Brookfield Asset Management is returning to the commercial mortgage bond market once again to finance its January purchase of Forest City Realty Trust. This time, it’s refinancing the fee interest in acquired in four office properties, one mixed-use office/retail property, and two biomedical office properties, in New York, Pennsylvania, Virginia and Maryland.
And this time, the real estate investment trust is putting down down some fresh equity, rather than cashing money out, according to rating agency presale reports.
Brookfield has obtained some $550 million in loans from four banks (Barclays, Citigroup, Bank of America and Deutsche Bank): a $402.8 million first mortgage and $147.2 million of mezzanine debt. The mortgage, which pays only interest of Libor plus 2.22875%, and no principal, for its entire extended term of five years, is being used as collateral for an offering of mortgage bonds called CORE 2018-CORE Mortgage Trust.
Wells Fargo is the master servicer and Trimont Real Estate Advisors is the special servicer.
Among the strengths of the deal, according to S&P Global Ratings, is that all the properties are of either class A or B quality. And, with the exception of one, Glen Forest Office Park, all of them are in core central business district.
Additionally, some of the properties benefit from "consistent demand drivers," including being located adjacent to the campuses of major research universities (UPenn Life Sciences and Johns Hopkins Life Sciences), or having long-term government tenants that have demonstrated a commitment to the properties (One Pierrepont Plaza and Harlem Office).
The 6.3 million-square-foot portfolio has a diverse rent roll with approximately 194 distinct tenants. Johns Hopkins is the largest, with 6.4% of the net rentable area and 9.1% in-place rent, followed by various departments of the City of New York (6.3% NRA; 9.9% in-place rent), and the University of Pennsylvania (NRA; 7.8% in-place rent); no other tenant occupies more than 3.4% of NRA. Furthermore, the leases are staggered so that no more than 9.7% roll over in any given year.
Risks include the fact that four of the properties are either fully or partially subject to ground leases. "Ground rents for UPenn Life Sciences and the Edgeworth Building have no escalations over their respective terms," S&P states in its presale report. "However, for One Pierrepont Plaza and the Harlem Office building, the base ground rent will reset periodically, and will be based, in part, on the then fair market value of the land underlying the buildings. These resets are expected to dramatically increase the amount of ground rent due under these ground leases."
Based on the allocated purchase price of the subject portfolio, S&P estimates that Brookfield is investing approximately $285.5 million of fresh equity, or 34.2% of the total cost, to acquire the properties, fund upfront reserves and cover closing costs.
Nevertheless, the trust loan balance is highly leveraged, with a 92.5% LTV, based on S&P’s own valuation; based on the appraiser's valuation, the LTV is much lower, a 56.1%.
After taking into account the mezzanine loans held outside the securitization trust, S&P’s LTV rises to 126.3%.
Both S&P and Morningstar Credit Ratings expect to assign triple-A ratings to the senior tranche of securities to be issued by CORE-2019 Core Mortgage Trust.
