DBRS Morningstar Downgrades Credit Rating on BWAY 2015-1740 Mortgage Trust

DBRS, Inc. (DBRS Morningstar) downgraded its credit rating on the Commercial Mortgage Pass-Through Certificates, Series 2015-1740 issued by BWAY 2015-1740 Mortgage Trust as follows:

-- Class A to C (sf) from A (sf)

Simultaneously, DBRS Morningstar removed the Under Review with Negative Implications status of this credit rating, where it was placed on August 30, 2023. There is no trend as the C (sf) credit rating category typically does not carry trends in commercial mortgage-backed securities (CMBS) ratings.

DBRS Morningstar only rates the $157.5 million Class A certificate in this transaction, which has a total deal balance of $308.0 million. In August 2023, DBRS Morningstar had downgraded the Class A certificate to A (sf) from AAA (sf) because of an increase in interest shortfalls that first affected the certificate as of the August 2023 remittance. As of the October 2023 remittance, the master servicer continues to short interest on all classes, with outstanding interest shortfalls of $1.15 million on the Class A certificate and $3.1 million across all classes combined. The interest shortfalls are the result of a significant drop in the collateral’s appraised value, as further described below. Based on the updated appraised value and outstanding servicer advances of approximately $36.5 million as of October 2023, DBRS Morningstar expects losses will be realized through the Class A certificate, which led to the downgrade of the credit rating.

The 10-year interest-only underlying loan is secured by a 26-story office and retail tower at 1740 Broadway in Manhattan, New York, with a scheduled maturity date in January 2025. The loan sponsor is Blackstone Property Partners, L.P. (Blackstone). The property comprises 572,645-square feet (sf) of office space, 16,587-sf of ground-floor retail space, and 14,696-sf of storage space. The loan was placed on the servicer’s watchlist in early 2021 when it was confirmed that the property’s largest tenant, L Brands (70.9% of the net rentable area) would not be renewing its lease at the scheduled expiration in March 2022.

The loan transferred to special servicing in April 2022, after L Brands vacated the space and was no longer paying rent. The loan documents did not contain any provisions that would have allowed for any cash to be trapped during the end of the lease for L Brands, a structural weakness that DBRS Morningstar cited at issuance. As such, the sponsor retained all excess cash flow in the years leading up to the tenant’s exit, when the loan’s debt service coverage ratio (DSCR) was 1.87 times (x) and 1.42x for YE2020 and YE2021, respectively. According to the servicer’s reporting, there was approximately $15.5 million in excess cash after debt service and below-the-line expenses across those two years. Once L Brands vacated in 2022, cash management was triggered but by that time, there was no excess cash to trap. At issuance, DBRS Morningstar noted mitigating factors to the lack of structure around the L Brands lease in the strong sponsorship in Blackstone and the issuance appraisal’s dark value, which suggested the property value would remain significantly above the loan balance if L Brands were to vacate. The sponsor’s commitment to the property remained evident in 2020, when the last of a $33.3 million capital improvement project was completed to upgrade the common area amenities. The project included a major renovation of the building’s lobby area, the addition of a restaurant and the construction of a 15,000-sf private club.

At issuance, the special servicer for this transaction was Green Loan Services LLC (GLS), an affiliate of SL Green. GLS was the special servicer when the loan transferred to special servicing in April 2022 and over the next nine months, consistently reported ongoing efforts to resolve the loan with steps that included granting Blackstone a forbearance in May 2022, which in October 2022 was extended further through December 2022. GLS also noted at the time of the loan’s transfer that Blackstone had expressed its unwillingness to contribute additional capital to fund the shortfalls, later reporting that Blackstone was involved in the ongoing efforts to market the property for sale.

Loan payments were initially made out of reserves and the servicer began advancing interest payments with the October 2022 payment date. Property protection advances were made prior to the October 2022 payment date, however, with the July 2022 remittance report showing the servicer advanced a $5.7 million property tax payment in June 2022. DBRS Morningstar notes that while the loan was reported current in the transaction reporting throughout the time loan payments were being made out of reserves, the October 2022 distribution statement indicated a retroactive paid-through date, suggesting for the first time that the loan was delinquent. The servicer has since confirmed that this was a reporting oversight – it is unclear if the oversight was on the part of the master servicer, Wells Fargo, or GLS. Inclusive of $16.7 million in tax and insurance advances made between June 2022 and June 2023, as well as $8.7 million in operating expenses, total outstanding advances as of the October 2023 remittance were approximately $36.4 million.

