Boston Properties and the Teachers Insurance and Annuity Association are tapping the commercial mortgage bond market to refinance a 15-acre office campus in Santa Monica, Calif.
A joint venture between the real estate investment trust and the pension fund has obtained a $550 million mortgage from three banks, Morgan Stanley, Deutsche Bank and Wells Fargo, on the 1,176,161 square foot complex, which is located in the city’s media and entertainment district, according to credit rating agency DBRS.
A $350 million portion of the loan is being used as collateral for a transaction dubbed BXP Trust 2017-CC. Both DBRS and Standard & Poor's expect to assign triple-A ratings to the senior tranche of notes, which benefits from 45.818% credit enhancement. The rating agencies differ in their assessment of fiyr tranches of subordinate notes; DBRS rates them from AA to BB, while S&P's ratings range from AA- to BB-.
The remaining $200 million portion of the loan is comprised of six notes that are expected to be securitized in separate transactions.
According to DBRS, Boston Properties and TIAA acquired the property last year. The presale report does not list the original purchase price or the term of the original financing. However, proceeds from the new loan will be used to return $502.6 million of equity, fund $45.95 million in upfront reserves for outstanding leasing costs and gap rent, and cover closing costs.
Among the strengths of the transaction, according to both DBRS and S&P, is the property’s location. DBRS notes that it is near public transportation and I-10, as well as several major local thoroughfares. It spans an entire city block bounded by Cloverfield Boulevard, 26th Street, Broadway and Colorado Avenue, with direct frontage and good visibility along all four of the bordering streets, according to the presale report.
Amenities include a three-level subterranean parking garage that spans the entire length and width of the site and can accommodate up to 3,105 vehicles. The outdoor common areas are also appealing, as they feature lush landscaping, plenty of open area space, free WiFi throughout the entire site and an on-site park with tennis courts and a basketball court.
The owners plan to spend $16.9 million on capital improvements, including renovating the ground-floor retail and food court, beginning in the fourth quarter of this year.
Among the primary risks, according to S&P, is the fact that the trust loan pays only interest, and no principal, for its entire 10-year extended term. The lack of amortization could make the property more difficult to finance at maturity.
Also, the property has underperformed its submarket recently. Occupancy dipped to 57% in 2015 following the departure of two major tenants, RIOT Games and Yahoo!, that leased a total of 500,000 square feet. Since 2016 the sponsors have leased over 300,000 square feet and the property is now 90.2% leased.
There are currently 10 office tenants, with the largest five – Hulu, Edmonds, Rubin, Rubin Postaer & Associates, Kit Pharma and HBO, comprising 79.4% of the total net rentable area.
However, HBO, which occupies 10.9% of net rentable area, has given notice that it will not renew its lease. It is currently in negotiations to holdover for nine months after the lease's expiration on June 30, 2019, after which it will move into a new built-to-suit office in Culver City, CA.
CBRE values the property in its current state at $1.2 billion, based on a 40% cap rate, but DBRS puts it at roughly half that, at $584.6 million, based on a 7.5% cap rate. The resulting loan-to-value ratio would “typically be indicative of higher leverage financing, but here it is more of a reflection of the extremely low market cap rates compared with the higher DBRS stressed cap rate,” the presale report states.
S&P puts the LTV at 83.1%, taking into account the entire debt load and its valuation of the property.