DBRS Assigns Provisional Ratings to BXP Trust 2017-CC

DBRS, Inc. (DBRS) has today assigned provisional ratings to the following classes of Commercial Mortgage Pass-Through Certificates, Series 2017-CC (the Certificates) to be issued by BXP Trust 2017-CC. The trends are Stable.

-- Class A at AAA (sf)
-- Class X-A at AAA (sf)
-- Class X-B at AA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (sf)
-- Class E at BB (sf)

All classes will be privately placed.

The Class X-A and X-B balances are notional.

The collateral for the $550.0 million whole loan is a premier urban creative office campus comprising six Class A office buildings totaling 1,176,161 sf and a three-level underground parking garage, which are collectively referred to as Colorado Center. The improvements were built in phases from 1984 to 1991 and are situated on a 15.0-acre site that spans an entire city block bounded by Cloverfield Boulevard, 26th Street, Broadway and Colorado Avenue in the heart of the Media and Entertainment District of Santa Monica, California. The office campus is located one block north of the 26th Street/Bergamot Los Angeles County Metro Rail light rail station that connects downtown Santa Monica to Downtown Los Angeles. Property-wide amenities include a full-service fitness facility operated by TriFit, LLC, which contains a fitness area with weights and exercise equipment, an indoor swimming pool, a yoga and Pilates studio, a spin/cycling studio, a full-service spa, and racquetball and squash courts, in addition to a food court, dry cleaning services, a children’s playground and daycare, and a public park with two tennis courts and a basketball court. The parking garage can accommodate up to 3,105 vehicles and is equipped with complimentary valet, electric car charging stations and car washing services.

The subject’s original developer, Tishman Speyer, spent approximately $25.0 million on renovations to the retail area and outdoor plaza areas, which were completed in 2002. The property was acquired shortly thereafter through a joint venture between TIAA Real Estate Account (TIAA) and Equity Office Properties Trust (EOP). Blackstone Group LP (Blackstone) acquired EOP in Q1 2007, along with its ownership stake in the property. Blackstone spent approximately $10.4 million on capital improvements from 2013 to mid-2016, including seismic retrofitting on all six buildings, elevator modernization and upgrades to landscaping. In July 2016, Boston Properties Limited Partnership (BPLP) acquired its 49.8% ownership interest in the subject from Blackstone, and together with TIAA (collectively the sponsor) plans to contribute approximately $16.9 million toward planned capex improvements that are slated to begin in Q4 2017. The majority of the improvements will be focused on the renovation and repositioning of the ground-floor retail and food court within the 2425-2501 Colorado building. The new improvements will transform the area into a more modern dining hall concept that is anticipated to be run in partnership with a world-class culinary operator, which would prepare and serve fresh meals daily. The new retail space is expected to have a high-quality design and finishes that will be more in line with Class A offerings in the surrounding market. During the planned capex, the sponsor also plans to redesign the exterior landscape and outdoor common areas.

Historically, the subject has reported relatively strong occupancy rates, though the average since 2008 is only 83.0%, and the average over the past four years is even lower at 77.3%. Former tenants Riot Games, Inc. and Yahoo! vacated the property in 2015, and as a result, the property’s occupancy declined from 85.0% to 49.9%. The subject was approximately 68.0% occupied when BPLP acquired its ownership position in July 2016, and more than 337,000 sf of new, renewal or expansion leases have been executed at the property since that time. As of the July 2017 rent roll, the subject was 90.9% occupied (excluding four small retail tenants on month-to-month leases) by a diverse mix of national, regional and local tenants. The rapid re-leasing of recently vacated space shows the desirability of the asset and the ability of the Santa Monica submarket to absorb large blocks of space on the rare occasions that they become available.

Loan proceeds will be used to return $502.6 million of equity to the sponsor, fund $45.95 million in upfront reserves for outstanding leasing costs and gap rent and cover closing costs. CBRE, Inc. has determined the as-is value of the property to be $1,212,500,000 ($1,031 psf), based on a 4.00% cap rate. The DBRS concluded value of $584.6 million ($497 psf) equates to a 51.8% discount to the appraiser’s value and is based on a 7.5% cap rate. The resulting DBRS loan to value (LTV) of 94.1% 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; further, the DBRS Debt Yield of 8.0% is considered moderate for the market, and the subject’s appraised value of $1,031 per square foot (psf) is well supported by recent property sales in the area that range from $503 psf to $1,470 psf. Finally, the cumulative investment-grade-rated proceeds of $283.1 million reflect an extremely attractive basis of only $241 psf, and the corresponding DBRS LTV on such proceeds is much lower at 85.8%. The ten-year loan is interest-only throughout the term.

The ratings assigned to the Certificates by DBRS are based exclusively on the credit provided by the transaction structure and underlying trust assets. All classes will be subject to ongoing surveillance, which could result in upgrades or downgrades by DBRS after the date of issuance.

For more information on this transaction and supporting data, please log into www.ireports.dbrs.com. DBRS will continue to monitor this transaction with periodic updates provided in the DBRS CMBS IReports platform.

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

The principal methodology is North American Single-Asset/Single-Borrower Methodology, which can be found on dbrs.com 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.

The full report providing additional analytical detail is available by clicking on the link below or by contacting us at info@dbrs.com.