DBRS Morningstar Assigns Ratings to SFAVE Commercial Mortgage Securities Trust 2015-5AVE, Places All Classes Under Review with Negative Implications

DBRS, Inc. (DBRS Morningstar) assigned ratings to the Commercial Mortgage Pass-Through Certificates, Series 2015-5AVE issued by the SFAVE Commercial Mortgage Securities Trust 2015-5AVE as follows:

-- Class A-1 at AAA (sf)
-- Class A-2A at AAA (sf)
-- Class A-2B 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)

DBRS Morningstar has placed all classes Under Review with Negative Implications, given the negative impact of the Coronavirus Disease (COVID-19) on the underlying collateral. The current ratings assigned by DBRS Morningstar do not carry trends.

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 October 22, 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upon withdrawal of MCR’s outstanding ratings, the DBRS Morningstar ratings will become the successor ratings to the withdrawn MCR ratings.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, at www.dbrsmorningstar.com. On April 24, 2020, DBRS Morningstar placed the ratings on its outstanding SASB transactions secured by retail properties Under Review with Negative Implications while MCR placed the ratings on its outstanding SASB transactions secured by retail properties Under Review Negative as the global shelter-in-place and mandatory retail closures related to the coronavirus have contributed to retail bankruptcies and anticipated vacancies in retail centers. For further information on these rating actions, please see the DBRS Morningstar press release dated April 24, 2020, at www.dbrsmorningstar.com and the MCR press release dated April 24, 2020, at www.morningstarcreditratings.com.

To assign ratings to this transaction, DBRS Morningstar considered both the impact of the updated NA SASB Methodology and its scenarios attributable to the ongoing coronavirus pandemic on the ratings.

Because of the coronavirus’ significant impact on retail performance, DBRS Morningstar first considered the application of the updated NA SASB Methodology in conjunction with the “North American CMBS Surveillance Methodology” to arrive at a baseline result, which incorporated qualitative assumptions, capitalization rates, and loan-to-value (LTV) ratio sizing benchmark quality/volatility adjustments and excluded any potential changes in current or future expected asset performance resulting from the coronavirus.

DBRS Morningstar would then typically overlay scenarios to incorporate additional reductions in net cash flow (NCF) to account for exposure to bankrupt or closed tenants; however, considering the unique collateral type which will be discussed below, no additional stress to the collateral value was applied. For more information on macroeconomic scenarios related to COVID-19, please refer to projections related to “Global Macroeconomic Scenarios: September Update” (https://www.dbrsmorningstar.com/research/366542). The global macroeconomic scenarios include a moderate decline of 15% for all commercial real estate (CRE), which acts as an average for all CRE property types. However, DBRS Morningstar expects a greater range of value decline for retail properties, ranging from 10% to 45% based on the type of tenant composition, exposure to bankrupt or challenged retailers, asset sponsorship, and asset location. DBRS Morningstar expects that lower-tier regional malls with in-line sales generally less than $300 per square foot (sf) will be the most affected.

LOAN/PROPERTY OVERVIEW
The transaction is backed by a $1.25 billion fixed-rate, interest-only (IO), first-mortgage loan with a 20-year term. The loan is secured by the borrower’s interest in the condominium unit and related interests in the land and improvements that comprise the 12-story, 655,238-sf Saks on Fifth retail building in New York. Located at 611 Fifth Avenue, between West 49th and 50th Streets, the building has served as the flagship store for the Saks Fifth Avenue brand since 1924. The store has been a mainstay in the upper east side of Manhattan for over 90 years and has historically competed well with a number of luxury retailers within the submarket. The building sits atop a 1.4-acre parcel (59,229 sf) and contains a full block of retail frontage across from the famous Rockefeller Center and adjacent to the landmark St. Patrick’s Cathedral.

Considered one of the most famous department stores in New York, the building is 100% occupied by the single tenant, Saks Fifth Avenue, under an initial 30-year operating lease term expiring on December 30, 2044. The property is a premier shopping destination and is known for its Renaissance Revival architecture, which includes cast iron entrances, large display windows set in ornate bronze frames, and carved spiral moldings. The tenant, Saks & Company, pays the building owner an initial $160.0 million in annual rent with an annual abatement of up to $20.0 million for capital improvements. There is also an annual rent increase of 3.25%. In turn, the building owner pays the borrower annual rent of $62.5 million, which increases annually by the greater of 3.25% or CPI. The operating lease is not collateral for the mortgage loan, and the lender is not obligated to recognize the operating lease in the event of a mortgage foreclosure.

