DBRS Morningstar Assigns Ratings to Worldwide Plaza Trust 2017-WWP

DBRS, Inc. (DBRS Morningstar) assigned ratings to the Commercial Mortgage Pass-Through Certificates, Series 2017-WWP issued by Worldwide Plaza Trust 2017-WWP (the Issuer):

-- Class A at AAA (sf)
-- Class X-A at AAA (sf)
-- Class B at AA (high) (sf)
-- Class C at A (high) (sf)
-- Class D at BBB (high) (sf)
-- Class E at BBB (low) (sf)
-- Class F at BB (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 July 16, 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upon withdrawal of MCR’s outstanding ratings, the DBRS Morningstar ratings will become the successor ratings to the withdrawn MCR ratings.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 subject loan is secured by a 1.8 million-square-foot (sf) multitenant Manhattan, New York, office property and a pledge of membership interests, with a collateral assignment of certain mortgages on the property’s amenities parcel. The Issuer used loan proceeds of $940.0 million and $260.0 million of mezzanine debt to facilitate the recapitalization financing of the collateral and cover closing costs. In conjunction with the recapitalization, SL Green Realty Corp. and RXR Real Estate Value Added Fund – Fund III LP. acquired a 48.7% ownership interest from New York REIT, Inc. which previously owned 98.8% of the property. New York REIT, Inc. retained 50.1% ownership in the property; George Comfort & Sons, Inc. retained a 1.2% interest. The Issuer contributed two senior A notes inclusive of the controlling note, with an aggregate principal balance of $381.3 and two junior notes, with an aggregate principal balance of $323.7 million, to the WPT 2017-WWP mortgage trust. Noncontrolling A notes with a combined $235.0 million trust balance are included in the GSMS 2017-GS8, BMARK 2018-B1, BMARK 2018-B2, and GSMS 2018-GS9 securitizations.

The two largest tenants, Nomura Holdings America, Inc. (Nomura) and Cravath Swaine & Moore LLP. (Cravath), collectively account for 66.8% of net rentable area (NRA) and 73.1% of total DBRS Morningstar gross base rent. Nomura, representing 40.0% of NRA and 34.2% of DBRS Morningstar gross base rent, uses the space at the property for its North American headquarters. The average contractual rent for Nomura was $45.27 per sf (psf) at issuance, which was 31.8% below the appraiser’s market levels of $66.47 psf for the space. Nomura is an investment-grade tenant and has a lease expiry in September 2033, but the leases also contain a contraction option for up to 10.0% of its total NRA for the five-year period commencing in February 2022 and a one-time termination right for all of its space in January 2027, following an 18-month notice period. Cravath, representing 26.8% of NRA and 38.9% of DBRS Morningstar gross base rent, uses the space for its headquarters and occupied the highest floors at the property. Cravath’s contractual rental rate at issuance of $92.80 psf was 17.8% above the appraiser’s market rent levels of $78.76 psf for its space. Cravath’s current lease has a lease expiration date in August 2024. As of April 2020,the tenant is subleasing the entire 31st floor to McCarter & English LLP and portions of the 18th floor to Heritage Realty LLC and AMA Consulting Engineers, P.C. Cravath confirmed in October 2019 that it plans to relocate its headquarters from the subject property to Two Manhattan West in 2024. While the sponsors have four years to backfill the space currently leased by Cravath, the loan was structured with a Cravath rollover reserve account, which will begin sweeping cash on August 31, 2023, until the aggregate amount deposited equals $42.4 million, equal to $76.96 psf.

Per Reis, the collateral is in the Midtown West submarket, which is part of the greater New York Metro office market. Reis reported a submarket vacancy rate of 7.9% and asking rate of $72.67 psf for Q1 2020, but forecast the submarket vacancy rate to increase to 11.3% and the asking rent to decrease to $63.30 psf by 2024. The Class A office properties within the submarket for Q1 2020 exhibited a vacancy rate of 7.0% and asking rate of $79.51 psf, which compares favorably relative to the general office submarket. The building’s location in the Eighth Avenue corridor is tenanted by many financial-services companies, publishing houses, and law firms because of the convenient access to retail and transportation. The 50th Street subway station, serving the C and E Lines with direct connections to Penn Station, the Port Authority Bus Terminal, and Grand Central Station, is connected to the building. The property’s in-place physical occupancy rate of 5.8% as of December 2019 was below the 2.0% in-place vacancy rate at issuance in October 2017, but the collateral has outperformed the submarket in terms of occupancy rate since issuance.

The DBRS Morningstar net cash flow (NCF) derived at issuance was re-analyzed for the subject rating action to confirm its consistency with the “DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria.” The resulting NCF figure was $73.1 million and a cap rate of 6.75% was applied, resulting in a DBRS Morningstar Value of $1.1 billion, a variance of -37.8% from the appraised value at issuance of $1.7 billion. The NCF figure applied as part of the analysis represents a -14.1% variance from the Issuer’s NCF, primarily driven by rental rate markdowns and leasing costs. The DBRS Morningstar Value implies an LTV of 86.8% on the first mortgage compared with the LTV of 54.0% on the appraised value at issuance. On the total debt stack, the DBRS Morningstar Value represents an LTV of 110.9% compared with the appraised LTV of 69.0%. As of YE2019, the servicer reported a NCF figure of $76.9, a -5.0% variance from the DBRS Morningstar NCF figure, primarily a function of leasing costs.

The cap rate applied is at the lower end of the range of DBRS Morningstar Cap Rate Ranges for office properties, reflective of the location, market position, and quality. In addition, the 6.75% cap rate applied is above the implied cap rate of 4.89% 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 4.5% 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.

Class X-A is an interest-only (IO) certificate that references a single rated tranche. 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 www.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 www.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.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

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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