DBRS Morningstar Confirms Ratings on 20 Times Square Trust 2018-20TS

DBRS, Inc. (DBRS Morningstar) confirmed its ratings on the Commercial Mortgage Pass-Through Certificates, Series 2018-20TS issued by 20 Times Square Trust 2018-20TS as follows:

-- Class A at AAA (sf)
-- Class B at AAA (sf)
-- Class C at AA (high) (sf)
-- Class D at AA (low) (sf)
-- Class E at A (low) (sf)
-- Class F at BBB (low) (sf)
-- Class G at B (high) (sf)
-- Class H at B (low) (sf)
-- Class V at B (low) (sf)

All trends are Stable. The rating confirmations and Stable trends reflect sufficient credit support, relative to the ratings, as evidenced by the projected recoverable value of the asset, as described below. Although revenues continue to sufficiently fund debt service and there have been no delinquencies to date, the loan transferred to special servicing in November 2022 because of a nonmonetary event of default.

The loan represents a $600 million pari passu participation of a $750 million whole first mortgage loan secured by the leased-fee interest in 16,066 square feet (sf) of land under 20 Times Square. The property’s ground lease and the leased-fee financing are senior to the leasehold interest and leasehold financing. The 99-year ground lease expires in April 2117 and has no termination options. The initial ground rent payment was $29.3 million, increasing 2.0% annually during the first five years and then 2.75% per year thereafter. As of September 2022, the annualized ground rent payment reported by the servicer was $31.5 million, and there have been no reported defaults on the ground lease or the leased-fee mortgage to date. According to the January 2023 remittance, there is approximately $1.4 million in reserves.

The noncollateral improvements consist of a mixed-use property located at 20 Times Square, at the corner of Seventh Avenue and West 47th Street. The property comprises a 452-key Marriott Edition luxury hotel, 74,820 sf of retail space (5,500 sf of which is non-revenue-generating storage space), and 18,000 sf of digital billboards. The debt on the noncollateral leasehold interest went into default in December 2019, with the lender citing numerous undischarged mechanics liens against the property as well as a missed deadline to lease up the retail space, and the property was foreclosed in January 2022.

The subject loan has been transferred to special servicing in relation to the aforementioned mechanics liens, which are a breach under the terms of the ground lease. The loan remains current but is currently in cash flow sweep given the event of default. The loan is scheduled to mature in May 2023. The lender for the leasehold debt plans to inject capital into the project to stabilize operations at the hotel and lease up the vacant retail space.

Updated performance metrics for the hotel were not provided, but DBRS Morningstar notes rooms are available for booking at nightly rates in excess of $500. Optimism surrounding the expected resurgence of tourism and hospitality in the city’s metropolitan area is supported by data presented at the City Guide’s Annual Tourism Seminary in January 2023 indicating that New York City welcomed approximately 56 million tourists in 2022 and domestic tourism has mostly recovered from trough Coronavirus Disease (COVID-19) pandemic levels. The largest retail tenant at issuance, NFL Experience (formerly 43,130 sf), closed after only a few months of operations in 2019. The servicer reported June 2022 occupancy for the retail component was 11.3% with the only retail tenant in place being the 8,440-sf Hershey’s Chocolate World flagship store.

DBRS Morningstar’s estimate of the leased-fee component value is $758.6 million based on an analysis of the payments expected from the in-place ground lease and applying a blended cap rate to the ground rent payment at maturity. DBRS Morningstar’s analysis assumed an additional liquidation scenario for the noncollateral improvements given the default on the leasehold financing. The liquidation value is based on a look-through of the performance for the improvements, including stressed estimates for retail rent and hotel income, and a blended cap rate of 7.1%. The liquidation value results in a loan-to-value ratio of approximately 75% for the trust, slightly above 90% when considering the additional $150 million of debt collateralized in other conduit transactions, and roughly 110% inclusive of the mezzanine note.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) that had a significant or relevant effect on the credit analysis.

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 (May 17, 2022).

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

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

The principal methodology is North American CMBS Surveillance Methodology (October 3, 2022), 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.

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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