DBRS Morningstar Confirms Ratings on All Classes of GS Mortgage Securities Corporation Trust 2012-TMSQ

DBRS, Inc. (DBRS Morningstar) confirmed its ratings on all classes of the Commercial Mortgage Pass-Through Certificates, Series 2012-TMSQ issued by GS Mortgage Securities Corporation Trust 2012-TMSQ as follows:

-- Class A at AAA (sf)
-- Class X-A at AAA (sf)
-- Class X-B at AA (high) (sf)
-- Class B at AA (sf)
-- Class C at A (sf)
-- Class D at BBB (sf)

DBRS Morningstar changed the trends on Classes A, B, X-A, and X-B to Stable from Negative. Classes C and D continue to carry Negative trends because of sustained underlying pressures and lasting residual effects of the Coronavirus Disease (COVID-19) global pandemic. The rating confirmations reflect DBRS Morningstar’s view that, despite a significant interruption of operations and cash flow as described below the property should be positioned to rebound and the assigned ratings adequately reflect the remaining risk. The loan has remained current during the pandemic, with no delinquencies or defaults reported to date.

This single asset transaction is collateralized by a $208 million loan secured by One Times Square, a 23-story retail and signage building in New York City. The 10-year, fixed-rate loan pays interest only through its maturity in December 2022. The loan is secured by a 23-story retail building with 93,263 square feet (sf) of net rentable area situated on a 5,400-sf parcel of land. Walgreens Company (Walgreens) leases the entire building but uses only the ground, second, and third floors for retail sales activities. The remainder of the floors are vacant. The largest component of rental income is the 20-plus vinyl and electronic signs on the outside of the building, which accounted for 85% of revenue at origination while the Walgreens lease represented the remaining 15% of revenue at origination.

The New York Times (The Times) used the building, constructed in 1904, as its headquarters until 1961 when The Times sold the property and moved out. The annual New Year’s Eve ball drop ceremony began in 1907 at the subject property and continues to be held every year. This publicity allows the building to generate interest in the exterior signage, which millions of tourists see each year and hundreds of millions of viewers watch at home for the annual New Year’s Eve event.

In 2019, the sponsor completed a $12.0 million renovation to replace three signs on the property’s north facade with a single 350-foot LED sign. The signs were offline in Q1 and Q2 2019 because of the renovation and the new sign came online in July 2019. In connection with the new sign, the borrower signed a 10-year master sublicense agreement with New Tradition Media, LLC (New Tradition) to sublicense all signs at One Times Square with the exception of the signs leased to Walgreens as part of its retail lease. This agreement will likely eliminate approximately 10% of annual leasing costs related to the sign revenue that the borrower was previously paying.

The loan is being monitored on the servicer’s watchlist for cash flow concerns as the year-end 2020 net cash flow (NCF) was down 44.1% when compared with NCF at issuance, which is likely attributable to a combination of factors including lost revenue from the sign replacement project The loan is under a cash flow sweep until the property achieves a trailing 12-month net operating income of $18.1 million for two consecutive quarters. As of the September 2021 remittance, the balance in the cash flow reserve was $9.8 million. The sign replacement caused 2019 revenue to decrease 39.9% compared with 2018. Revenue improved in 2020 increasing 49.6% year over year but continues to trail issuance by 18.4%, which is likely because of weakened advertising and signage demand from the loss of foot traffic as a result from the pandemic. The sign construction also led to an increase in operating expenses, which was up 133.0% in 2019 and 72.6% in 2020 when compared with issuance. An additional concern is associated with the property’s single retail tenant, Walgreens; published reports have speculated the tenant will likely vacate upon its June 2023 lease expiration after it executed a new lease at the neighboring Bow Tie Building in 2019. Mitigating these concerns is Walgreens below-market rent of $56.99/sf, which also includes signage. According to CBRE, retail asking rents were $615/sf as of Q2 2021. In June 2021, Popeyes Louisiana Kitchen signed a new lease for 6,100 sf for a flagship location at West 44th and 45th streets within the Times Square submarket. The asking rent for the space was $800/sf.

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.

Classes X-A and X-B 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.

The DBRS Viewpoint platform provides additional information on this transaction and underlying loans including DBRS Morningstar metrics, commentary, servicer-reported cash flows, and other performance-related data.

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com. The platform includes issuer and servicer 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 methodology is North American CMBS Surveillance Methodology (March 26, 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.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

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.

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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