DBRS Morningstar Confirms Ratings of TMSQ 2014-1500 Mortgage Trust

DBRS Limited (DBRS Morningstar) confirmed the ratings of the following classes of Commercial Mortgage Pass-Through Certificates (the Certificates), Series 2014-1500 issued by TMSQ 2014-1500 Mortgage Trust:

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

All trends are Stable.

The ratings confirmations reflect the overall stable performance of the transaction, which remains in line with DBRS Morningstar’s expectations at issuance. The loan is secured by the fee interest in a 33-storey Class A office and retail tower located at 1500 Broadway within the Times Square Bowtie of Manhattan. This property includes 413,922 square feet (sf) of office space (81.2% of net rentable area (NRA)), 72,652 sf of retail (14.2% of NRA) and 23,335 sf of storage (4.6% of NRA), for a total of 509,909 sf. The transaction is interest-only (IO) for the entire ten-year term and consists of a $335.0 million first mortgage loan and a subordinate senior mezzanine loan of $170.0 million.

According to the June 2019 rent roll, the property was 88.3% occupied, a slight decrease compared with the June 2018 occupancy rate of 91.5%; however, the June 2019 occupancy rate remains in line with the issuance occupancy figure of 89.7%. There is minimal near-term tenant rollover, with six tenants, representing 6.4% of NRA, expiring prior to March 2020. As of the June 2019 rent roll, the retail portion of the property reported an average rent of $224.55 per sf (psf) and the office component reported an average rent of $60.85 psf. According to Reis, as of Q2 2019, office properties in the Midtown West submarket reported an average vacancy rate of 7.8%, with an average asking rental rate of $71.76 psf, which is in line with Q2 2018 figures of 7.5% and $70.73 psf, respectively. Given the highly desirable location, market rental rates for the retail space at the subject are quite high, estimated by DBRS Morningstar to be approximately $270 psf at issuance. DBRS Morningstar noted at issuance the in-place rents at the subject were generally below market estimates, suggesting upside for the property as renovations were completed and tenants were either renewed at higher rates or replaced with tenants paying market rental rates.

Major tenants at the property include Times Square Studios (TSS), a subsidiary of Walt Disney Studios, which occupies 15.2% of the NRA on a lease through April 2024; Nasdaq, Inc., which occupies 10.4% of the NRA on a lease through August 2024; and About Inc., which occupies 9.0% of the NRA on a lease through May 2023. The TSS space serves as the studio for the Good Morning America broadcast, which airs live six days a week on ABC. Last year, the tenant exercised its renewal option to extend the lease by an additional five years through April 2024. TSS occupies space from the basement level to the fifth floor and pays a blended rate of $172.04 psf, with its next rent step occurring in May 2022. NASDAQ currently leases four floors (the tenth, 30th, 31st and 32nd floors) in the building, but according to the servicer, NASDAQ sublets the tenth and 32nd floors to Leslie Digital Imaging, LLC (in occupancy since November 2004) and Brand Connections, LLC (in occupancy since March 2013), respectively. Both subleases are coterminous with the original lease date of August 2024.

The loan reported a year-end (YE) 2018 debt service coverage ratio (DSCR) of 2.18 times (x), compared with the YE2017 DSCR of 2.23x and the DBRS Term DSCR at issuance of 2.65x. The YE2018 figure is reflective of a 2.5% decrease in net cash flow (NCF) over the prior period and 20.6% decrease since issuance. Effective gross income decreased by 0.7% year over year and operating expenses increased by 1.8%, both contributing to the NCF decline in 2018. Operating expense increases were attributed to a 4.6% increase in real estate taxes. Cash flows remain below the DBRS NCF figure derived at issuance; however, as leased rates step up in accordance with contractual steps, cash flows are expected to continue to improve.

Class X-A is an IO certificate that references a single rated tranche or multiple rated tranches. The IO rating mirrors the lowest-rated applicable reference obligation tranche adjusted upward by one notch if senior in the waterfall.

All ratings are subject to surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed or discontinued by DBRS Morningstar.

DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for this transaction.

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

The principal methodology is North American CMBS Surveillance Methodology, which can be found on www.dbrs.com under Methodologies & Criteria. For a list of the structured-finance-related methodologies that may be used during the rating process, please see the DBRS Global Structured Finance Related Methodologies document, which can be found on www.dbrs.com in the Commentary tab under Regulatory Affairs. Please note that not every related methodology listed under a principal structured finance asset class methodology may be used to rate or monitor an individual structured finance or debt obligation.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info@dbrs.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The DBRS Morningstar long-term rating scale definition indicates that ratings of CCC or lower are assigned when the bond is highly likely to default or default is imminent, thereby prevailing over a sensitivity analysis.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

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