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Fitch Affirms Brandywine Realty Trust's IDR at 'BB+'; Outlook Positive
February 2, 2015 / 6:38 PM / 3 years ago

Fitch Affirms Brandywine Realty Trust's IDR at 'BB+'; Outlook Positive

(The following statement was released by the rating agency) NEW YORK, February 02 (Fitch) Fitch Ratings has affirmed its 'BB+' Issuer Default Rating (IDR) for Brandywine Realty Trust and its operating partnership Brandywine Operating Partnership, L.P. (together Brandywine or the company). A full list of rating actions follows at the end of this release. The Rating Outlook is Positive. KEY RATING DRIVERS The affirmation of Brandywine's ratings is driven by projected leverage and unencumbered asset coverage of unsecured debt that are consistent with a 'BB+' IDR. Fitch expects leverage and unencumbered asset coverage of unsecured debt (UA/UD) to sustain slightly below 7x and 2x, respectively, absent equity offerings to reduce indebtedness and fund development costs. The company's portfolio of CBD and suburban office properties has continued to improve, as highlighted by higher occupancy and improved leasing that has strengthened growth in same-store net operating income (SSNOI). These credit strengths are mitigated by leverage that remains elevated for the rating, weak UA/UD coverage and somewhat weak fixed-charge coverage relative to peers, and ongoing development risk stemming from Brandywine's large unfunded development pipeline (6.7% of gross assets). The Positive Outlook reflects Fitch's expectations of further equity offerings which should reduce leverage and improve fixed-charge and UA/UD coverage. Primary upgrade drivers to a 'BBB-' IDR are future equity issuance and retained cash flows from operations that reduce leverage below 6.8x and improve unencumbered asset coverage of unsecured debt to above 2x on a sustained basis. Fitch expects to resolve the Positive Outlook after the company reports second quarter 2015 (2Q'15) earnings. Absent the company delevering below 6.8x, Fitch is likely to maintain the rating at 'BB+' with a Stable Outlook. Equity Offering Temporarily Reduced Leverage Fitch expects leverage to decline slightly below 7x over the next 12-24 months - absent equity raises - as the company deploys this equity capital to fund development and other corporate uses. Brandywine raised $334 million of common equity in July 2014 via a follow-on offering, reducing leverage to 7.1x as of Sept. 30, 2014, when assuming $400 million of balance sheet cash will be used to fund development. Fitch previously noted that leverage sustaining below 6.8x would be one driver for positive rating momentum. Fitch calculates leverage as total debt less readily available cash to reduce debt-to-recurring operating EBITDA, excluding stock-based compensation. Modest Base Case Liquidity Shortfall Sources of liquidity cover uses by 1.7x, pro forma for bond tenders that occurred post-Sept. 30, 2014 for the period from Oct. 1, 2014 to Dec. 31, 2016. However, when incorporating the company's development pipeline, liquidity coverage falls to 0.9x, absent access to external capital sources. A mitigant to this coverage is the company's access to the common equity, secured and unsecured bond markets to address capital uses. Liquidity coverage would be 1.3x under a scenario where 80% of secured debt is refinanced. Fitch defines liquidity coverage as sources (freely available cash, availability under the company's unsecured revolving credit facility and retained cash flows after dividends) divided by uses (pro rata debt maturities, recurring capital expenditures and estimated development costs). The company's adjusted funds from operations (AFFO) payout ratio has been between 75%-82% over the last three years, resulting in the company retaining over $20 million annually in organic liquidity. Unencumbered Asset Coverage Appropriate for Rating Brandywine has adequate contingent liquidity via its portfolio, with unencumbered asset coverage, based on pro forma 3Q'14 annualized unencumbered NOI and a stressed 9.0% capitalization rate, of unsecured debt (net of freely available cash) of 1.8x at 4Q'14. Fitch generally views UA/UD above 2x as consistent with an investment-grade profile. Further deleveraging and development deliveries should migrate the company's ratio closer to 2x. Mid-Atlantic Portfolio Focus