NEW YORK--()--Fitch Ratings affirms the following credit ratings of Brandywine Realty Trust (NYSE: BDN) and its operating partnership, Brandywine Operating Partnership, L.P. (collectively Brandywine):
Brandywine Realty Trust
--Issuer Default Rating (IDR) at 'BB+';
--Preferred stock at 'BB-'.
Brandywine Operating Partnership, L.P.
--IDR at 'BB+';
--Unsecured revolving credit facility at 'BB+';
--Senior unsecured notes at 'BB+.'
Additionally, Fitch assigns a rating of 'BB+' to the $600 million of senior unsecured term loans.
The Rating Outlook is Stable.
The rating affirmation reflects the company's credit strengths, including its manageable debt maturity and lease expiration schedules, granular tenant base, and healthy access to capital markets. Operating fundamentals in Brandywine's markets remain weak and likely will be so in the near to medium term. However, Fitch expects the company's leverage and coverage metrics to remain appropriate for the rating category over the next 12-24 months.
Overall, Brandywine's credit profile is improving and fundamentals, though still weak are showing signs of improvement. Fitch does not anticipate that Brandywine's credit profile will improve enough over the next 12-24 months to warrant an Outlook revision to Positive at this time, despite this improvement.
The economic recovery remains fragile, with the high unemployment rate continuing to adversely impact business prospects of many of Brandywine's tenants. Brandywine's portfolio is focused in the Mid-Atlantic region, with the top regions represented by the Pennsylvania suburbs (29.1% of NOI for the three months ended June 30, 2012) Philadelphia central business district (24%), Metropolitan D.C. (19.6%), New Jersey/Delaware (12.7%), Richmond, VA (6.5%), Austin (5.5%) and California (2.6%).
The company's portfolio benefits from tenant diversification, with the top 10 tenants representing 24.3% of total base rent at June 30, 2012 and no tenant except for the U.S. Government Services Administration (GSA) comprises more than 4% of total base rent.
The company's geographic focus, with exposure to some weaker submarkets with low barriers to entry, has provided limited growth notwithstanding decent performance by the stronger CDB and urban core markets, most notably the Philadelphia CBD and the Pennsylvania Crescent markets. Same-store NOI on a cash basis declined 5.2%, 3.7% and 2.7% in 2011, 2010 and 2009, respectively. However, SSNOI grew 1.8% in 1Q 2012, before declining 0.7% in 2Q 2012. Fitch projects SSNOI will grow 1.6% in 2012, largely driven by increasing occupancy, offset by negative leasing spreads.
Since 2006, Brandywine has underperformed its selected office peer group by approximately 310 bps in both same-property NOI growth performance and occupancy statistics. Brandywine has also underperformed its markets on an NOI basis, as followed by Property & Portfolio Research (PPR), by approximately 150 bps since 2006.
Weak occupancy and rent growth combined with elevated recurring capital expenditures have negatively impacted fixed charge coverage levels. Fixed-charge coverage for the 12 months ended June 30, 2012 was 1.5x, unchanged from 1.5x in 2011, and down slightly from 1.6x in 2010. This coverage is appropriate for the 'BB+' IDR and significantly below BDN's investment-grade suburban office peers. Fitch expects the company's fixed charge coverage ratio to rise toward 1.9x through 2014, driven by moderately positive SSNOI growth and moderating recurring capital expenditures. Fitch defines fixed-charge coverage as recurring operating EBITDA less recurring capital expenditures less straight line rent adjustments, divided by interest expense, capitalized interest, and preferred dividends.
Leverage (net debt divided by recurring operating EBITDA) remains appropriate for the 'BB+' rating. Leverage was 7.0x at June 30, 2012, compared with 7.2x and 7.5x at Dec. 31, 2011, and 2010, respectively. Fitch expects leverage to decline to 6.7x in 2014, due primarily to modestly improving fundamentals and asset sales driving debt reduction.
The Stable Outlook reflects Fitch's view that Brandywine maintains healthy access to capital, adequate liquidity and solid unencumbered asset coverage of unsecured debt.
The company's liquidity coverage ratio is strong. Sources of liquidity (unrestricted cash, availability from the company's unsecured revolving credit facility, projected retained cash flows from operating activities after dividends and distributions) divided by uses of liquidity (debt maturities, projected recurring capital expenditures and development/redevelopment expenditures) result in a liquidity coverage ratio of 1.5x for the period July 1, 2012 through Dec. 31, 2014.
The company has adequate unencumbered asset coverage of unsecured debt of 1.5x as of June 30, 2012 for the 'BB+' IDR, which is lower than higher-rated suburban office REIT peers. Fitch calculates unencumbered asset coverage by estimating BDN's unencumbered NOI divided by a stressed 9% capitalization rate.
The two-notch differential between Brandywine's IDR and preferred stock rating is consistent with Fitch's criteria for corporate entities with an IDR of 'BB'. Based on 'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis', these preferred shares are deeply subordinated and have loss absorption elements that would likely result in poor recoveries in the event of a corporate default.
The following factors may result in positive momentum on the ratings and/or Rating Outlook:
--Sustained positive same-store NOI growth;
--Fitch's expectation of net debt to recurring operating EBITDA sustaining below 6.5x (leverage was 7.0x for the 12 months ended June 30, 2012);
--Fitch's expectation of fixed-charge coverage sustaining above 2.0x (coverage was 1.5x for the 12 months ended June 30, 2012).
The following factors may result in negative momentum on the ratings and/or Rating Outlook:
--Leverage sustaining above 8.0x;
--Maintaining fixed-charge coverage below 1.5x;
--A sustained decline in unencumbered asset coverage below 1.5x (defined as annualized unencumbered property net operating income divided by a 9% capitalization rate).
Additional information is available at 'www.fitchratings.com'. The ratings above were unsolicited and have been provided by Fitch as a service to investors.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology,' Aug. 8, 2012;
--'Parent and Subsidiary Rating Linkage,' Aug. 8, 2012;
--'Recovery Rating and Notching Criteria for Equity REITs,' May 3, 2012;
--'Criteria for Rating U.S. Equity REITs and REOCs,' Feb. 27, 2012;
--'Treatment and Notching of Hybrids in Non-financial Corporate and REIT Credit Analysis,' Dec. 15, 2011.
Applicable Criteria and Related Research:
Corporate Rating Methodology
Parent and Subsidiary Rating Linkage
Recovery Ratings and Notching Criteria for Equity REITs
Criteria for Rating U.S. Equity REITs and REOCs
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis