Upset City: Villanova

Ah, March -- a time of revelry. Every year around this time, some Fools raise a mug of green beer to St. Patrick. Others make the pilgrimage to musical mecca Austin, Texas, for the South by Southwest festival. I missed out on both events this year, but there's one I never miss: the NCAA Men's Basketball Tournament.

March Madness wouldn't captivate me without upsets, the victories of low-seeded teams over much more highly favored ones. And you know what? Neither would investing.

Taking a classic value approach to investing is akin to rooting for the underdog. It's not only intellectually satisfying to back a company that the crowd scorns -- there are big bucks to be made, too. Far more than you could hope to clear in your annual office pool, you bold bracketeer, you.

In the spirit of March Madness, I've crafted a series I like to call Upset City. Over the next few days, we'll be focusing on the hometowns of some teams that won significant upset victories during the tournament. In and around those towns, we'll scout some local companies that are widely expected to underperform the market, according to our Motley Fool CAPS community. After playing the field, I'm going to call some upsets, defined as an S&P-beating return over the course of the year. Then I'll track the results, just as I did last season.

Enough with the pregame, it's time for the first round!

Who let the cats out?
The 12th-seeded Villanova Wildcats clawed their way past the Clemson Tigers in the first round of the tournament, and continued their run into the Sweet 16, only to fall to mighty Kansas. Is there a publicly traded company in Villanova, Pa., that's set to stun investors?

Well, no. I actually can't identify a single company headquartered in this well-to-do community. But I have given myself a little leeway this year, and there are some contenders in nearby towns.

Radnor, for example, is a veritable hotbed of capitalism. There, you've got well-regarded companies such as energy outfit Penn Virginia (NYSE: PVA  ) and insurer/investment advisor/broadcaster Lincoln National (NYSE: LNC  ) . There's also Airgas (NYSE: ARG  ) , which is admittedly not my favorite industrial gas supplier. But those are the fan favorites and not what we're looking for.

The benchwarmer in this town is Brandywine Realty Trust (NYSE: BDN  ) , an office property REIT whose shares have been slammed over the past year. Brandywine has plenty of company in this regard -- HRPT Properties Trust (NYSE: HRP  ) , for example, has slumped just as severely. But for some reason, 94% of Fools are hailing HRPT, whereas only 59% are bullish on Brandywine. Is the latter company so much worse off?

Trust me, I'm a REIT
In high-yield REIT land, it's all about the funds from operations (FFO). Income Investor co-advisor Andy Cross defines FFO as "net income plus depreciation and amortization expenses minus gains from property sales." Because FFO is a non-GAAP number, companies have to downplay the figure somewhat in their financial filings, but this is an important metric for sussing out a REIT's ability to put money in your pocket.

A steadily rising FFO generally allows a real estate company to continually increase dividends to shareholders. Brandywine, however, has allowed its share count to balloon since 2002, so the dividend has been hamstrung.

The company did undertake a modest share buyback last year, but in retrospect it was a poor capital allocation decision, and management admitted this on its most recent conference call. I appreciate the candor, but I care more about the company's financial fortitude.

In that respect, Brandywine stacks up pretty well. The company's property portfolio is about 95% leased, compared to 93% for comparable companies such as HRPT and Mack-Cali Realty (NYSE: CLI  ) . That's a solid cushion against any weakening of rental rates. Then there's the FFO payout ratio, at a very comfortable 69% in 2007. This figure indicates that Brandywine isn't stretching itself too thin with its dividend.

Then again, on its conference call, management noted that its "cash available for distribution" (CAD) payout ratio clocked in at 120% for 2007. The company thus had to borrow money to cover its dividend shortfall. In 2008 however, Brandywine sees revenue-maintaining capital expenditures easing up and foresees no need to tap the capital markets to execute its business plan.

I'm torn on this one, because the current yield in excess of 10% is quite appealing, and it also appears pretty secure. But I'm not prepared to call an upset here. The company looks pretty cheap based on a discounted FFO valuation, but I can't see Mr. Market warming up to office REITs this year. In other words, Brandywine is a pass for now.

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