Fitch Rates Brandywine's $250MM Sr Unsecured Notes Due 2023 'BB+'; Outlook Stable
Fitch Ratings assigns a credit rating of 'BB+' to the $250 million aggregate principal amount 3.95% senior unsecured notes due 2023 issued by Brandywine Operating Partnership, L.P., a subsidiary of Brandywine Realty Trust (NYSE: BDN). The notes were issued at 99.27% of par to yield 4.04%, representing a 235-basis point (bp) spread to the benchmark treasury.
BDN will use the proceeds to fund previously announced tender offers for up to $217 million of outstanding 7.5% senior notes due 2015 and up to $250 million of 6.0% senior notes due 2016. Any excess proceeds will be used for general corporate purposes including the repayment or repurchase of other debt.
Fitch currently rates Brandywine Realty Trust and its affiliates as follows:
Brandywine Realty Trust
--Issuer Default Rating (IDR) 'BB+';
--Preferred stock 'BB-'.
Brandywine Operating Partnership, L.P.
--Unsecured revolving credit facility 'BB+';
--Senior unsecured term loans 'BB+';
--Senior unsecured notes 'BB+.'
The Rating Outlook is Stable.
The ratings reflect 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. Despite this 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,.
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 (29.5% of net operating income [NOI] for the three months ended Sept. 30, 2012) Philadelphia central business district (24.3%), Metropolitan D.C. (18.8%), New Jersey/Delaware (12.3%), Richmond, VA (6.1%), Austin (5.7%) and California (3.0%). Fitch views the geographic concentration as a modest credit negative.
The company's portfolio benefits from tenant diversification, with the top 10 tenants representing 24.3% of total base rent at Sept. 30, 2012, and no tenant except for the U.S. Government Services Administration (GSA) comprises more than 3% 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 CBD 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. SSNOI grew 1.8% in 1Q 2012, declined 0.7% in second quarter (2Q'12) and grew 3.4% in 3Q'12, driven primarily by rising occupancy.
Since 2006, Brandywine has underperformed a selected office peer group by approximately 310 bps in both same-property NOI growth performance and occupancy metrics. Brandywine has also underperformed its markets on an NOI growth 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 had a negative impact on fixed-charge coverage levels. Fixed-charge coverage for the 12 months ended Sept. 30, 2012 was 1.6x, compared with 1.5x in 2011, and 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 Sept. 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 solid at 1.4x for the period Oct. 1, 2012 through Dec. 31, 2014. Fitch defines liquidity coverage as 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).
The company has adequate unencumbered asset coverage of unsecured debt for the 'BB+' IDR of 1.5x as of Sept. 30, 2012, which is lower than investment-grade rated suburban office REIT peers. Fitch calculates unencumbered assets 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 Sept. 30, 2012);
--Fitch's expectation of fixed-charge coverage sustaining above 2.0x (coverage was 1.6x for the 12 months ended Sept. 30, 2012).
The following factors may result in negative momentum on the ratings and/or Rating Outlook:
--Fitch's expectation of leverage sustaining above 8.0x;
--Fitch's expectation of BDN 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:
--'Treatment and Notching of Hybrids in Non-financial Corporate and REIT Credit Analysis,' Dec. 13, 2012.
--'Recovery Rating and Notching Criteria for Equity REITs,' Nov. 12, 2012;
--'Corporate Rating Methodology,' Aug. 8, 2012;
--'Parent and Subsidiary Rating Linkage,' Aug. 8, 2012;
--'Criteria for Rating U.S. Equity REITs and REOCs,' Feb. 27, 2012.
Applicable Criteria and Related Research:
Criteria for Rating U.S. Equity REITs and REOCs
Parent and Subsidiary Rating Linkage
Corporate Rating Methodology
Recovery Ratings and Notching Criteria for Equity REITs
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis
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