Brookfield Asset Management is tapping the European commercial mortgage bond market to refinance a 36-story office building in the City of London that it acquired two years ago.
In November, BSREP International, an entity controlled by Brookfield, obtained a £367.5 million mortgage and £91.9 million of mezzanine debt from Morgan Stanley; proceeds were used to refinance £436.0 million of existing mortgage debt; fund £16.9 million of capital expenditures, leasing commissions, letting agent costs, and tenant incentives; and pay closing costs. The facility consists of a £13.5 million portion that is pari passu to the Senior Loan and a £3.4 million portion that is pari passu to the mezzanine debt.
The senior loan has an initial term of three years and can be extended by one year twice, for a total extended term of up to five years; it pays only interest of Libor plus 2.15%, and no principal, for the entire term. This loan consists of two parts: a £349.1 million senior portion, which is being securitized in a transaction called Salus (European Loan Conduit No. 33) and an £18.4 million portion that will be retained by Morgan Stanley.
The property, known as CityPoint is a 709,236 square foot, 36-story office building located in the City of London, London's financial district, in close proximity to the Moorgate underground station. The property was purpose-built in 1967 for British Petroleum and substantially adapted and rebuilt to increase height and floorplate size between 1998 and 2000. It includes 627,887 square feet of office space, with the remaining square footage made up of retail (67,357 square feet) and basement storage (13,992 square feet) space. Additionally, the property has a 99-vehicle subterranean parking facility.
Kroll Bond Rating Agency considers the senior loan to be “moderately leveraged”; it puts the loan-to-value ratio of the debt held in the securitization trust at 74.8%. The LTV based on the current valuation of the property is even lower, at 61.3%. That’s lower than average of 65.4% for 11 European CMBS transactions over the past year. However, after the mezzanine debt is taken into account, the property has an LTV of £91.9 million and a KLTV of 93.5%.
DBRS puts the LTV, including mezzanine debt, much lower, at 75%. Though it considers this level to be relatively high, the rating agency takes comfort from the fact that the sponsor still has $150 million of equity in the property.
Both rating agencies noted in their presale reports that BSREP originally purchased a £106 million junior loan associated with the property from Mount Kellett Capital Management in 2014. At the time, the property was also encumbered by a £429 million senior loan that was originated by Morgan Stanley in 2007 and securitized in the Ulysses (European Loan Conduit No. 27) transaction. The senior loan was transferred to special servicing in February 2012 due to a payment default but was paid off in full in January 2017, when BSREP acquired the property, with no principal losses to the bondholders.
Five classes of certificates will be issued in the new transaction, of which four are entitled to principal and interest and one is entitled to interest only; both Kroll and DBRS expect to assign a triple A to the senior tranche.
DBRS noted that its ratings assume that BSREP will complete the planned £22.6 million capital expenditures, which include renovating floors six through eight, which are currently leased at below-market rates, and releasing them.
