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June 09, 1997 01:00 AM

PENNSYLVANIA FUND BUYS PIECE OF REIT: PROPERTY, CASH CONTRIBUTION MADE TO FIRM

Terry Williams
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    HARRISBURG, Pa. - The $18 billion Pennsylvania State Employes' Retirement System's roughly $40 million investment in Brandywine, a New Jersey real estate investment trust, could be included easily in the pension fund's venture capital allocation.

    The pension fund contributed properties and cash to the REIT, boosting its market capitalization to $280 million from $125 million, and making it attractive to a broader base of investors.

    "It is a fairly significant transaction," said Christopher Lucas, director of research with the National Association of Real Estate Investment Trusts, Washington.

    "You had a company with a 10-year track record of doing nothing and all of a sudden you give it institutional access and a portfolio with a size enough to be a player in the mid-Atlantic region," said Mr. Lucas.

    In its deal, the Pennsylvania State Employes' fund contributed suburban office properties it owned in Pennsylvania, receiving stock worth $26.5 million, and deferring an additional $3.8 million to be paid at Brandywine's discretion.

    The pension fund also contributed $10 million in cash to the REIT, which "made the deal better," according to David Kalman director of real estate for the pension fund.

    According to Richard Layman, managing director with Radnor Advisors, Radnor, Pa., Pennsylvania's manager on the deal, the system's investment gave it an ownership stake of more than 50% in Brandywine.The REIT, however, had a debt-to-equity ratio of 75%, which violated the retirement system's direct real estate investment guidelines restricting investments in properties to those with debt ratios of less than 50%.

    The $10 million cash was used to buy additional stock and reduce debt, said Mr. Layman.

    The additional money also made the company attractive to other institutional investors, he said.

    "With 20-20 hindsight, was it (the $10 million) gratuitous?" said Mr. Layman. "We didn't have 20-20 vision.

    "This was a small company with a thin float," he said. "We wanted a conservatively leveraged company. We went from (owning) a closely held company to one with top shareholders," said Mr. Layman.

    Since the Pennsylvania investment, Brandywine's stock price has gone to about $20 a share from $16.25 a share.

    Pennsylvania's ownership is now down to about 18%, because of offerings done subsequent to the deal's completion, said Mr. Kalman.

    "That is positive," Mr. Kalman said.

    "It means the company is growing. We are not on it for the control; we are in it to make a good return on our investment."

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