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

^{Published on 2010-09-28 11:10:19 - Market Wire}
 

NEW YORK--([ BUSINESS WIRE ])--Fitch Ratings has affirmed the ratings of Brandywine Realty Trust (NYSE:BDN) and its subsidiary, Brandywine Operating Partnership, L.P. (collectively, Brandywine or the company) as follows:

Brandywine Realty Trust

--Issuer Default Rating (IDR) at 'BB+';

--Preferred stock rating at 'BB-'.

Brandywine Operating Partnership, L.P.

--IDR at 'BB+';

--Unsecured revolving credit facility at 'BB+';

--Senior unsecured notes at 'BB+.'

The Rating Outlook is Stable.

The affirmation of Brandywine's IDR at 'BB+' reflects the company's credit strengths, including its manageable debt maturity and lease expiration schedules, granular tenant base and the company's maintenance of leverage and coverage ratios appropriate for the rating category, despite the weak operating environment. The Stable Outlook reflects Brandywine's strong liquidity and unencumbered asset coverage of unsecured debt, offset by expected soft property-level fundamentals.

The company's portfolio benefits from tenant diversification with the top 10 tenants representing 28.3% of annual base rent (ABR) of June 30, 2010. The U.S. Government Services Administration (GSA) is the company's largest tenant, contributing 7.2% of annual base rent, pro forma for the delivery of the Post Office Square building rented to the IRS.

The economic recovery remains fragile, with the high unemployment rate continuing to adversely impact the business prospects of many of Brandywine's tenants. Brandywine's portfolio is focused in the Mid-Atlantic region, with the top five sub-markets being Dulles Toll Road Corridor (17.8% of same-property NOI as of June 30, 2010), Philadelphia CBD (13.2%), Radnor, PA (8.4%), King of Prussia/ Berwyn/ N202 Corridor (8.1%), and Southwest Austin (5.9%). With the delivery of the Post Office Square development in Aug. 2010, Brandywine will generate nearly 19% of its NOI from the Philadelphia CBD. Fitch views the company's presence in Philadelphia as a credit positive as Brandywine is a well established operator in this submarket.

However, as a result of this geographic focus with exposure to some weaker submarkets with low barriers to entry, the portfolio experienced a 4.3% decline in same store NOI in 2009, a 3% same store NOI decline in the first quarter of 2010 (1Q'10) and a 1.3% decline in 2Q'10. Since 2006, Brandywine has underperformed its office peer group by approximately 200bps in both same property NOI performance and occupancy statistics. Brandywine has also underperformed its markets, as followed by PPR, by almost 100 bps since 2006.

Occupancy and rent deterioration since early 2008 have challenged the operations of Brandywine, but these challenges have not adversely affected fixed charge coverage. Despite declines in same store NOI and occupancy rates, fixed charge coverage (defined as recurring operating EBITDA less recurring capital expenditures less straight line rent adjustments, divided by interest expense, capitalized interest and preferred dividends) has remained unchanged at 1.8 times (x) for the 12 months ended June 30, 2010 as compared to Dec. 31, 2009. The company has raised approximately $40.9 million under the continuous equity offering program commenced in March 2010, the proceeds of which have been used to repay indebtedness, and hence reduced interest incurred. Revenues from new development have also helped buffer the effect of the same store declines. Additionally, current and projected coverage levels remain healthy for the ratings.

Brandywine's leverage ratio remains consistent with a 'BB+' rating, as the company's net debt divided by recurring operating EBITDA was 7.7x for the trailing 12 months ended June 30, 2010, compared with 7.6x and 8.1x during 2009 and 2008, respectively. The improvement in leverage since 2008 stems from the company's equity issuances which were used to fund cash tender offers for unsecured debt, repayment under the line of credit, acquisitions and general corporate purposes. Brandywine's risk-adjusted capitalization of 1.0x is also appropriate for the 'BB+' rating.

The Stable Outlook reflects Brandywine's large unencumbered property pool, which gives the company financial flexibility as a source of contingent liquidity. Unencumbered asset coverage of unsecured debt (calculated as 2Q'10 annualized unencumbered property net operating income divided by a 8% capitalization rate reflective of the portfolio) results in coverage of 1.7x as of June 30, 2010, which is appropriate for a 'BB+' rating. Moreover, covenants within the company's unsecured revolving line of credit agreement and bond indenture do not currently restrict Brandywine's financial flexibility.

Brandywine's liquidity position is adequate for the rating category. Sources of liquidity (unrestricted cash, availability under the company's unsecured revolving credit facility, expected retained cash flows from operating activities after dividends and distributions) divided by uses of liquidity (pro rata debt maturities, expected recurring capital expenditures) for July 1, 2010 to Dec. 31, 2011 result in a liquidity coverage ratio of 1.0x and 1.3x if maturing secured debt is refinanced at a rate of 80% of current debt outstanding. Furthermore, the company's debt maturity schedule is well laddered with no more than 22% of debt maturing annually over the next five years.

The two-notch differential between Brandywine's IDR and its preferred stock rating is consistent with Fitch's criteria for corporate entities with a 'BB+' IDR. Based on Fitch's report, 'Equity Credit for Hybrids and Other Capital Securities' (dated Dec. 29, 2009 and available at [ www.fitchratings.com ]), Brandywine Realty Trust's preferred units are 75% equity-like and 25% debt-like since they are perpetual and have no covenants but have a cumulative deferral option in a going concern. Net debt plus 25% of preferred stock to recurring operating EBITDA was 7.8x as of June 30, 2010, compared with 7.7x and 8.2x, as of Dec. 31, 2009 and Dec. 31, 2008, respectively.

Guidelines for Further Rating Actions

The following factors may result in positive momentum on the ratings and/or Rating Outlook:

--Positive operating trends;

--Demonstrated access to multiple sources of capital;

--Net debt to recurring operating EBITDA declines below 6.5x;

--Maintaining fixed charge coverage above 2.0x (for the 12 months ended June 30, 2010, recurring EBITDA divided by total fixed charges was 1.8x);

The following factors may result in negative momentum on the ratings and/or Rating Outlook:

--Maintaining fixed charge coverage below 1.5x;

--A sustained decline in unencumbered asset coverage below 1.5x (as defined as the annualized unencumbered property net operating income divided by a 8% capitalization rate).

--Net debt to recurring operating EBITDA increases above 8.0x.

Applicable Criteria and Related Research:

--'Corporate Rating Methodology', Aug. 13, 2010;

--'Parent and Subsidiary Rating Linkage', July 14, 2010;

--'Criteria for Rating U.S. Equity REITs and REOCs', April 16, 2010;

--'Equity Credit for Hybrids & Other Capital Securities - Amended', Dec. 29, 2009;

--'Rating Hybrid Securities', Dec. 29, 2009;

--'Recovery Rating and Notching Criteria for REITs', Dec. 23, 2009;

--'Evaluating Corporate Governance', Dec. 12, 2007.

Applicable Criteria and Related Research:

Evaluating Corporate Governance

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=363502 ]

Rating Hybrid Securities

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493086 ]

Equity Credit for Hybrids & Other Capital Securities - Amended

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493112 ]

Criteria for Rating U.S. Equity REITs and REOCs

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=510465 ]

Corporate Rating Methodology

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646 ]

Parent and Subsidiary Rating Linkage Criteria Report

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=534826 ]

Recovery Rating and Notching Criteria for REITs

[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=492828 ]

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