DBRS Morningstar Assigns Provisional Ratings to BWAY 2021-1450 Mortgage Trust, Commercial Mortgage Pass-Through Certificates

DBRS, Inc. (DBRS Morningstar) assigned provisional ratings to the classes of BWAY 2021-1450 Mortgage Trust, Commercial Mortgage Pass-Through Certificates, as follows:

-- Class A at AAA (sf)
-- Class X-CP at BBB (sf)
-- Class X-NCP at BBB (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (low) (sf)
-- Class E at BB (low) (sf)
-- Class F at B (low) (sf)

All trends are Stable. Class G and Class HRR are not rated by DBRS Morningstar.

Class X-CP and X-NCP are interest-only (IO) classes whose balance is notional

The BWAY 2021-1450 Mortgage Trust transaction is secured by the fee-simple interest in 1450 Broadway, a 42-story, 439,786-square-foot (sf) office tower. The building is located at the southeast corner of 41st Street and Broadway in the Times Square South submarket of Manhattan. Built in 1931 and acquired by the sponsor in 2011, the property has received in excess of $11 million in capital expenditures that have upgraded the lobby, elevators, restrooms, mechanical systems, HVAC systems, retail signage, and exterior facade. The property is currently 82.3% leased to a mix of 36 tenants with a weighted-average (WA) remaining lease term of approximately 5.8 years. The property’s rent roll is granular, with only one tenant making up more than 10% of the gross potential rent (GPR). Major tenants include WeWork (62,087 sf, 14.1% of net rentable area (NRA), 15.6% of GPR), Studio1 (aka Shazdeh Fashions Inc.; 44,527 sf, 10.1% of NRA, 7.8% of GPR), and Iconix Brand Group Inc. (35,222 sf, 8.0% of NRA, 9.3% of GPR). Only 39.1% of the NRA and 46.1% of the base rent rolls during the fully extended five-year loan term.

In addition to 422,506 sf of office space, the property has 9,229 sf of lower floor retail space and 8,051 sf of storage space. The retail portion is currently 92.8% leased to popular food vendors such as Chop’t, Sticky Fingers, Oxido, and Paris Baguette on long-term leases resulting in a 7.8-year retail WA lease term and $2.2 million in rent (approximately 10% of revenue at the property). With consumer behavior continuing to evolve because of the Coronavirus Disease (COVID-19) pandemic, 1450 Broadway’s fast-casual food uses and long-term leases may offer some protection from the post-pandemic environment. The sponsor is in discussions with several potential tenants for the office vacant space and is working with existing tenants on extensions and expansions within the building. The majority of the vacant office space is move-in ready, allowing for immediate tenant occupancy. Furthermore, the 665-sf vacant retail space is street level with Broadway frontage, offering superior visibility and high foot traffic.

The property has significant exposure to WeWork as the largest tenant, comprising 14.1% of the NRA. Although there is a long-term lease in place through September 2035, the company has shuttered many of its facilities since the outbreak of the coronavirus pandemic, which places the company at increased risk in the short term, with significantly reduced revenue. WeWork uses its space at the subject primarily for its WeWork Enterprise model. According to the sponsor, the WeWork space is approximately 2/3 occupied with letters of intent being negotiated for the remainder of the available space with two publicly traded Fortune 500 tech companies, both of which have reportedly accepted their space. WeWork’s lease includes a corporate guarantee from WeWork Companies Inc. The guarantee is currently at approximately $6.0 million, which burns off annually but never falls below $3.4 million. DBRS Morningstar assumed a 50% renewal probability for WeWork, resulting in higher leasing costs in its net cash flow analysis.

ZG Capital Partners (the Zar Group) is a New York-based real estate investment firm with extensive ownership and operating experience. The firm’s investment strategy is opportunistic, flexible, and focused on long-term value creation. The Zar Group’s holdings include the 1450 Broadway asset as well as the Bruckner Building in Mott Haven, Connecticut, 654 Broadway, and 1410 Lexington Avenue. The sponsor is partially using proceeds from the mortgage loan to repatriate approximately $23.8 million of equity. DBRS Morningstar views cash-out refinancing transactions as less favorable than acquisition financings because sponsors typically have less incentive to support a property through times of economic stress if less of their own cash equity is at risk. Based on the appraiser’s as-is valuation of $345 million, the sponsor will have approximately $130 million of unencumbered market equity remaining in the transaction.

The DBRS Morningstar loan-to-value ratio (LTV) for the five-year fully extended mortgage loan is high at 112.4% based on the $215 million in total mortgage debt. In order to account for the high leverage, DBRS Morningstar programmatically reduced its LTV benchmark targets for the transaction by 2.0% across the capital structure.

The nonrecourse carveout guarantors are collectively, jointly, and severally Babak Zar, Sammy Hakimian, and Solaiman Hakakian, who are required to maintain a joint net worth of at least $107.5 million with a $10 million liquidity minimum, effectively limiting the recourse back to the sponsor for bad act carveouts. “Bad boy” guarantees and consequent access to the guarantor help mitigate the risk and increased loss severity of bankruptcy, additional encumbrances, unapproved transfers, fraud, misappropriation of rents, physical waste, and other potential bad acts of the sponsor.

Class X-CP and Class X-NCP are interest-only (IO) certificates which references multiple rated tranches. The IO rating mirrors the lowest-rated applicable reference obligation tranche adjusted upward by one notch if senior in the waterfall

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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

For supporting data and more information on this transaction, please log into www.viewpoint.dbrsmorningstar.com. DBRS Morningstar provides analysis and in-depth commentary in the DBRS Viewpoint platform.

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

With regard to due diligence services, DBRS Morningstar was provided with the Form ABS Due Diligence-15E (Form-15E), which contains a description of the information that a third party reviewed in conducting the due diligence services and a summary of the findings and conclusions. While due diligence services outlined in Form-15E do not constitute part of DBRS Morningstar’s methodology, DBRS Morningstar used the data file outlined in the independent accountant’s report in its analysis to determine the ratings referenced herein.

The principal methodology is the North American Single-Asset/Single-Borrower Ratings Methodology (March 2, 2021), 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.

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/375376/.

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.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at info@dbrsmorningstar.com.

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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