Brandywine's office portfolio is focused in the Mid-Atlantic U.S., with Pennsylvania and greater Washington DC generating 82% of year-to-date net operating income (NOI). The Pennsylvania portfolio is well-diversified across various submarkets, with the Philadelphia central business district representing the largest submarket at 34% of NOI. Fitch expects the company to continue growing its footprint in the CBD and metro regions over the medium term while reducing exposure to slower growth suburban properties in New Jersey, Delaware, and Richmond. Strong Tenant Diversification The GSA is BDN's largest tenant and contributes 7.2% of annual base rent (ABR). Excluding the GSA, the remaining top 10 tenants generate only 15.7% of total base rent, with no tenant representing greater than 2.5% of ABR. The tenant base is also of strong credit quality with 7 of the 20 largest tenants rated investment grade by Fitch (Fitch does not rate the other 13). Solid Portfolio Fundamentals; Leasing Conditions Improving Operating fundamentals have begun to improve, with cash SSNOI growth of 1% during the first nine months of 2014. Fitch forecasts growth to advance into the low single digits towards the end of 2016, driven by stronger leasing and same-store core occupancy exceeding 90% from 89% as of Sept. 30, 2014. Tenant allowances and leasing commissions per square foot have also moderated as the leasing environment in BDN's core markets continues its recovery. Limited Lease Rollover Brandywine has a well-laddered lease maturity schedule with limited near-term rollover; 16.3% of base rent expires through 2016. Management has been proactive in renewing leases well in advance of expiration, which has contributed to higher than expected leasing-related capital expenditures. In accordance with Fitch's updated Recovery Rating (RR) methodology, Fitch is now providing RRs for issuers with IDRs in the 'BB' category. The 'RR4' for Brandywine's senior unsecured debt supports a rating of 'BB+', the same as BDN's IDR, and reflects average recovery prospects in a distressed scenario. The RR6' for Brandywine's preferred stock supports a rating of 'BB-', two notches below BDN's IDR, and reflects weak recovery prospects in a distressed scenario. RATING SENSITIVITIES The following factors may have a positive impact on Brandywine's ratings being upgraded to investment-grade: --Fitch's expectation of leverage sustaining below 6.8x (leverage at Sept. 30, 2014 was 7.1x); --Fitch's expectation of fixed-charge coverage sustaining above 2x (coverage for the TTM ended Sept. 30, 2014 was 1.8x); --Unencumbered asset coverage of unsecured debt (based on a stressed 9% cap rate) maintaining above 2x (asset coverage was 1.6x as of Sept. 30, 2014). The following factors may have a negative impact on the company's ratings and/or Outlook: --Fitch's expectation of leverage sustaining above 8x; --Fitch's expectation of fixed-charge coverage sustaining below 1.5x. Fitch has affirmed Brandywine's ratings and assigned Recovery Ratings as follows: Brandywine Realty Trust --Issuer Default Rating (IDR) at 'BB+'; --Preferred stock at 'BB-'/'RR6'. Brandywine Operating Partnership, L.P. --IDR at 'BB+'; --Senior unsecured lines of credit at 'BB+'/'RR4'; --Senior unsecured term loans at 'BB+'/'RR4'; --Senior unsecured notes at 'BB+'/'RR4'. The Rating Outlook is Positive. Contact: Primary Analyst Steven Marks Managing Director +1-212-908-9161 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Secondary Analyst Stephen Boyd, CFA Director +1-212-908-9153 Committee Chairperson Bill Densmore Senior Director +1-312-368-3125 Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com. Additional information is available at 'www.fitchratings.com'. Applicable Criteria and Related Research: --'Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis' (Nov. 25, 2014); --'Recovery Ratings and Notching Criteria for Equity REITs' (Nov. 18, 2014); --'Corporate Rating Methodology' (May 28, 2014); --'Rating U.S. Equity REITs and REOCs: Sector Credit Factors' (Feb. 26, 2014). Applicable Criteria and Related Research: Rating U.S. Equity REITs and REOCs (Sector Credit Factors) here Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage here Recovery Ratings and Notching Criteria for Equity REITs here Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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