The borrower and sponsor own the fee interest for the land. The sponsor executed a 99-year, absolute triple-net lease expiring in 2113 of the land to the leasehold retail building owner who is the ground lessee. The lease payment from the ground lessee (12 East 49th Street, LLC) is the cash flow that pays the subject mortgage. The ground lessee pays all expenses related to the land and building, then leases the building to Saks Fifth Avenue. In addition, Saks & Company, the ground lessee, and fee interest owner, are related entities of the Hudson’s Bay Company (HBC), further reducing diversity within the transaction.

The property was last renovated in 1989; however, Saks & Company announced in November 2013 that the subject would undergo approximately $279.0 million in renovations with the intent of making it “the most exciting and spectacular department store in the world.” Approximately $200 million has been spent to date and the renovation is expected to be completed by May 2021. A portion of the site is a 36-story Class A office building situated above the subject building. The office building and the excess development air rights are owned by the Cohen Brothers Realty Corporation and are not part of the subject collateral.

The sponsor, HBC, the owner of the Saks Fifth Avenue and bankrupt Lord & Taylor brands, bifurcated the land and improvements as part of this refinancing transaction. While not directly related to the leased fee interest, DBRS Morningstar notes that HBC was not treated as an investment-grade tenant at issuance. In January 2020, HBC ownership went private with the acquisition of minority shareholders’ interests. Post privatization, HBC no longer publicly reports financial updates, but the retailer is facing the same pressures currently experienced by all department store chains, including a changing retail landscape which has been exacerbated by the coronavirus pandemic. In August 2020, the firm withdrew a potential $900 million bond offering to raise capital after investors reportedly required a higher interest rate than the firm was willing to pay.

In mid-March, U.S. government representatives mandated the closure of stores, restaurants, and nonessential businesses and imposed stay-at-home orders and other rules to mitigate the spread of the virus. Saks Fifth Avenue was among many other stores in midtown Manhattan and across the country that were forced to temporarily shut down because of the government mandate and lack of customers. Saks Fifth Avenue closed its store during the early months of the pandemic. The store reopened on June 24, 2020; however, retail and tourist traffic has not yet returned to midtown Manhattan.

The servicer reports no debt service delinquencies as all loan payments remain current.

DBRS Morningstar reanalyzed the look-through NCF derived at issuance 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 $91.0 million and DBRS Morningstar applied a cap rate of 6.75%, which resulted in a DBRS Morningstar Value of $1.3 billion, a variance of 63.6% from the appraised value of $3.7 billion at issuance. At issuance the ground lease was valued at $2.1 billion by the appraiser. The DBRS Morningstar Value implies an LTV of 92.7% compared with the LTV of 33.8% on the appraised value at issuance. DBRS Morningstar’s NCF approach was based on a look-through cash flow of the building assuming it was being used for a mix of retail and office space.

The cap rate DBRS Morningstar applied is at the lower end of the range of DBRS Morningstar Cap Rate Ranges for retail properties, reflecting the subject’s urban location and quality.

DBRS Morningstar made positive qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis, totaling 5.5% to account for cash flow volatility, property quality, and market fundamentals. DBRS Morningstar also made other negative adjustments to account for the subject’s high total secured debt LTV. DBRS Morningstar did not apply any additional stress related to the coronavirus’ impact to the asset considering the unique nature of the revenue sources due to ownership structure, the property’s exceptional location on Fifth Avenue, as well as the conservative approach when deriving the DBRS Morningstar NCF.

Under the moderate scenario, the cumulative rated debt was insulated from loss.

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.

After applying the Coronavirus Impact Analysis, DBRS Morningstar had higher variances from the ratings assigned to Classes A-1, A-2B, B, C, and D to the results of its LTV sizing benchmarks. The variation is warranted due to going concerns with the impact of coronavirus on the collateral assets and as a result, DBRS Morningstar placed these classes Under Review with Negative Implications.

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.

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 (March 1, 2020) and North American CMBS Surveillance Methodology (March 6, 2020), 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.

DBRS Morningstar’s North American CMBS analytical team will continue to monitor the transaction to evaluate the increased risk factors related to the coronavirus pandemic. As information (e.g., updated property-level financials, rent rolls, new valuations for specially serviced loans, and workout and/or modification specifics, if applicable) becomes available, DBRS Morningstar will address the Under Review with Negative Implications rating actions over the near to moderate term. DBRS Morningstar typically endeavors to resolve an Under Review rating action within 90 days, but the circumstances surrounding these rating actions (i.e., the unknown length of the pandemic-related downturn) may result in a prolonged resolution period.

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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