to the growing demand for high-quality office space and driven the city's growth.
Brandywine has been expanding its presence in Texas' capital, growing the NOI it receives in that market from 1% in 2013 to 22% this year. Of note, Brandywine owns the Broadmoor development, a 66-acre mixed-use community it's redeveloping.
Other investment characteristics to consider
Brandywine's portfolio strategy isn't the only factor REIT investors should consider. Two others are the company's income stream and its underlying value compared to other office REITs.
In terms of valuation, Brandywine expects its current portfolio to generate between $1.34 and $1.40 of funds from operations (FFO) per share this year. With the stock recently trading at around $14 per share, it sells for about 10 times its FFO.
That's cheaper than other office REITs with similar strategies. For example, Cousins Properties (NYSE: CUZ), one of Austin's largest office landlords, trades at more than 14 times its 2021 FFO. Meanwhile, Alexandria Real Estate Equities (NYSE: ARE), an office REIT focused on life science properties, trades at more than 24 times its FFO.
Because of that relatively lower valuation, Brandywine pays a higher-yielding dividend than most REITs. It currently yields 5.5%, well above the REIT sector's sub-3% average.
The company can easily afford that dividend. It expects to generate $135 million in cash flow after interest payments this year, covering its expected $98 million dividend outlay with room to spare. That will enable Brandywine to retain some of the cash it needs for its development and redevelopment projects, which will total $222 million this year.
Meanwhile, the company has ample financial flexibility to cover the remaining balance through land sales, cash on hand, and available credit.
Determining whether Brandywine is the right office REIT for you
While Brandywine won't appeal to everyone, it has several characteristics that make it seem like an appealing buy for certain investors. It has a unique growth strategy centered around two major development projects in two metro areas. As such, it would be a good fit for investors seeking exposure to Philadelphia's growing life science market and the fast-growing Austin metro area.
On top of that, it trades at a cheap valuation and offers a high dividend yield. Those factors would appeal to value investors and income-seekers alike. However, while Brandywine holds some appeal, other office REITs look like better buys right now.