QSuper Board, an Australian pension fund managed by Invesco, is tapping the commtercial mortgage bond market to finance a portion of a 52-story office building on Manhattan’s Upper West Side, according to S&P Global Ratings.

The firm obtained $319 million in loans from Wells Fargo; a $175 million, 10-year, fixed-rate loan that pays only interest, and no principal, is being used as collateral for a commercial mortgage securitization. Wells Fargo is retaining a $144 million companion loan that ranks pari passu, or equal status, to the loan being securitized.

Bloomberg News

The collateral for both loans is the borrower's leasehold and condominium interest in the 684,515-square-foot office portion of 1745 Broadway, a 52-story, LEED-certified, class A mixed-use office, retail, and residential tower.

Among the strengths pf the deal, according to S&P, is it 's llow leverage. The mortgage has a 64.5% loan-to-valua based on S&P's valuation. The LTV ratio based on the appraiser's valuation is 50.5%. Our estimate of long-term sustainable value is 21.8% lower than the appraiser's valuation of $632 million.

The mortgage lhas a debt service coverage (DSC) ratio of 2.47x, calculated using the mortgage note's fixed rate and S&P’s estimate of net cash flow, which is 17.9% lower than the issuer's net cash flow. The DSC ratio when using the issuer's net cash flow is 3.00x.

The property is fully leased to two office tenants as of June 2018, and it has served as the global headquarters for Penguin Random House (92% of the net rentable area) and its parent company, Bertelsmann, which carries an investment grade rating, since the building's construction in 2003. The other tenant, PDT Partners Inc., leases the top two floors, 24 and 25 (7.8% of net rentable area). The current base rent for office tenants is $79.35 per square foot, as calculated by S&P. In comparison, per CBRE Econometric Advisors, its West Side office submarket has a class A office vacancy rate of 5.3%, and gross asking rent was $83.85 per square foot as of this year's first quarter.

Also, the transaction structure holds the borrower responsible for expenses that would typically result in shortfalls to the certificate holders, such as special servicing, workout, and liquidation fees, as well as costs and expenses incurred from the special servicer's appraisals and inspections.

However, the mortgage does not provide for a “warm-body guarantor.” The loan's nonrecourse carve-out guarantor is 1745 Broadway Owner LLC. “This limitation weakens the disincentive that a typical nonrecourse carve-out related to voluntary bankruptcy provides,” S&P states in its presale report. “However, we believe the institutional ownership, location in a primary market, and the transaction's low leverage based on the appraisal valuation are mitigating factors.”

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