Fitch Upgrades Brandywine's Ratings to Investment Grade; Outlook Stable

The Rating Outlook is Stable.

KEY RATING DRIVERS

The ratings upgrade for Brandywine to investment-grade centers on Fitch's expectation of the company reducing leverage to the mid-6x range in 2016 and sustain this level for the foreseeable future. Fitch expects proceeds from announced 4Q'15 dispositions, combined with additional sales in early 2016, to be used primarily to reduce debt and fund development, primarily FMC Tower, which should be delivered in mid-2016.

Upon stabilization of FMC Tower, Fitch expects the company's leverage to sustain in the low- to mid-6x area. Fitch's current ratings have moderate tolerance for BDN's leverage increasing above 7.0x due to share buybacks and/or new development. The company's portfolio of CBD and suburban office properties has continued to strengthen as highlighted by higher occupancy and improved leasing that has bolstered continued decent same-store net operating income (SSNOI) growth. These credit strengths are mitigated by a UA/UD ratio that is low for the rating, moderately weak fixed-charge coverage relative to investment-grade peers, and lease-up risk related to FMC Tower.

ASSET SALES ACCELERATE DE-LEVERING

Brandywine has capitalized on a robust sales market in the past 12 months, publicly announcing the sale of over $700 million in assets during 2015. The sales have not only monetized non-core assets, but have also reduced BDN's secured debt stack by $236 million, accelerating the de-levering of the company's balance sheet well beyond Fitch's near-term expectations. Pro forma for the announced transactions, Brandywine's leverage was 6.8x at Sept. 30, 2015.

SLIGHTLY WEAK LIQUIDITY DUE TO DEVELOPMENT PIPELINE

The company's liquidity coverage is 0.8x when considering Brandywine's unfunded development pipeline, the largest portion of which relates to $229 million of unfunded costs for FMC Tower. The company expects to fund these costs, upcoming debt maturities and recurring capital expenditures with the aforementioned asset sales. Fitch defines liquidity coverage as liquidity sources divided by liquidity uses. Liquidity sources include unrestricted cash, availability under unsecured revolving credit facilities and projected retained cash flows from operating activities. Liquidity uses include pro rata debt maturities, projected recurring capital expenditures and development expenditures.

SLIGHTLY LOW UNENCUMBERED ASSET COVERAGE

Brandywine's unencumbered asset coverage of unsecured debt (net of readily available cash) was 1.8x at 3Q'15, which is low for the 'BBB-' IDR. Fitch views asset coverage of unsecured debt above 2.0x as more consistent with an investment-grade profile. This ratio remains level assuming stabilization of an unencumbered FMC Tower by YE17 at an 8% yield, pro forma for dispositions of unencumbered assets announced in 2015 and expected in 2016.

FIXED CHARGE COVERAGE

The company's fixed-charge coverage was 1.9x for the LTM period ended Sept. 30, 2015, 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-2.0x range due to manageable lease expirations and the company disposing of lower-growth, higher capital-intensive assets.

MID-ATLANTIC PORTFOLIO FOCUS

Brandywine's office portfolio is focused in the Mid-Atlantic United States, with Pennsylvania and greater Washington DC generating 81% of 3Q'15 NOI. The Pennsylvania portfolio is well-diversified across various submarkets, with the Philadelphia central business district representing the largest submarket at 35% 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
The GSA is BDN's largest tenant and contributed 6.9% of annual base rent (ABR) for the quarter ended Sept. 30, 2015. Excluding the GSA, the remaining top 10 tenants generate only 17.8% of total base rent, with no tenant representing greater than 2.9% of ABR. The tenant base is also of strong credit quality with 6 of the 20 largest tenants rated investment grade by Fitch (Fitch does not rate the other 14).

SOLID PORTFOLIO FUNDAMENTALS

Operating fundamentals have been improving, with cash same-store NOI growth of 3.0% during the first nine months of 2015. 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 in the mid-90% area, consistent with the 94.2% rate as of Sept. 30, 2015. Year-to-date GAAP leasing spreads have been a solid 6.7%, although tenant allowances and leasing commissions per square foot per lease year have been volatile and have been slightly above the company's long-term average over the last six quarters.

LIMITED LEASE ROLLOVER

Brandywine has a well-laddered lease maturity schedule with limited near-term rollover. 22.8% of base rent expires through 2017 and management has been proactive in renewing leases well in advance of expiration, which has contributed to higher than expected leasing-related capital expenditures.

Preferred Stock Notching

The two-notch differential between BDN's IDR and preferred stock rating is consistent with Fitch's criteria for corporate entities with an IDR of 'BBB-'. Based on Fitch research titled 'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis', these preferred securities are deeply subordinated and have loss absorption elements that would likely result in poor recoveries in the event of a corporate default.

STABLE OUTLOOK

The Stable Outlook reflects Fitch's expectation that BDN will reach targeted operating metrics and maintain them at appropriate levels through the rating horizon.

KEY ASSUMPTIONS

Fitch's key assumptions within our rating case for the issuer include:
--Low single-digit same store growth in 2016 and 2017;
--Dispositions of $354 million through the balance of 2015 at 7.4% cap rate;
--Net dispositions of approximately $700 million in 2016 at 7.1% cap rate, and none in 2017;
--No acquisitions in 2017;
--(Re)development expenditures of $109 million, $292 million, and $95 million in 2015 - 2017, respectively;
--Recurring maintenance capex of $31 million, $50 million, and $42 million in 2015 - 2017, respectively;
-- $300 million unsecured issuance in 2017 to refinance note maturity;
--Approximately $230 million in secured debt repaid via net proceeds from 2015 asset dispositions, $130 million mortgage note refinanced in 2015;
--All $100 million Series E preferred stock repurchased and retired in 2017.

RATING SENSITIVITIES

The following factors may have a positive impact on Brandywine's ratings and/or Outlook:

--Fitch's expectation of leverage sustaining around 6x (leverage at Sept. 30, 2015 was 6.9x);
--Fitch's expectation of fixed-charge coverage sustaining above 2.5x (coverage for TTM ended Sept. 30, 2015 was 1.9x);
--Unencumbered asset coverage of unsecured debt (based on a stressed 9% cap rate) maintaining above 2.5x (asset coverage was 1.8x as of Sept. 30, 2015).

The following factors may have a negative impact on the company's ratings and/or Outlook:
--Fitch's expectation of leverage sustaining above 7x;
--Fitch's expectation of fixed-charge coverage sustaining below 1.5x;
--Actions indicative of the company prioritizing equity stakeholders ahead of creditors, such as further stock buybacks and/or speculative development starts.

FULL LIST OF RATING ACTIONS

Fitch has upgraded Brandywine's ratings as follows:

Brandywine Realty Trust
--IDR to 'BBB-' from 'BB+';
--Preferred Stock to 'BB' from 'BB-'/RR6.

Brandywine Operating Partnership, L.P.
--IDR to 'BBB-' from 'BB+';
--Senior unsecured line of credit to 'BBB-' from 'BB+'/RR4;
--Senior unsecured term loans to 'BBB-' from 'BB+'/RR4;
--Senior unsecured notes to 'BBB-' from 'BB+'/RR4.

The Rating Outlook is Stable.