DBRS Morningstar Assigns Ratings to BWAY Commercial Mortgage Securities Trust 2013-1515

DBRS, Inc. (DBRS Morningstar) assigned ratings to the Commercial Mortgage Pass-Through Certificates, Series 2013-1515 issued by BWAY Commercial Mortgage Securities Trust 2013-1515 as follows:

-- Class A1 at AAA (sf)
-- Class A2 at AAA (sf)
-- Class B at AA (high) (sf)
-- Class C at AA (low) (sf)
-- Class D at A (sf)
-- Class E at A (low) (sf)
-- Class F at BBB (sf)
-- Class G at BBB (low) (sf)
-- Class XA at AAA (sf)
-- Class XB at A (sf)

All trends are Stable.

These certificates are currently also rated by DBRS Morningstar’s affiliated rating agency, Morningstar Credit Ratings, LLC (MCR). In connection with the ongoing consolidation of DBRS Morningstar and MCR, MCR previously announced that it had placed its outstanding ratings of these certificates Under Review–Analytical Integration Review and that MCR intended to withdraw its outstanding ratings; such withdrawal will occur on or about May 4, 2020. In accordance with MCR’s engagement letter covering these certificates, upon withdrawal of MCR’s outstanding ratings, the DBRS Morningstar ratings will become the successor ratings to the withdrawn MCR ratings. Information about the MCR ratings, including the history of the MCR ratings, can be found at www.morningstarcreditratings.com.

On March 1, 2020, DBRS Morningstar finalized its “North American Single-Asset/Single-Borrower Ratings Methodology” (the NA SASB Methodology), which presents the criteria for which ratings are assigned to and/or monitored for North American single-asset/single-borrower (NA SASB) transactions, large concentrated pools, rake certificates, ground lease transactions, and credit tenant lease transactions. For further information on the NA SASB Methodology, please see the press release dated March 1, 2020, on the DBRS Morningstar website at www.dbrsmorningstar.com.

The subject rating actions are the result of the application of the NA SASB Methodology in conjunction with the “North American CMBS Surveillance Methodology,” as applicable. Qualitative adjustments were made to the final loan-to-value (LTV) sizing benchmarks used for this rating analysis.

The transaction consists of an $832.6 million loan secured by the fee interest in a Class A, 1.7 million square foot (sf) office tower in the Times Square submarket of Midtown Manhattan. The loan has a 12-year term and began amortizing on a 30-year schedule after a three-year interest-only (IO) period. As of April 2020 reporting, the loan has amortized by 7.5%. Sponsorship and management is provided by SL Green Realty Corp. (SL Green), which purchased the subject as part of a joint venture in 2002 and ultimately acquired full ownership interest in 2011. In Q4 2017, SL Green sold a 43% noncontrolling stake in the subject to Allianz Real Estate at an implied overall property value of $1.95 billion. SL Green is the largest owner and landlord of Manhattan office properties, with its portfolio totaling 26.5 million sf.

The collateral is a 54-story tower originally built in 1972 consisting of 1.66 million sf of office space; the 1,200-seat Minskoff Theatre; the 2,000-seat former PlayStation Theater; 31,000 sf of ground-floor retail; a four-level, 225-space subterranean parking garage; and two 48-foot by 38-foot LED signage displays. The subject is located in the heart of Times Square, one of the world’s most iconic tourist destinations, between 44th and 45th Streets along 7th Avenue.

The property serves as the global headquarters for Viacom Inc. (Viacom), which has occupied the property since 1989 and gradually expanded as space has become available. At loan closing, Viacom occupied 79.0% of the net rentable area and had signed a 16-year lease extension running from June 2015 through June 2031. As part of its lease renewal, the sponsor also granted Viacom additional office space totaling up to 191,691 sf, subject to the sponsor’s timely delivery. Through YE2019, Viacom had assumed occupancy of floors 11 and 12, totaling 64,788 sf. According to SL Green’s website, floors 14, 15, and a portion of floor 36 are currently available through September 2020, at which time Viacom is expected to assume the additional space totaling 91,825 sf. Excluding a small office suite on the 36th floor (7,213 sf leased through September 2020 to Electronic Arts Inc.), the property has only one other office tenant that leases the 43rd floor through January 2022. DBRS Morningstar has requested an update from the servicer regarding the sponsor’s delivery of additional space and Viacom’s expansion plans.

In conjunction with Viacom’s lease extension, the sponsor was required to complete building and tenant improvements (TIs) and Viacom received free rent concessions on the space it leased at issuance. SL Green has spent $56.1 million in building upgrades and another $76.3 million in tenant improvements, and intends to contribute an additional $12.1 million to build out the additional 191,691 sf of space that Viacom is set to assume. The free-rent period runs from 2019 to 2024 and totals $78.0 million, $67.0 million of which the sponsor reserved from 2016 to 2018 ($22.3 million annually). The largest one-year free-rent concession of $64.6 million occurred in 2019 with 2020 to 2024 annual concessions ranging from $2.4 million to $3.0 million.

