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Fitch Affirms and Withdraws Brandywine's Ratings; Outlook Stable
April 20, 2017 / 5:53 PM / 7 months ago

Fitch Affirms and Withdraws Brandywine's Ratings; Outlook Stable

(The following statement was released by the rating agency) NEW YORK, April 20 (Fitch) Fitch Ratings has affirmed its 'BBB-' Long-Term Issuer Default Ratings (IDRs) for Brandywine Realty Trust (NYSE: BDN) and its operating partnership, Brandywine Operating Partnership, L.P. The Rating Outlook is Stable. Fitch has chosen to withdraw the ratings of Brandywine Realty Trust for commercial reasons. A full list of rating actions follows at the end of the release. KEY RATING DRIVERS BDN's ratings and Stable Outlook reflect Fitch's expectation that the company will sustain positive operating fundamentals and appropriate financial metrics for the 'BBB-' IDR through the one-to-two-year Outlook horizon. APPROPRIATE LEVERAGE BDN's ratings reflect Fitch's expectation that the company sustains leverage in the mid-6x range through the cycle, which is appropriate for a 'BBB-' rated REIT with Brandywine's asset profile and operating strategy. BDN's leverage was 6.4x at Dec. 31, 2016. The company's fixed-charge coverage was 2.2x for the LTM period ended Dec. 31, 2016, relatively unchanged since 2012. Coverage has been burdened by elevated recurring maintenance capital expenditures due to relatively slowly improving office fundamentals. Going forward, Fitch expects coverage to improve to the mid-2x range due to manageable lease expirations and the company disposing of lower-growth, higher capital-intensive assets. LOW RELATIVE UNENCUMBERED ASSET COVERAGE Brandywine's UA/UD has generally sustained in the high 1x range, which is low for the 'BBB-' IDR. Fitch generally views UA/UD above 2.0x as more consistent with an investment-grade profile. METRO, MID-ATLANTIC FOCUS Fitch's ratings reflect the company's Mid-Atlantic, metro office property portfolio focus. Pennsylvania and greater Washington DC generated 85.6% of 4Q16 net operating income (NOI). The Pennsylvania portfolio is well-diversified across various submarkets, with the Philadelphia central business district representing the largest submarket at 37.4% 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, Richmond and California. STRONG TENANT DIVERSIFICATION BDN has reduced its single-tenant exposure to the U.S. Government since Sept. 30, 2015 when the General Services Administration accounted for 6.9% of annualized base rent (ABR). IBM, Inc. ('A+'/Negative) was BDN's largest tenant as of Dec. 31, 2016 and contributed 3.8% of ABR for the quarter. SOLID PORTFOLIO FUNDAMENTALS Operating fundamentals have been improving, with cash same-store NOI growth of 2.3% during 2016. Fitch forecasts growth to advance into the low single digits towards the end of 2017 driven by stronger leasing and same-store core occupancy sustaining at around mid-90%, consistent with the 93.6% rate as of Dec. 31, 2016. LIMITED LEASE ROLLOVER Brandywine has a well-laddered lease maturity schedule with limited near-term rollover. 15.1% of base rent expires through 2018 and management has been proactive in renewing leases well in advance of expiration, which has contributed to higher than expected leasing-related capital expenditures. UNSECURED MATURITIES DEPRESS LIQUIDITY Fitch estimates BDN's liquidity coverage at roughly 1.0x, based on an $11 million deficit to expected uses when considering Brandywine's unfunded development pipeline, which is spread fairly evenly across four wholly-owned projects and BDN's remaining equity commitment to its 1919 Market Street real estate joint venture. The company's liquidity is most impacted by $625 million in unsecured bond maturities through 2018, which Fitch expects the company will be able to refinance. Positively, the company has no significant mortgage maturities until 2020 since BDN successfully reduced interest costs and extended the maturity on its Two Logan Square asset in April 2016. STABLE OUTLOOK The Stable Outlook reflects Fitch's expectation that BDN will manage to its financial policy targets which are appropriate for the rating level through the one-to-two-year Rating Outlook horizon. KEY ASSUMPTIONS Fitch's key assumptions within the rating case for BDN include: --BDN operates with financial policies that are appropriate for the 'BBB-' rating level through the cycle, including sustaining leverage in the mid-6x range; --Moderately positive portfolio operating fundamentals through the forecast period; --BDN successfully executes and stabilizes its developments under construction; --Unsecured maturities are refinanced with unsecured debt capital. RATING SENSITIVITIES Ratings sensitivities are no longer relevant given today's withdrawal. FULL LIST OF RATING ACTIONS Fitch has affirmed and withdrawn the following ratings: Brandywine Realty Trust --IDR at 'BBB-' Brandywine Operating Partnership, L.P. --IDR at 'BBB-'; --Senior unsecured line of credit at 'BBB-'; --Senior unsecured term loans at 'BBB-'; --Senior unsecured notes at 'BBB-'. Contact: Primary Analyst Stephen Boyd, CFA Senior Director +1 212 908 9153 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Secondary Analyst Steven Marks Managing Director +1 212 908 9161 Committee Chairperson Britton Costa, CFA Senior Director +1 212 908 0524 Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com. Summary of Financial Statement Adjustments --Historical and projected recurring operating EBITDA is adjusted to add back non-cash stock-based compensation and include Fitch's estimate of recurring cash distributions from joint venture operations; --Fitch has adjusted the historical and projected net debt by assuming the issuer requires $100 million of cash for working capital purposes which is otherwise unavailable to repay debt. 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