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Rating Action:

Moody's downgrades to A1 from Aa3 the LCOR Alexandria, L.L.C.'s (VA) Federal Lease-Backed Bonds; outlook stable

21 Jun 2021

$60 million of outstanding bonds affected

New York, June 21, 2021 -- Moody's Investors Service has downgraded the rating to A1 from Aa3 on the $60.2 million Federal Lease-Backed Series 2001E Floating Rate Bonds issued by LCOR Alexandria, LLC for the US Patent and Trademark Office in Alexandria, Virginia. The outlook is stable.

This action concludes the rating review for possible downgrade initiated on 15 December 2020. The action is in conjunction with the 21 June 2021 release of an updated methodology for Lease, Appropriation, Moral Obligation and Comparable Debt of US State and Local Governments.

RATINGS RATIONALE

The A1 rating on the Federal Lease-Backed Series 2001E Floating Rate Bonds reflects the expectation that the leases with the United States (Aaa stable) General Services Administration (GSA) and Patent and Trademark Office (PTO) are extremely likely to be renewed on or before the expiration of August 2024 with terms that will support repayment of the high leverage that will remain on the project at that time.

The financed project, the United States Patent and Trademark Office (USPTO) headquarters in Alexandria, Virginia, is very essential to government operations, making it extremely likely that the lease will be renewed. Absent renewal, recovery for bondholders may be limited. Due to the vast size of the project that was built to suit for the USPTO, finding a non-governmental tenant, if needed, may prove difficult. However, the building is favorably located within the Washington DC metropolitan area, putting it in a prime real estate location and increasing the potential reuse value. Further, the credit profile is strengthened by a fully amortizing bond structure, eliminating the refinancing risk present in many other federal lease transactions with renewal risk.

Like most federal leases with renewal risk, this project benefits from satisfactory cash flow and legal structures, which include a strong US federal government tenant through at least 2024, a mortgage lien on the facility, and the assignment and direct payment of all lease payments to the trustee, reducing bondholders' exposure to operating risk of the borrower and property manager. There are two leases on the property with LCOR Alexandria LLC. The larger is with the GSA, and represents an unconditional obligation for a 20-year firm term. The smaller lease is with the USPTO and is subject to annual renewal. The GSA lease requires two years advance notice of the government's intent not to renew, providing ample flexibility to secure a new tenant in the unlikely event the government does not renew the lease. Finally, while there is no debt service reserve fund, other reserves pledged to the bonds provide additional support in the event of rental disruption.

RATING OUTLOOK

The stable outlook reflects our expectation that monthly lease payments will continue to flow uninterrupted to the trustee during the current term of the lease, owing to the legal and cash flow structure, and that the tenant, the United States of America, acting through the General Services Administration, will maintain its credit quality.

FACTORS THAT COULD LEAD TO AN UPGRADE OF THE RATING

-Reduction in debt levels that reduces overall leverage

-Strong indications that the lease with the GSA will be renewed with terms that enable all bond payments to be serviced with revenue from leases currently in force

-A large, measurable increase in the market value of the project, that would provide high bondholder recovery in the event the lease is not renewed

FACTORS THAT COULD LEAD TO A DOWNGRADE OF THE RATING

-Material credit weakening of the United States

-Increased leverage on the project

-Interruption or delay in monthly lease payments

-Nonperformance of its obligations under the lease by the borrower

-Increased risk of non-renewal of the lease, due to deterioration in asset condition, weakened lessor/lessee relationship and/or change in federal policies

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).

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.

PROFILE

The United States has the world's largest economy and is the center of global trade and finance, with a gross domestic product of $20.9 trillion in 2020. Its population of 328 million is third-largest. The Department of Veterans Affairs provides healthcare services and other benefits to military veterans.

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, it developed 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 Methodology published in June 2021 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBM_1274696. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1263068.

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
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Timothy Blake
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