Credit Suisse is marketing $180.8 million of bonds backed by a portfolio of 58 suburban office and industrial properties totaling 3.9 million square feet, according to Standard & Poor’s.
The properties are cross-collateralized and cross-defaulted and are located in Virginia, Pennsylvania, New Jersey, and North Carolina. Additionally, as part of the loan collateral, the lender has received a pledge of 100% of the equity interests in the borrower, a joint venture between Brandywine Operating Partnership and a series of five investment funds.
S&P expects to assign an ‘AAA’ to the senior tranche of notes to be issued, which has a loan to value ratio of 45%.
Among S&P’s primary rating considerations is the fact that 38.5% of the properties securing the loan are located in what it considers to be primary markets and the remaining 61.5% in secondary markets. “Primary and secondary markets have exhibited lower default and loss rates relative to tertiary markets,” the presale report states.
Also, the portfolio is currently 90.3% occupied and has operated at a relatively stable occupancy level of between 86.8% and 90.8% since 2011.
The portfolio benefits from the long-term ownership and management by Brandywine Operating Partnership. Brandywine began assembling and managing the portfolio in 1996, and has owned the vast majority of the assets since 1998. Since 2010, the property manager invested about $11.6 million in capital improvements at the properties.
However, the properties are highly leveraged, with a loan-to-value ratio, as measured by S&P, of 91.1%. (S&P’s long-term sustainable value is 21.0% below the appraiser's valuation; the LTV ratio based on the appraised value is 72%.)
Moreover, the mortgage loan pays only interest, and no principal, for its entire term, meaning that there will be no scheduled amortization during the loan term. This increases the risk that the sponsor will not be able to refinance when the loan comes due in February 2018. (The loan can be extended until February 2021.) However, S&P has accounted for this risk in our credit enhancement levels.
Also, there is no additional debt other than the mortgage loan and debt incurred in the ordinary course of the borrower's business. Additionally, future subordinate debt is not permitted as part of the transaction.
Another risk is that several of the properties have rents that are considered to be above market, based on the appraiser's assessment, meaning they might be renewed at lower levels.
The properties face tenant rollover risk during the loan term, with approximately 23.6% of the in-place gross rent (as calculated by S&P) expiring by the initial loan maturity in February 2018. By the fully extended loan maturity date in February 2021, approximately 60.4% of the in-place gross rent expires.