According to the December 2019 rent roll, property occupancy was 94.6%, down slightly from 98.4% as former tenant, Syska Hennessy, vacated floors 14 and 15 in 2019. If Viacom assumes all but one office suite in October 2020, as expected, it will occupy 98.0% of the office space at the property. Viacom currently pays a rental rate of $40.00 per sf (psf) gross on its originally leased space and $54.79 psf gross on any leased and occupied additional space. Beginning in March 2021, the rental rates for the originally leased space and the expansion space will increase by $5.00 psf to $45.00 psf gross and $59.79 psf gross, respectively, through loan maturity in 2025. Viacom also leases the two large LED signs that were added to the building in 2010. At YE2019, other income, which is primarily generated by signage revenue, totaled $4.8 million.

Other significant tenants at the property include the Minskoff Theatre, which has a lease through June 2044 and currently hosts Disney’s “The Lion King” musical production, and the former PlayStation Theater, which closed in August 2019 before its January 2020 lease expiry. According to a January 2020 article in “The Real Deal,” RAD Entertainment Group LLC has signed a 20-year lease for the space; however, DBRS Morningstar is awaiting details of the agreement. Given the current Coronavirus Disease (COVID-19) pandemic, the performance of both theaters at the subject in 2020 are expected to be significantly impacted by extended closures. The ground-floor retail portion of the collateral is 100.0% occupied by six tenants, including Line Friends, Junior’s Cheesecake, and Sketchers USA, Inc. There are no scheduled lease expiries until February 2022 (Luxottica Group S.p.A., occupying 2,729 sf).

According to Reis, Inc. (Reis), Manhattan’s Times Square submarket remains stable for Class A office properties as of YE2019 with an average vacancy rate of 6.8% and an asking rental rate of $79.42 psf gross. By 2025, Reis projects new supply in the submarket totaling 1.1 million sf, and expects the vacancy rate to increase to 9.2% while rental rates also grow marginally to $80.39 psf gross. In terms of sales activity, in its H2 2019 report, CBRE Group, Inc. stated that stabilized Class A office properties in Manhattan were trading at capitalization (cap) rates ranging from 4.50% to 4.75%. The subject benefits from a long-term lease to an investment-grade-rated tenant, which pays a below-market rental rate and a reasonable debt load of $490 psf based on the April 2020 remittance.

According to YE2019 financials, the loan reported a debt service coverage ratio (DSCR) of 1.51 times (x), a 6.9% decline from the YE2018 figure of 1.63x, which was the direct result of Viacom’s free-rent concessions in 2019. The decline in cash flow beginning in 2019 was expected and the loan was structured with reserves to address that decline. While percentage rent and parking revenue were recorded at $4.9 million and $3.6 million, respectively, in 2019, each revenue source is expected to decline in 2020 as a result of the coronavirus pandemic. This will have the largest impact on percentage rent, which is primarily generated by the theater tenants. Given the long-term lease to Viacom, the sponsor’s financial wherewithal and experience as well as the overall desirability of the collateral improvements and location, however, DBRS Morningstar expects the loan to continue to exhibit stable performance.

In the analysis for these rating actions, DBRS Morningstar used the YE2019 net cash flow (NCF) figure of $77.4 million and applied a cap rate of 6.75%, resulting in a DBRS Morningstar Value of $1.12 billion, a variance of -19.7% from the appraised value of $1.40 billion at issuance. The DBRS Morningstar Value implies an LTV of 74.2% compared with the LTV of 59.4% on the appraised value at issuance.

DBRS Morningstar applied the cap rate at the middle of the DBRS Morningstar Cap Rate Ranges for office properties, which reflects the subject cash flow volatility, property quality, and market fundamentals. In addition, the 6.75% cap rate DBRS Morningstar applied is above the implied cap rate of 5.29% based on the Issuer’s underwritten NCF and appraised value.

DBRS Morningstar made positive qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis, totaling 5.0% to account for cash flow volatility, property quality, and market fundamentals.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

Classes XA and XB are IO certificates that reference 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.

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com The platform includes loan-level data for most outstanding CMBS transactions (including non-DBRS Morningstar-rated), as well as loan-level and transaction-level commentary for most DBRS Morningstar-rated and -monitored transactions.

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

The principal methodologies are the North American Single-Asset/Single-Borrower Ratings Methodology and North American CMBS Surveillance Methodology, which can be found on dbrsmorningstar.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 Morningstar Global Structured Finance Related Methodologies document, which can be found on dbrsmorningstar.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.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

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.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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