DBRS Morningstar Confirms Rating on Class A of BWAY 2015-1740 Mortgage Trust, Removes Under Review with Developing Implications Status

DBRS Limited (DBRS Morningstar) confirmed the rating on the Commercial Mortgage Pass-Through Certificates, Series 2015-1740, Class A issued by BWAY 2015-1740 Mortgage Trust (the Issuer) at AAA (sf).

The trend is Stable. The rating has been removed from Under Review with Developing Implications, where it was placed on November 14, 2019.

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.

Prior to the finalization of the NA SASB Methodology, the DBRS Morningstar rating for the subject transaction and all other DBRS Morningstar-rated transactions subject to the methodology in question were previously placed Under Review with Developing Implications, as the proposed methodology changes were material.

The subject rating action is 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 rating confirmation reflects the transaction’s consistent performance metrics since issuance. The collateral consists of the fee interest in a 26-story Class B+ office and retail tower at 1740 Broadway in Midtown Manhattan. The subject was built in the 1950s by the same architects as the Empire State Building, extensively renovated in 2007 and, most recently, the sponsor undertook a complete modernization of the lobby that is set for completion by Spring 2020. The $308.0 million loan is fully interest-only (IO) for the entire 10-year term. The property is well located in the Columbus Circle submarket and is LEED Silver certified. The sponsor and guarantor of the loan is Blackstone Property Partners, L.P., an affiliate of the Blackstone Group (Blackstone). Blackstone is a well-capitalized and experienced owner/operator of commercial real estate with significant experience in the New York market. The subject loan financed the acquisition of the property and the sponsor retained cash equity of over $300 million at closing.

The property comprises 572,645 square feet (sf) of office space, 16,587 sf of ground-floor retail space, and 14,696 sf of storage space. Major tenants at the property include L Brands, Inc. (L Brands; 69.3% of net rentable area (NRA)) and Davis & Gilbert LLP (15.8% of NRA), whose leases expire in March 2022 and December 2020, respectively. The largest tenant, L Brands, houses its regional headquarters and the division headquarters for its Victoria’s Secret and PINK brands at the property.

In late 2018, L Brands announced the sale or closure of two company divisions (La Senza and Henri Bendel, respectively) and reported sales declines at its Victoria’s Secret and PINK stores. These well-publicized struggles have contributed to sharp drops in the company’s stock price in the last two years; however, its Bath & Body Works brand continues to perform well as the only division under L Brands’ umbrella to report year-over-year sales revenue growth in 2019. L Brands has a one-time termination option for cumulative leased space on any one floor leased for a minimum of five years with a 15-month notice required. DBRS Morningstar notes that leases were signed in 2019 for the 14th and 15th floors, which were dark but leased to L Brands at issuance. DBRS Morningstar received confirmation from the servicer that L Brands is not currently subleasing space at the property as La Senza and Henri Bendel only comprised a small portion of the space. Blackstone’s strong sponsorship and management, as well as the healthy market conditions, should be conducive to backfilling any space that becomes vacant either before or at L Brands’ 2022 lease expiry.

According to the December 2019 rent roll, the property was 94.8% occupied compared with the September 2018 occupancy rate of 98.2%. According to the Q4 2019 Reis, Inc. market report, the subject averages rental rates of $63.60 per square foot (psf) for the office space, which is slightly lower than other office properties within the Midtown West submarket that report an average asking rental rate of $89.90 psf and an effective rate of $74.66 psf; this shows an overall submarket vacancy rate of 14.1% for the period. The two newest retail tenants signed to the subject are Sweetgreen (0.5% of NRA through March 2030) and SUGARFISH (0.4% of NRA through May 2030), both of which are trendy upscale fast-casual restaurants well suited to this area.

The YE2019 debt service coverage ratio (DSCR) is 1.85 times (x) compared with the YE2018 DSCR of 2.03x and the issuance DSCR of 1.92x. A 10.6% increase in total operating expenses, largely caused by increased general and administrative fees as well as real estate taxes, drove the net cash flow (NCF) decrease in 2019.

The resulting NCF figure used was $21.7 million and a cap rate of 6.75% was applied, resulting in a DBRS Morningstar Value of $321.4 million, a variance of 46.9% from the appraised value at issuance of $605.0 million. The DBRS Morningstar Value implies an LTV of 95.8% compared with the LTV of 50.8% on the appraised value at issuance.

DBRS Morningstar applied a cap rate at the low end of the DBRS Morningstar Cap Rate Ranges for office properties, reflecting the investment-grade-rated largest tenant, the property’s condition, strong historical occupancy, and desirable Columbus Circle location. In addition, the 6.75% cap rate DBRS Morningstar applied is substantially above the implied cap rate of 4.1% 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 2.5% to account for 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.

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

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