Willis Tower still under renovation, but Blackstone is refinancing (again)

Talk about a fixer-upper.

The Blackstone Group is just one year into a five-year, nearly $500 million renovation of one of the nation’s most recognizable landmark buildings, the Willis Tower – formerly known as the Sears Tower – in Chicago.

Things appear to be going well, because it’s refinancing the $1.02 billion mortgage loan it obtained last year from three banks, Goldman Sachs, Bank of America and Citigroup.

Two more banks, Barclays and Deutsche Bank, have agreed to lend Blackstone an additional $300 million against the property.

This loan, which pays a floating rate of interest, and no principal, for its extended term of up to seven years, is being securitized in a new transaction called BBCMS 2018-TALL, according to Morningstar Credit Ratings and Moody’s Investors Service, which are both rating the new deal.

Morningstar’s final value is 16.8% lower than the as-is appraised value of $1.78 billion. The Morningstar valuation resulted in a LTV ratio of 89.4%, which it characterizes as “high.” (The appraiser’s higher “as-stabilized value” of $2.44 billion, according to the rating agency.)

Moody’s puts the property’s value even lower, at 39.4% below appraisal.

This transaction does not include any additional subordinate debt, though Blackstone may take out up to $150 million of mezzanine loans, subject to certain conditions.

When Morningstar rated the securitization of the previous loan (Chicago Skyscraper Trust 2017-SKY), it noted that there was plenty of work to do on the Willis Tower. Though one of the world’s tallest buildings and a major tourist attraction, it maintains a “monolithic street level appearance” and “falls well short of being a destination for anyone other than the employees that work in the building,” the rating agency stated in its presale report for the 2017 transaction.

Morningstar now says that Blackstone has seen "significant momentum" from its ambitious $667.8 million repositioning of the property. "By all accounts, the sponsor’s efforts have generated a great deal of interest in the once-marginalized property," the presale report for the new deal states.

Over the past 12 months, the sponsor has executed new or renewal leases for 901,706 square feet, resulting in an increase in occupancy for the property’s office space from 77.3% to 89.7% since the prior securitization. Based on these gains, Morningstar's in-place underwritten cash flow of $97.4 million is 22% higher than its prior analysis. Additionally, this robust leasing has resulted in only 22.8% rollover of the existing office space over the fully extended seven-year loan term.

Both Morningstar and Moody's note, however, that the borrower’s business plan has four years and $468.6 million remaining, including the reconfiguration and construction of the property’s retail space and planned upgrades to the Skydeck attraction. Moody's notes that the loan structure does not reserve for the planned upgrades upfront. "Rather, the sponsor has executed a guaranteed maximum price contract for the completion of the retail component, and the sponsor has executed a construction guaranty with the lender in an amount equal to $205.4 million to cover these costs."

Both rating agencies expect to assign triple-A ratings to the senior tranche of notes to be issued, which benefits from 55.177% credit support.