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Ratings firm cautions over WeWork exposure for LA office MBS

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A Canadian real estate developer’s new loan for a Western Los Angeles office tower complex – which is 88.5% leased – is being partially financed through the mortgage securitization market.

But the $405.15 million MBS deal has raised some unique risk concerns with a ratings agency: much of the cash flow supporting the loan will be derived from a potentially volatile tenant, shared workspace operator WeWork.

According to a presale report from DBRS Morningstar, Onni Group has pledged all of the fee income and leasehold interests in its 1.06-million square foot Wilshire Courtyard property to MBS investors in a deal arranged by Natixis. (The single-asset, single-borrower deal is dubbed Natixis Commercial Mortgage Securities Trust 2019-MILE).

About 31.6% of the net rentable area has been leased to WeWork, making the controversial company the largest tenant in the building when the company is scheduled to begin occupying 335,386 square feet of Wilshire Courtyard space next May.

While WeWork has accepted the space as of November 2019, and is expected to begin paying rent when its lease commences, DBRS Morningstar's reported stated the agency is nevertheless concerned that the transaction has “significant exposure” to the co-working space provider.

The ratings agency noted WeWork’s failed IPO in September and the subsequent ouster of chief executive and founder Adam Neumann has raised worries on the future of the “embattled” company, which has been taken over by Japanese conglomerate Softbank.

In addition, the agency report stated, the shared workspace firm has also reportedly tried to “back out” or sublease several of its leases in commercial buildings elsewhere – abandoning space that developers and owners had built-to-suit with costly renovations for WeWork.

“They are in a restructuring process that resulted in layoffs, and the future remains unclear as it attempts to shed spaces and reposition the company,” the agency’s presale report stated.

“WeWork typically gets high [tenant improvement] packages and this property is no different with the buildout at Wilshire Courtyard costing in excess of $100 per square foot according to the sponsor,” according to DBRS Morningstar’s report. “The cost to repurpose WeWork’s space to another user could be high as well,” if WeWork leaves or ultimately does not utilize the space in the building.

Having WeWork as a tenant has been considered a potential negative to office-building loans collateralized in recent CMBS deals.
Most of those worries, however, centered on whether the market for short-term office space would suffer in the event of an economic downturn.

The transaction features seven classes of notes as well as a non-offered risk-retention tranche, which will be funded through proceeds from the fee-simple and leasehold interest in the two-building office complex in LA’s “Miracle Mile” submarket adjacent to Beverly Hills.

The notes include a $150.1 million Class A tranche with preliminary AAA ratings from DBRS Morningstar.

The bonds are secured by the three-year loan (with two one-year renewable options) secured by the revenues from the fee-simple and leasehold interests held in the buildings by Onni, the real estate holding vehicle for Canada’s wealthy De Cotiis family.

The Onni loan backing the notes has a 5.95% coupon, and benefits from a debt-service coverage ratio of 1.09x and a loan-to-value ratio estimated at 114.9% by DBRS Morningstar. On potential rent of $55.58 million, the net cash flow is estimated at $26.5 million.

In addition to the first mortgage that was co-underwritten with Cantor Fitzgerald, Natixis also originated a $69.45 million mezzanine loan for the property that increased the DBRS Morningstar LTV to 134.5%. (That loan was assigned outside the trust to a Brookfield Real Estate Financial Partners affiliate).

The Vancouver-based real estate development firm purchased Wilshire Courtyard earlier this year in a reported $630 million transaction.

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CMBS Natixis