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Fitch: Prentiss Acquisition May Lead to Outlook Revision for Brandywine.

NEW YORK -- Fitch Ratings views Brandywine Realty Trust's (NYSE:BDN) expected acquisition of approximately 77% of the assets of Prentiss Properties Trust (NYSE:PP) as a credit positive for Brandywine based on information that was provided by management. Upon the closing of the transaction, Fitch expects to affirm Brandywine, as well as principal operating subsidiary, Brandywine Operating Partnership L.P., as follows:

-- Issuer rating 'BBB-';

-- Senior unsecured notes 'BBB-';

-- Preferred stock 'BB+'.

Additionally, Fitch expects to revise BDN's Rating Outlook to Positive from Stable.

BDN has established a track record as a strong operator in its current markets, consistently outperforming its competitors with above-average occupancy, rents, and tenant retention. Brandywine ended the second quarter of 2005 with a portfolio that was 92.9% leased, a solid feat in a challenging office market. BDN significantly outperforms its competitors in several of its major submarkets. Additionally, BDN's average tenant retention rate over the past five years is 77%, illustrating the company's management skills and high quality assets. BDN's portfolio contains a diverse, high quality tenant base with over 1,700 tenants and no tenant representing more than 3.7% of annualized base rent. This tenant base also serves to generate cash flows that are fairly stable, adding to the credit profile.

These factors have enabled BDN to consistently maintain coverage ratios that are strong for the rating category. Interest coverage, defined as EBITDA divided by the sum of interest expense and capitalized interest, was 3.06 times (x) for the last 12 months. Fixed-charge coverage, defined as EBITDA less tenant improvements, recurring capital expenditures, and straight line rents divided by the sum of interest expense, preferred dividends and capitalized interest, was 2.27x for the same period.

BDN management has continued to place a high priority on maintaining a conservative balance sheet, with reasonably low leverage, a manageable debt maturity schedule, a fairly low portion of variable-rate debt, and a large pool of unencumbered assets. As of June 30, 2005, debt to undepreciated book capital was 48.1% while debt plus preferred stock to undepreciated book capital was 51.7%, both of which are acceptable for the rating category. Including BDN's remaining development commitments increases leverage only modestly. As of June 30, 2005, BDN's unencumbered asset coverage was a significant 2.11x.

BDN management has also sought to further diversify its funding sources by accessing the unsecured borrowing market in 2004 with three series of unsecured notes totaling $637 million. BDN has maintained a $450 million revolving credit facility that can be expanded to $600 million and has successfully issued several series of preferred stock, adding to its liquidity profile.

Geographic concentration has been an ongoing credit concern for Fitch. BDN's portfolio is currently located in four states in the mid-Atlantic region, with Pennsylvania and New Jersey generating over 75% of annualized rental income. This is particularly worrisome because the commercial office sector and several of BDN's submarkets specifically have historically suffered from greater volatility than other property types and markets.

The acquisition of the Prentiss assets will materially add to the geographic diversification of BDN's portfolio. Brandywine adds significant assets in the Dallas/Forth Worth, Washington D.C., Austin, and Bay Area markets, as well as several assets in Southern California, making it less susceptible to an economic downturn in a single region. While Fitch acknowledges that some of the new markets are susceptible to supply/demand imbalances, others have been more stable during the recent cyclical fluctuations. On balance, Fitch sees the diversification into additional markets as a significant positive for BDN's credit profile. Fitch also anticipates that BDN's expanded size will enhance its access to capital and potentially lower its financing costs.

BDN's lease expiration and debt maturity schedules are expected to be reasonable, with no more than 15% of leases coming due in any year and no more than 16% of debt coming due in any given year. BDN's expanded tenant roster will continue to be dominated by diverse tenants with strong credits.

Partially offsetting these benefits is the hefty integration risk that the company faces. BDN is increasing the size of the company by nearly 70% and in markets where current management has not demonstrated its expertise. BDN management has indicated that it plans to work diligently to facilitate a smooth transition, retaining many important members of the Prentiss management team in an effort to maintain key relationships in the new markets. Fitch also notes that BDN's recent integration of the Rubenstein portfolio illustrates management's ability to maintain its focus on existing assets while adding a new portfolio. Fitch will monitor the Prentiss integration in future periods.

BDN's leverage is also expected to rise modestly as the company assumes some Prentiss mortgage debt and finances a portion of the purchase price with bridge financing. As a result, Brandywine's strong coverage metrics and unencumbered asset coverage are expected to decline somewhat. Fitch believes that these metrics will remain within a range that is appropriate for the rating category. Based on management's plan and Fitch's understanding of the execution risk, Fitch anticipates that management will reduce leverage and improve interest, fixed-charge, and unencumbered asset coverage over time.

Headquartered in Plymouth Meeting, Pennsylvania, Brandywine Realty Trust actively participates in acquiring, developing, redeveloping, leasing, and managing office and industrial properties primarily located in the mid-Atlantic region. As of June 30, 2005, BDN had $3.1 billion in undepreciated book capital. BDN's portfolio includes 223 office properties, 24 industrial facilities, and one mixed-use property, representing approximately 19.6 million of net rentable square feet. BDN also held economic interests in nine unconsolidated real estate ventures containing approximately 1.6 million net rentable square feet that were formed with third parties to develop or own commercial properties as well as two consolidated joint ventures that own two office properties.

Headquartered in Dallas, TX, Prentiss Properties acquires, owns, manages, leases, develops, and builds primarily office properties throughout the U.S. As of June 30, 2005, the company had equity interests in 128 properties representing 18.8 million net rentable square feet of commercial property in 10 markets and also managed an additional 8.9 million net rentable square feet of space for third parties. As of June 30, 2005, Prentiss had approximately $2.4 billion in undepreciated book capital.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, Published ratings, criteria, and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance, and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
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Publication:Business Wire
Date:Oct 3, 2005
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