Based on the information provided by the special servicer following the loan’s transfer to special servicing in April 2022, DBRS Morningstar believed that Blackstone was actively engaged in the loan’s workout (particularly given the granting of a forbearance, which was extended beyond the initial period of six months). As the loan was reported current and a forbearance was in place, the transaction documents did not require a new appraisal to be obtained by the special servicer. DBRS Morningstar believes an appraisal was not ordered until well after December 2022, when the extended forbearance expired. In March 2023, the special servicing was transferred from GLS to Midland Loan Services, a division of PNC Bank N.A. (Midland) and following the change in special servicer, Midland reported ongoing discussions with the Directing Certificate Holder (DCH) and the loan sponsor, as well as local brokers, to determine the appropriate disposition strategy.

Although the forbearance expired in December 2022, the first appraisal reduction amount (ARA) was not reported until July 2023. The reported $77.0 million ARA was calculated based on 25% of the outstanding principal balance, as required by the transaction documents once the loan became delinquent. As a result, Class E and Class F were fully shorted interest and Class D was partially shorted interest, beginning with the July 2023 remittance. These were the first interest shortfalls reported since the loan’s transfer to special servicing. The rationale for the delay in the application of the required ARA calculation is unclear. In August 2023, an updated appraised value, dated as of July 2023, was first reported, showing an as-is value decline to $175.0 million and the ARA increased to $187.6 million. The updated ARA resulted in the master servicer making a non-recoverability determination, and beginning in August 2023, none of the certificates received any interest payments. Following these events, DBRS Morningstar downgraded the Class A certificate to A (sf) and placed the rating Under Review with Negative Implications, as previously outlined.

The special servicer changed hands again, in August 2023, from Midland to CW Capital Asset Management LLC (CW Capital). However, CW Capital did not remain in place for long as the special servicer has since been changed for a third time, with Midland installed again as the special servicer in September 2023. The change to CW Capital that was finalized in early August 2023 appears to have been made at the request of the DCH at the time. The most recent change back to Midland appears prompted by a non-reduced certificate holder vote following the July 2023 appraisal reported as part of the August 2023 remittance report.

As previously noted, DBRS Morningstar reviewed this transaction following the end of the forbearance period in January 2023. During that review, DBRS Morningstar conducted a liquidation analysis given the length of time with the special servicer and the likelihood that the loan would be resolved with a disposition. DBRS Morningstar determined that there remained sufficient cushion below the Class A certificate ($157.5 million, $261 psf) to absorb losses, based on an analysis of relatively recently securitized Manhattan office loans in CMBS transactions, which was further supported by the subject property’s dark value of $400.0 million ($662 psf) and land value of $220.0 million (as derived by the appraiser at issuance). DBRS Morningstar identified nine land comparables that traded from March 2020 through YE2022 at prices ranging from $491 psf to $991 psf with a median of $553 psf, comparing with the issuance appraisal’s land value estimate of $497 psf for the subject. One comparable loan, 909 Third Avenue (backs the NYC 2021-909 transaction rated by DBRS Morningstar), had a dark value of $637 psf included in its appraisal. That figure was deemed similar to the $662 psf appraised dark value for the subject at issuance and provided ample cushion against loss for the Class A certificate, even when accounting for a deterioration in investor appetite for office properties in New York City and the cap rate expansion between 2021 and the January 2023 rating actions.

However, the July 2023 appraised value was well below DBRS Morningstar’s expectations and the resulting liquidated loss scenario considering the July 2023 appraised value suggests a loss will be incurred by the Class A certificate. The value stress concluded by the appraiser is well beyond DBRS Morningstar’s prior expectations and is the primary driver for rating downgrade. The 2023 appraiser’s analysis considers very high carry and stabilization costs for the property, which are driving the sharp value decline from the issuance appraiser’s dark value.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors 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 (July 4, 2023), https://www.dbrsmorningstar.com/research/416784.

All credit ratings are subject to surveillance, which could result in credit 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 (March 16, 2023; https://www.dbrsmorningstar.com/research/410912).

Other methodologies referenced in this transaction are listed at the end of this press release.

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 related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info@dbrsmorningstar.com.

The credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

DBRS Morningstar had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The DBRS Morningstar Long-Term Obligation Rating Scale definition indicates that credit 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, Inc.
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The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

North American Single-Asset/Single-Borrower Ratings Methodology (October 19, 2023)/North American CMBS Insight Model v 1.1.0.0 (https://www.dbrsmorningstar.com/research/422174)

Rating North American CMBS Interest-Only Certificates (December 19, 2022; https://www.dbrsmorningstar.com/research/407577)

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 22, 2023; https://www.dbrsmorningstar.com/research/420982)

North American Commercial Mortgage Servicer Rankings (August 23, 2023; https://www.dbrsmorningstar.com/research/419592)

Interest Rate Stresses for U.S. Structured Finance Transactions (June 9, 2023; https://www.dbrsmorningstar.com/research/415687)

Legal Criteria for U.S. Structured Finance (December 7, 2022; https://www.dbrsmorningstar.com/research/407008)

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.