Press Release

DBRS Finalizes Provisional Rating of BWAY 2015-1740 Mortgage Trust

CMBS
February 12, 2015

DBRS, Inc. (DBRS) has today finalized its provisional rating of the following class of BWAY 2015-1740 Mortgage Trust. The trend is Stable.

-- Class A at AAA (sf)

The collateral for the transaction consists of the fee interest in a 26-story, office tower in Midtown Manhattan, just south of Midtown Manhattan’s Columbus Circle. Following the release of the DBRS presale report on January 28, 2015, the named Special Servicer changed from Wells Fargo Bank, National Association to Green Loan Services LLC (Green Loan Services). There is no impact on the rating of Class A due to this update. A wholly owned subsidiary of SL Green Realty Corp., Green Loan Services is an established large loan special servicer with particular experience with New York office buildings. DBRS is familiar with the servicing operations of Green Loan Services and will evaluate them in conjunction with the DBRS North American Commercial Mortgage Servicer Evaluations methodology.

The subject property is located on Broadway, between West 55th and West 56th streets, and is considered to be of B+ quality. The building consists of 572,645 square feet (sf) of office space, 16,587 sf of ground-floor retail space and 14,696 sf of storage space. As of October 31, 2014, the property was 98.3% leased by five tenants, the largest of which is the women’s retailer L Brands, Inc. (L Brands), which leases 466,979 sf (77.3% of the net rentable area (NRA)) through March 2022, with one five-year extension option. L Brands uses the subject as a regional headquarters and operates two of its brands’ headquarters, Victoria’s Secret and Pink, at the collateral. The tenant has occupied space at the subject since 2006 and has expanded three times, consolidating five of its other Manhattan office locations, totaling 350,000 sf, within the collateral. The $308.0 million loan served as acquisition financing for the loan sponsor, Blackstone Property Partners, L.P. (BPP), an affiliate of The Blackstone Group (Blackstone), which acquired the subject for $605.0 million. Additionally, the dark value of the property is $400.0 million, which represents 129.9% of the loan amount.

Blackstone is considered strong, as the firm is an experienced commercial real estate operator with a considerable presence in the Manhattan market. The cash equity of $311.2 million results in a loan-to-cost-basis ratio of only 51.8%. However, through loan maturity in January 2025, leases representing 96.5% of the NRA are scheduled to expire. No dedicated loan structure exists for any upcoming lease expiries during the loan term, other than springing cash management upon the property’s reported debt yield declining below 7.0% for two consecutive quarters. While DBRS considers this to be a weakness for the loan, the added risk is mitigated by the significant amount of cash equity and the property’s stable historical performance. Given Blackstone’s robust local market knowledge, significant cash equity and ample financial resources, DBRS believes the sponsor is likely to protect its investment and invest the necessary resources to maintain the property’s performance in the event L Brands or Davis & Gilbert, LLP fail to renew their respective leases in the future.

Based on a 7.50% cap rate, the DBRS value represents a 49.9% discount to the appraised value. While the DBRS cap rate is low by rating agency standards, it is far above the current market cap rate (as estimated by the appraisal) of 4.5%. DBRS research has found that issuance cap rates (issuer’s underwritten net cash flow divided by appraised value) for Manhattan office properties securitized in CMBS transactions, regardless of location or quality, have not exhibited an average cap rate above 7.50% since 1999 (7.69%). For the 2014 vintage, the average cap rate was 4.79%. While the loan is not particularly low leverage compared with other single-borrower securitizations, and has an elevated default risk given the leverage and rollover, the Class A certificate rated AAA (sf) by DBRS represents a 14.4% debt yield and a loan per sf of $261.

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

All classes have been privately placed.

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.

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