On Wednesday, Deutsche Bank (ETR:DBKGn) adjusted its outlook on BrandyWine Realty Trust (NYSE:BDN) shares, reducing the price target to $5.00 from the previous $5.50, while continuing to advise a Hold position on the stock.
The change follows BrandyWine's announcement on April 4, 2024, that it had raised $400 million in unsecured debt due in 2029 with an interest rate of 8.875%. The company plans to utilize these funds to repay $340 million of debt with a 4.1% interest rate, which was due to mature in the fourth quarter of 2024.
The analyst noted that the interest rate on the new debt was significantly higher than expected, which could increase the company's leverage. Additionally, given BrandyWine's implied capitalization rate of 10.1% on its stock, it seems unlikely that the firm can sustain its development program through equity capital markets in the long term, especially after its current construction loans are exhausted. This is evident as the 3151 JFK Blvd development project is without a construction loan.
BrandyWine's financial strategy includes plans to sell assets worth between $80 million to $100 million in 2024. However, the analyst pointed out that the current difficult transaction and leasing markets might necessitate a further adjustment to the dividend to generate needed equity capital.
With the stock's dividend yield around 13%, it suggests that investors might not be valuing the stock for its current $0.60 per share annual dividend. This is particularly relevant given that REIT regulations only require 90% of taxable income to be distributed to maintain REIT status, and BrandyWine's taxable ordinary income in 2023 was approximately $0.40 per share, which may be a more viable dividend level in the near term.
In light of the higher cost of capital, a slower assumption for leasing up development projects, and the increased likelihood of an additional dividend reduction, Deutsche Bank has revised downward its earnings and dividend forecasts for BrandyWine for the years 2024, 2025, and 2026. The firm maintains its Hold rating while adjusting the price target to reflect these considerations.
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