Bond buyers have snapped up the dirt beneath a new luxury hotel and retail complex in New York’s Times Square, betting on big returns from one of the biggest tourist hot spots in the world.
Mark Siffin, chairman and CEO of Maefield Development, is mortgaging the roughly 0.4 acres of land on which the 20 Times Square complex sits through a US$600m lease-fee CMBS.
Lease-fee loan collateral is not common in CMBS deals, cropping up sometimes in conduit trades but rarely in securities for single, trophy-like assets such as this one.
“The risk is that it’s new construction and there is limited operating history to go off,” Jen Ripper, a specialist in CMBS at Penn Mutual Life Insurance Company, told IFR. “On the plus side, it’s a primary location and high-quality collateral.”
The new Times Square deal is the biggest of its kind since the financial crisis, according to CMBS data specialist Trepp.
Bankers did not market the deal broadly, having pre-placed all the bonds with a handful of investors, two CMBS buyers said.
Those investors that bought the deal are betting that Times Square holds its appeal with international tourists - at least for the next five years - and that they will stay in the hotel and spend in its bars, restaurants and shops.
NEW ATTRACTION
The massive redevelopment is positioned in the heart of the bustling Times Square area that attracts more than 61 million pedestrians every year and helps generate 11% of New York City’s economic output, according to a Morningstar pre-sale report.
But it’s the dirt below the building that counts as bondholders’ main collateral, Robb Paltz, associate managing director at Moody’s, told IFR.
“From a credit perspective, you are holding the position that holds the lowest amount of risk. The owners of the improvements pay you the ground rent, and in the event they don’t pay it, you as the investor have the actual building,” said Paltz.
The construction is not yet complete, as the 452-key Marriott Edition Hotel does not open until July 2018. But as the first luxury hotel built in this “Bowtie” area of Times Square in the past 15 years, according to Morningstar, it is likely to be a popular choice with visitors.
The retail space is also likely to draw the crowds. Just over two thirds has already been rented out by Hershey’s - which has relocated from nearby - and the NFL, which is a retail entertainment attraction created in partnership with Cirque du Soleil.
The third retail space on a corner plot is still vacant, but could potentially yield even higher rental prices once the hotel is fully operational, one analyst said.
BRIGHT LIGHTS
The project’s massive state-of-the-art LED signage - for which Times Square is probably best known - is also seen as a huge revenue booster.
“Signage marketing in Times Square is unlike any other place in the world with the market being able to generate 10 billion brand impressions,” said Morningstar.
It estimates that the total retail space and signage will generate around US$26m or about 48% of the overall cashflow from the complex - and that those incomes are the stickiest and most stable.
Cashflow from the hotel is expected to produce another US$28.5m, for a total of US$54.8m, according to Morningstar.
Loan underwriters Natixis Real Estate, Credit Suisse’s Column Financial and the China Merchants Bank, expect the project to produce a rosier US$107.7m of net cash flow.
Of course the deal is not without its risks.
Unforeseen events such as a terrorist attack could make Times Square a less appealing tourist destination, which would harm revenues, one investor said.
The interest-only profile of the mortgage is also a negative, since it will require a big balloon payment by the borrower in five years.
Leverage is also high. Moody’s estimates leverage at a 139.1% loan-to-value ratio, a jump from the average 98.8% LTV on other large single-borrower trades rated by the agency in 2017.
Moody’s was hired only to rate the deal’s top three classes Triple A to A3, while Morningstar rated eight classes Triple A to Single B minus.
HISTORY
And though the sponsor, Mark Siffin, is experienced in real estate, he does have a colourful past.
“Court records indicate that Mr. Siffin was charged in 1973 with unlawful possession of heroin with intent to distribute and served approximately 18 months’ probation,” according to the deal documents.
“In addition, Mr. Siffin was indicted in 1982 by a federal grand jury as part of a conspiracy to distribute marijuana and in 1986 for felony possession of a firearm.”
Both indictments were dismissed before commencement of trial.
Natixis and Credit Suisse, co-lead managers and joint bookrunners, are expected to price the bond, called TSQ 2018-20TS, on Friday.