DBRS Finalizes Provisional Ratings on LCCM 2014-909 Mortgage Trust

DBRS has today finalized the provisional ratings on the following classes of LCCM 2014-909 Mortgage Trust. The trends are Stable.

-- Class A at AAA (sf)
-- Class X-A at AAA (sf)
-- Class X-B at AAA (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)

The collateral for this transaction consists of the leasehold interest in a 1.34 million-sf Class A office building in Midtown Manhattan. The property is located between East 54th Street and East 55th Street on Third Avenue, and comprises 32 above-ground floors as well as two subterranean floors. Situated on a 1.88-acre parcel, the subject was originally constructed in 1968 and was recently renovated in 2011 and 2012 with upgrades to building mechanicals. According to the March 1, 2014, rent roll, the subject is 99.8% leased to 14 tenants, the largest of which is the United States Postal Service (USPS), which occupies 492,375 sf (36.7% of the NRA). The USPS has been at the subject since completion and its below-market rent is the source of significant long-term future upside potential. Loan proceeds of $350 million will go toward refinancing approximately $193.8 million of existing debt, paying defeasance costs of $10.8 million and paying closing costs of $2.5 million. Additional proceeds of approximately $143 million will be returned to the sponsor, Vornado Realty Trust, which has owned the subject since 1999.

The loan benefits from a high-quality, very stable cash flow stream, as 83.8% of the NRA is occupied by tenants (or their parent companies) with investment-grade ratings. These tenants contribute 76.7% of DBRS UW base rent. In addition, the subject property is very well located in the prestigious Plaza District submarket of Midtown Manhattan. The submarket attracts many large corporations, high-end law firms and financial services tenants, with the high-quality tenancy reflected in the $75 psf average asking rent for Class A space. This is higher than all other major Manhattan office submarkets except for Times Square, which has similar asking rents. Further, current vacancy in the submarket is quite low for Class A buildings at only 6.8%. DBRS considers the default risk during the seven-year loan term to be minimal, as the DBRS Term DSCR is high at 2.03x and only 26.4% of the NRA expires during the loan term. The DBRS Debt Yield is 7.9%, which is relatively low given the last dollar of debt is rated BB (low), and the loan is interest only for the full seven-year term. However, there is significant embedded upside in the USPS space, as the tenant pays a rental rate that is approximately $20 psf below market. If this space were leased at a market rental rate, the DBRS Debt Yield would increase to 10.7%. Investors would most likely view the subject property as a combination of a leased fee interest with significant upside potential decades into the future and a traditional leasehold property. The appraiser recognizes this fact when utilizing a 4.25% cap rate, which would otherwise be quite low for an asset of this quality. Correspondingly, a lower debt yield than normal is considered acceptable.

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

All classes have been privately placed pursuant to Rule 144A. The Class X balances are notional.

The applicable methodology is CMBS Rating Methodology, which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The Rule 17g-7 Report of Representations and Warranties is hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

The full report providing additional analytical detail is available by clicking on the link under Related Research at the right of the screen or by contacting us at info@dbrs.com.