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Fitch Revises Brandywine Realty Trust's Rating Outlook to Positive; IDR Affirmed at 'BB+'
August 28, 2013 / 7:37 PM / 4 years ago

Fitch Revises Brandywine Realty Trust's Rating Outlook to Positive; IDR Affirmed at 'BB+'

(The following statement was released by the rating agency) NEW YORK, August 28 (Fitch) Fitch Ratings has revised the Rating Outlook to Positive for Brandywine Realty Trust and its operating partnership Brandywine Operating Partnership, L.P. The ratings were affirmed as follows: Brandywine Realty Trust --Issuer Default Rating (IDR) at 'BB+'; --Preferred stock at 'BB-'. Brandywine Operating Partnership, L.P. --IDR at 'BB+'; --Senior unsecured lines of credit at 'BB+'; --Senior unsecured term loans at 'BB+'; --Senior unsecured notes at 'BB+'. KEY RATING DRIVERS The ratings reflect Brandywine's improved portfolio of central business district (CBD) and suburban office assets located principally in the Mid-Atlantic United States, improved operating fundamentals, demonstrated actual and expected reduced leverage/increasing fixed-charge coverage, and financial flexibility highlighted by robust liquidity and strong access to capital. The Outlook revision to Positive reflects Fitch's view that Brandywine's credit metrics will continue to see incremental improvement over the next 12-24 months and approach levels that are consistent with an investment-grade rating. MID-ATLANTIC PORTFOLIO FOCUS Brandywine's office portfolio is focused in the Mid-Atlantic U.S. with Pennsylvania and greater Washington, D.C. generating 53% and 20% of second quarter 2013 (2Q'13) net operating income (NOI), respectively. The Pennsylvania portfolio is well-diversified across various submarkets, with the Philadelphia CBD representing the largest submarket at 25% of total portfolio 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 Blue Bell, Pennsylvania. STRONG TENANT DIVERSIFICATION The General Services Administration (GSA) is BDN's largest tenant and contributes 7.6% of annual base rent (ABR). Excluding the GSA, the top 10 tenants represent only 18% of total base rent, with no tenant representing greater than 3% of ABR. The tenant base is also of strong credit quality with nine of the 20 largest tenants rated investment grade by Fitch. SOLID PORTFOLIO FUNDAMENTALS Operating fundamentals have remained strong with cash same-store NOI growth of 5.5% during the first six months of 2013. Fitch forecasts sustained strong growth in the latter portion of the year, driven by favorable leasing results and improving occupancy that will approach 90%. Year-to-date GAAP and cash leasing spreads improved 10.2% and 2.7%, respectively. Additionally, leasing capex has continued to moderate to less than $2.30/sf per lease year for each of the last four quarters versus roughly $2.60/sf on average in 2010-2012. Reasonable expiring rent levels over the next several years should support sustained positive leasing spreads over the next 12-24 months. LIMITED LEASE ROLLOVER Brandywine has a well-laddered lease maturity schedule with limited near-term rollover. Less than 22% of base rent expires through 2015, driven by proactive leasing executed well in advance of expirations. IMPROVING CREDIT METRICS Leverage decreased to 6.8x at June 30, 2013 from 7.6x and 7.2x at Dec. 31, 2012 and Dec. 31, 2011, respectively. The decline was driven primarily by increased cash balances from the April 2013 equity offering. Fitch expects that leverage will continue to decline to approximately 6.5x over the next 12-24 months, driven primarily by sustained same-store NOI growth across the portfolio. Fixed-charge coverage for the trailing 12 months (TTM) ended June 30, 2013 was 1.8x, compared to 1.7x for TTM Dec. 31, 2012 and 1.5x for TTM Dec. 31, 2011. Fitch expects that fixed-charge coverage will exceed 2.0x over the next 12-24 months as growth in recurring operating EBITDA complements reduced interest expense from de-levering and moderating recurring capex from an improved leasing environment. STRONG LIQUIDITY Brandywine has strong near-term liquidity highlighted by $216 million of unrestricted cash, full availability under the $600 million unsecured line of credit, and no sizable debt maturities until late 2014. Sources of liquidity cover uses of liquidity by 2.8x from July 1, 2013 - Dec. 31, 2014. Coverage declines materially to 1.2x through 2015 given $480 million of pro-rata debt maturities in 2015. However, Fitch expects the company to continue to access capital via the unsecured bond markets to term out these maturities. The company's December 2012 offering of $250 million 3.95% senior unsecured notes illustrates strong access to capital. MODEST AFFO PAYOUT RATIO Improving operating fundamentals have led to moderating recurring capex across Brandywine's portfolio, which has complemented an already prudent funds from operations (FFO) payout ratio. Fitch believes that there is potential for a dividend increase over the next 12-24 months but expects that the adjusted FFO (AFFO) payout ratio will remain in a reasonable range given management's longer-term de-levering targets. ADEQUATE UNENCUMBERED ASSET COVERAGE Brandywine's unencumbered asset coverage of unsecured debt (based on 2Q'13 unencumbered NOI capitalized at a stressed 9% cap rate) was 1.6x based on gross unsecured debt. When considering current cash balances, coverage improves to 1.8x. These metrics are adequate for the rating. RATING SENSITIVITIES The following factors may have a positive impact on Brandywine's ratings and/or Outlook: --Fitch's expectation of leverage sustaining below 6.8x (leverage at June 30, 2013 was 6.8x); --Fitch's expectation of fixed-charge coverage sustaining above 2.0x (coverage for the TTM ended June 30, 2013 was 1.8x); --Unencumbered asset coverage of unsecured debt (based on a stressed 9% cap rate) maintaining above 2.0x. The following factors may have a negative impact on the company's ratings and/or Outlook: --Fitch's expectation of leverage sustaining above 8.0x; --Fitch's expectation of fixed-charge coverage sustaining below 1.5x. Contact: Primary Analyst Reinor Bazarewski Associate Director +1-212-908-0291 Fitch Ratings, Inc. One State Street Plaza New York, NY 10004 Secondary Analyst Steven Marks Managing Director +1-212-908-9161 Committee Chairperson Sean Pattap Senior Director +1-212-908-0642 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: --'Corporate Rating Methodology' (Aug. 5, 2013); --'Parent and Subsidiary Rating Linkage' (Aug. 5, 2013); --'Criteria for Rating U.S. Equity REITs and REOCs' (Feb. 26, 2013); --'Treatment and Notching of Hybrids in Nonfinancial Corporates and REIT Credit Analysis' (Dec. 13, 2012); --'Recovery Ratings and Notching Criteria for Equity REITs' (Nov. 12, 2012). Applicable Criteria and Related Research: Recovery Ratings and Notching Criteria for Equity REITs here Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis here Criteria for Rating U.S. Equity REITs and REOCs – Effective Feb. 27, 2012 to Feb. 26, 2013 here Parent and Subsidiary Rating Linkage here Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage 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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