DBRS Assigns Provisional Ratings to 225 Liberty Street Trust Commercial Mortgage Pass-Through Certificates, Series 2016-225L

DBRS, Inc. (DBRS) has today assigned provisional ratings to the following classes of Commercial Mortgage Pass-Through Certificates, Series 2016-225L (the Certificates) to be issued by 225 Liberty Street Trust 2016-225L. The trends are Stable.

-- Class A at AAA (sf)
-- Class X at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)

The collateral for the transaction consists of the leasehold interest in an older trophy, Class A, 44-story office property located in Lower Manhattan on the heels of a $71.6 million renovation. The property is located on the Hudson River within the World Trade Center office submarket across from the World Trade Center site and features direct access to an underground transit concourse that connects it with the Fulton Street Transit Center, One World Trade Center and the World Trade Center Transportation Hub. The subject is the largest of four towers that make up Brookfield Place, a mixed-use office development encompassing 7.1 million square feet (sf) of office space and roughly 340,000 sf of newly renovated, lifestyle-oriented retail and public space. The building consists of 2,364,514 sf of office space and 63,001 sf of storage space and is 93.5% leased to a diverse mix of 13 national tenants among the global retail, media, education and financial industries, including three investment-grade-rated tenants that comprise nearly 32% of NRA: Bank of New York Mellon (13.4% of the net rentable area (NRA); DBRS: AA (low)), Bank of America (13.1% of NRA; DBRS: “A”) and Commerzbank (5.3% NRA; DBRS: BBB). Three tenants -- Time, Inc., BNY Mellon and Hudson’s Bay Company -- also utilize the space as their U.S. or global headquarters and encompass 52.0% of NRA. Only 19.9% of NRA expires during the loan term, and the subject’s weighted-average remaining lease term is 14.1 years. The property is subject to a long-term ground lease with the Battery Park City Authority, the annual rent under which is fixed at $5.1 million through its June 2069 expiry.

The building was initially constructed in 1987 as the global headquarters for Merrill Lynch, which net leased 100.0% of the property through its September 30, 2013, lease expiration, at which time it downsized considerably, giving back the majority of its space, or roughly 2.1 million sf. Following the expiration of this lease, the subject, together with 200 Liberty, 200 Vesey and 250 Vesey, was repositioned by the sponsor as part of the larger Brookfield Place repositioning, which converted the complex’s lower retail space into a luxury shopping and dining destination. Roughly 192,000 sf of the retail space is located at 225 Liberty and is 98.6% leased to a variety of luxury and upscale retailers and dining establishments. While the borrower’s interest in the retail component constitutes collateral for the loan, it is subject to a master lease with a sponsor affiliate that is coterminous with the ground lease at a rent of $1/year; thus, DBRS did not include income from the retail component in its underwriting. Instead, it was examined from an amenity standpoint, as it is unique to the Brookfield Place complex.

DBRS considers the sponsor of this loan, Brookfield Property Partners L.P., to be strong. It is one the largest public real estate companies in North America and specializes in the investment, ownership and operation of best-of-class commercial assets located primarily across North America, Europe and Australia and with a growing presence in China, Brazil and India. It also has a strong presence in the Lower Manhattan market, with seven operating properties encompassing roughly 13.4 million sf that are 92.3% occupied. The sponsor has owned the subject property for the last 20 years, and while the sponsor’s all-in cost basis is unknown, the sponsor has spent $282.6 million since 2013 renovating the subject and the rest of the Brookfield Place complex.

Loan proceeds of $900.0 million refinanced $802.0 million of debt, returned $11.7 million of equity to the sponsor, allocated $80.8 million to free rent reserves and covered $5.5 million in closing costs. Additionally, $72.8 million in outstanding tenant improvements were guaranteed by Brookfield Office Properties Inc., a subsidiary of the sponsor that is investment-grade rated by DBRS (BBB).

Based on a 7.50% cap rate, the DBRS value represents a 42.0% discount to the appraised value. While the DBRS cap rate is low by rating agency standards, it is far above the current market cap rate (as estimated by the appraisal) of 5.25%. DBRS research has found that issuance cap rates (Issuer underwritten (UW) net cash flow divided by Appraised Value) for Manhattan office properties securitized in CMBS transactions, regardless of location or quality, have not exhibited an average cap rate above 7.50% since 1999 (7.69%). For the 2015 vintage, the average cap rate was 5.15%. With nearly 36.0% of DBRS UW gross rent generated by investment-grade-rated tenancy --nearly 56.0% of which is because of long-term credit tenancy, limited near-term lease expirations and a strong and experienced sponsor -- DBRS believes the term default risk to be relatively low. While the loan is not particularly low leverage compared with other single-borrower securitizations and has an elevated refinance risk given the leverage, the lowest rated notes by DBRS, Class C Notes, are rated A (low) (sf ) with a representative 11.8% debt yield and a loan per square foot of $213.

Notes:
All figures are in U.S. dollars unless otherwise noted.

All classes will be privately placed.

The applicable methodology is North American CMBS Rating Methodology, which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

With regard to due diligence services, DBRS was provided with the Form ABS Due Diligence-15E (Form-15E), which contains the description of the information that the third party reviewed in conducting the due diligence services and a summary of the findings and conclusions. While DBRS did not require due diligence services outlined in Form-15E, DBRS did use the Data File outlined in the Independent Accountant’s Report in its analysis to determine the ratings.