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Rating Action:

Moody's assigns Aa3 to LCOR Alexandria, L.L.C.'s (VA) Federal Lease-Backed Series 2001E Floating Rate Bonds; outlook stable

27 Jun 2018

New York, June 27, 2018 -- Moody's Investors Service has assigned a Aa3 rating to LCOR Alexandria, L.L.C.'s $60.2 million Federal Lease-Backed Series 2001E Floating Rate Bonds for the US Patent and Trademark Office (USPTO) Project. The outlook is stable.

RATINGS RATIONALE

The Aa3 rating is notched off the Aaa rating of the United States of America based on the obligation of the US General Services Administration (GSA) to make lease payments that support debt service, and the high essentiality of the property (USPTO headquarters). The three-notch differential primarily reflects reauthorization risk of the GSA lease, which initially expires in August 2024, well before the August 2032 bond maturity. However, it is highly likely that the lease will be renewed given the size of the campus, the significant 17-year planning period to obtain the current lease, and the favorable financial terms available to the GSA upon renewal.

RATING OUTLOOK

The rating outlook is stable. The outlook reflects the rating outlook of the US and our expectations that lease payments will continue to flow uninterrupted to the trustee on a monthly basis.

FACTORS THAT COULD LEAD TO AN UPGRADE

- Renewal or extension of the lease to match the final maturity of the bonds

FACTORS THAT COULD LEAD TO A DOWNGRADE

- Downgrade of the US Government rating

- Interruption or delay in the monthly lease payments

- Indications that the GSA will not renew the lease on the USPTO headquarters

LEGAL SECURITY

The Series 2001E bonds and other outstanding parity debt are secured by a mortgage lien on the USPTO buildings and cash flows from two leases: the main lease for the USPTO headquarters buildings, which is paid by the GSA ("GSA lease") and a smaller lease ("USPTO lease") that covers parking garages and some smaller satellite buildings (see details below). For all outstanding lease-backed debt, annual debt service will grow to a maximum of $72.5 million in 2031, which is paid with annual rent payments for the GSA and USPTO leases of $82.6 million. Rent under the GSA lease is an absolute and unconditional obligation of the US Government and does not require legislative appropriation to authorize the annual payment of the lease. However the GSA lease would not have a permanent funding source for rent payments if a federal budget were not approved. Authorization and funding of the USPTO lease rental payment is subject to annual appropriation. The leases are also subject to termination and/or abatement in the event of destruction, however base rent, which funds debt service payments, cannot be set-off.

The transaction structure and available reserves provide some protection against disruption in the flow of lease payments. The borrower has irrevocably assigned its rights to lease payments to the trustee and payments are made directly to the trustee. The trustee is required to set-aside aside monthly lease payments for debt service on a 1/6th and 1/12th basis, which is a strong protection given the relative infrequency and historically short duration of federal government shutdowns. The trust agreement requires minimum balances in the Service Reserve Account ($5.9 million), Working Capital Account ($7 million) and the Capital Reserve Account (will be funded up to $3 million, currently $152,335).

Despite the current mismatch between the initial term of the GSA lease and final bond maturity, the lease is highly likely to be renewed. In federal fiscal year 2016, the GSA renewed 74% of the leases set to expire, however we expect the likelihood of renewing the USPTO lease is much higher. The lease for the USPTO headquarters is the largest GSA lease with a 2016 annual rent of $72 million, compared to a median rent of $207,000. In addition, the GSA has made considerable investment in the existing headquarters: project development took 17 years; $43 million of tenant improvements have been completed in the past five years; and upon lease renewal, GSA will get a $126 million allowance for additional tenant improvements and a rent schedule set below market for years 21-30 and at 90% of market for years 31-40.

In the event the lease is not renewed, the GSA must provide notice 800 days prior to expiration, in June 2022. This provides the landlord satisfactory flexibility to find a replacement tenant(s). Any replacement lease will be pledged to bondholders. Bondholders also have a mortgage lien on the project, which, based on our conservative estimates, would provide a dark value equivalent to approximately 50% of the outstanding bonds in 2024.

As of December 31, 2017, LCOR Alexandria L.L.C. had $877 million of debt outstanding related to the USPTO project, including $612 million total senior debt on parity with the Series 2001E bonds, and $281 million of subordinated bonds. The majority of the debt is fixed rate, however the Series 2001E bonds are floating rate index bonds with interest set at 3-month LIBOR + 23bps, payable quarterly. The variable interest rate is hedged by a swap agreement with Barclays Bank PLC (A2 stable) under which the borrowers pays a fixed rate of 6.8%. The swap notional matches the outstanding variable rate bonds, and the mark-to-market as of December 31, 2017 was negative $1.9 million. The Series 2001E principal redemptions are in 2031 and 2032 for this series, which will be pre-funded with sinking fund payments.

USE OF PROCEEDS

The bonds were originally issued in 2001 as part of a $580 million transaction, which was then reissued in 2004 and 2005 to convert most of the outstanding debt to fixed rate. Bond proceeds financed construction of the leased facilities, including the USPTO headquarters, two parking garages and two town-house style office buildings adjacent to the USPTO offices. The headquarters include a 2.4 million square foot, five-building office complex, providing office space for thousands of employees on a 15 acre property in Alexandria, VA. The project was delivered in phases starting in 2003 and completed in 2005. Original procurement began in 1988 - taking 17 years from the beginning of the process until final delivery.

PROFILE

The US Government has the world's largest economy and center of global trade and finance, with a gross domestic product of $18.6 trillion in 2016. Its population of 323 million is third-largest.

LCOR Alexandria L.L.C., the issuer, is a limited liability company formed solely to acquire, design, lease and manage the USPTO headquarters project. The LCOR Group, a national real estate development, investment and management organization,developmed and provides property management services at the USPTO headquarters facility.

METHODOLOGY

The principal methodology used in this rating was Lease, Appropriation, Moral Obligation and Comparable Debt of US State and Local Governments published in July 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Baye Larsen
Lead Analyst
State Ratings
Moody's Investors Service, Inc.
7 World Trade Center
250 Greenwich Street
New York 10007
US
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Emily Raimes
Additional Contact
State Ratings
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653

No Related Data.
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