DBRS Assigns Provisional Ratings to TMSQ 2014-1500 Mortgage Trust

DBRS has today assigned provisional ratings to the following classes of TMSQ 2014-1500 Mortgage Trust:

-- 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)

All trends are Stable.

The collateral for this transaction consists of the fee interest in a 33-story office and retail tower with a significant signage component located at 1500 Broadway in Times Square. In addition to the $335.0 million mortgage loan, there is a $170.0 million subordinate mezzanine loan outside the trust, together totaling $505.0 million. The property is situated on Broadway on the full block from West 43rd Street to West 44th Street in the Bowtie of Times Square, the heart of the neighborhood that attracts the most visitors and tourists. The subject was originally constructed in 1974 and consists of 506,412 square feet (sf), of which 438,108 sf is designated office space, 44,010 sf is classified as retail space and 24,294 sf is used for storage. The sponsor originally purchased the property in 1995 for $55.0 million, has invested approximately $18.3 million in capital improvements since 2004 and is currently renovating the lobby for an estimated cost of $6.3 million. The property is considered a Class A office building, including seven billboard signs with frontage on West 43rd Street, East Broadway and West 44th Street. As of September 1, 2014, the property is 89.7% occupied by 46 tenants, excluding one outstanding letter of intent. The largest tenant at the property is Times Square Studios (TSS), an affiliate of the Walt Disney Company, which occupies 76,897 sf (15.2% of the net rentable area) across five floors (and three signs) on a substantially below-market lease through April 2019, with one ten-year renewal option. The $505.0 million total financing served to repay existing debt of $310.9 million, pay closing costs of $5.0 million, fund upfront reserves of $12.7 million and return $176.4 million in equity to the sponsor.

The subject property is very well located in the Times Square bow tie, with prime visibility for both ground floor retail tenants as well as signage. In addition, the Times Square office market is quite strong, with a low vacancy rate of 4.1% for Class A properties built before 2000 located along Seventh Avenue and Broadway between 40th Street and 50th Street. Although the Debt Yield based on in-place cash flow (no credit to TSS rent steps through loan maturity) is 8.8%, which is relatively low given the last dollar of debt is rated at BBB (low), there is significant cash flow and value upside embedded in the TSS space. Its rental rate is well below market because of the lease being signed in the 1990s before the full renaissance of Times Square had taken hold. DBRS estimates that if the TSS space and signage were leased at market rates, cash flow would increase $14.7 million from the in-place level and $10.0 million from the DBRS underwritten level. The mortgage loan is low leverage, with a low DBRS loan-to-value (LTV) ratio of 68.9% based on inclusion only of TSS contractual rent steps attainable by loan maturity in 2024. While this LTV is relatively high given that the lowest-rated certificates are BBB (low), upside achievable five years after loan maturity would further de-lever the loan.

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

All classes are privately placed pursuant to Rule 144a.

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.

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

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