Blackstone Group LP, the world’s biggest private equity firm, acquired a 5 percent stake in Brandywine Realty Trust as part of a deal to sell the property company a 53-story Philadelphia office tower.
The transaction will make Blackstone the fourth-biggest shareholder in Radnor, Pennsylvania-based Brandywine, according to data compiled by Bloomberg. The firm is selling 1717 Arch St. for $129 million in cash and stock.
“They’re the local pros,” Frank Cohen, senior managing director of Blackstone, said in a telephone interview. “We think their stock is a good value. It allows us to participate in the re-leasing of this building.”
Brandywine paid Blackstone $51.2 million in cash and about 7.1 million operating partnership units that are convertible to stock. The property being sold is 63 percent rented and adds 1 million square feet to Brandywine’s central Philadelphia office holdings of 2.9 million square feet, Gerard Sweeney, Brandywine’s president and chief executive officer, said in a telephone interview.
Shares in the real estate investment trust fell 19 cents, or 1.7 percent, to $11.35 in New York Stock Exchange composite trading today. They’re little changed so far this year.
Brandywine already owns two buildings -- One and Two Logan Square -- across the street from 1717 Arch St., Sweeney said.
“This is one of the highest-quality assets in the city of Philadelphia,” he said. “We expect the property, upon full stabilization, to generate a return in the 9.5 percent to 10 percent range.”
The projected yield is “very attractive” given that so- called capitalization rates in the Philadelphia area fell to less than 7 percent at the market peak, Sweeney said.
Cap rates are calculated by dividing net operating income by purchase price; the higher the cap rate, the lower the price.
“It’s going to take a couple years to lease this property up,” Sweeney said. “We can create value through leasing. The investment is very attractive compared to replacement cost.”
If the strategy works, the building may end up worth $200 a square foot compared with Brandywine’s purchase price of about $125 plus leasing expenses, said Dean Frankel, senior portfolio manager at Urdang Securities in Plymouth Meeting, Pennsylvania, who helps oversees about $1.5 billion.
“If they lease this up, it’s going to be a home run,” Frankel said in a telephone interview.
Blackstone, based in New York, bought the property in 2003 and it was the firm’s only real estate holding in Philadelphia.
Brandywine said it expects to invest about $170 a square foot in the property and expense $250,000 of transaction cost in the third quarter. The company maintained its guidance for 2010 funds from operations of $1.30 to $1.34 per share.
FFO is a measure of cash flow used by realty trusts and doesn’t conform to generally accepted accounting principles.