Deutsche Bank plans to issue $900 million in securities backed by a first mortgage loan that is secured by the Grace Building, a midtown Manhattan high-rise office building, according to a Morningstar presale report.
The loan has a seven-year term and offers interest-only payments thorough the life of the loan, based on a fixed interest rate of 3.61%. German American Capital, Bank of America and JP Morgan are listed as the loan sellers.
Grace Building’s largest tenant is Home Box Office, (guarantor is Time Warner Inc.), which leases 20.7% of the net rentable area.
The ratings agency noted in the presale report that HBO’s lease has an expires on Dec. 31, 2018. HBO’s guarantor, Time Warner, reported plans to consolidate operations from numerous locations throughout New York City into the Hudson Yards project around the time HBO’s lease expires, which could indicate that the HBO will not renew its lease.
However, Morningstar thinks that the rollover risk is mitigated by a 24-month notice requirement associated with HBO’s seven-year renewal option. “This two-year period will provide the borrower ample time to find suitable replacement tenants in the event HBO opts to vacate,” the presale report states.
Additionally, a lease rollover could end up generating additional income. “HBO’s current weighted average base rental rate in the building is 16.2% below the weighted average of the appraiser’s concluded market rate for this space,” the report stated.
Morningstar expects to rate $520.6 million of class A notes, AAA’. The notes have debt service coverage ratio of 3.70x and credit enhancement at 42.15%.
Also offered are $74 million of AA-’ rated class B notes that have a DSCR of 3.24x and credit enhancement at 33.9%. The class C notes are sized at $51.3 million of A-’ notes that have DSCR of 2.94x and credit enhancement at 28.2%; the BBB+’ rated class D notes are sized at $18 million, with DSCR at 2.81x ad credit enhancement at 26.2%.
Morningstar will not rate the class E, F and G notes.