DBRS Confirms Ratings of COMM 2014-PAT Mortgage Trust

DBRS Limited (DBRS) has today confirmed all classes of Commercial Mortgage Pass-Through Certificates, Series 2014-PAT (the Certificates), issued by COMM 2014-PAT Mortgage Trust (the Trust), as follows:

-- Class A at AAA (sf)
-- Class B at AA (sf)
-- Class C at A (sf)
-- Class D at BBB (sf)
-- Class E at BB (sf)
-- Class F at B (low) (sf)

All trends are Stable. DBRS does not rate the first loss piece, Class G.

The rating confirmations reflect the stable performance of the transaction, which remains in line with the DBRS expectations since issuance in September 2014. The transaction consists of a $425 million interest-only single mortgage loan, structured with an initial two-year term followed by three one-year extension options. The whole-loan also consists of senior mezzanine ($35 million) and junior mezzanine ($100 million) loan components. Furthermore, the loan is structured with a full cash flow sweep reserve, which totaled approximately $13.9 million as of July 2015, and a $53.2 million payment guarantee from the sponsor, Blackstone Real Estate Partners VII, L.P. (Blackstone) to address planned buildings improvements and anticipated leasing costs due to a significant amount of rollover occurring in the next 12 months.

The collateral is secured by the fee interest in a 586,926 square feet (sf), 36-story Class A office tower located in Midtown Manhattan, New York. The subject property is well situated between Park Avenue and Madison Avenue at East 55th Street with public entrances on both sides and consists of 579,694 sf (98.7% of the net rentable area (NRA)) of office space, 7,232 sf (1.2% of the NRA) of retail space, and some storage space. As of December 2014, the property was 92% occupied with an average rental rate of $70.40 psf, which is comparable with other Class A Office properties within the Plaza District submarket. According to Costar, as of Q2 2015, the property subset had an average rental rate of $70.10 psf and an average vacancy rate of 7.6% within the submarket.

Through the next 12 months, five tenants, representing approximately 60.2% of the NRA, either signed new leasing agreements elsewhere or gave notice that they will most likely vacate upon their lease expiration dates. Paul Hastings LLP (Paul Hastings) (41.0% of the NRA), Davidson Kempner Capital Management LLC (Davidson Kempner) (8.0% of the NRA), Olshan Grundman Frome Rosenzweig & Wolosky (Olshan Grundman) (5.8% of the NRA) and the Grant Company (2.0% of the NRA) have all signed new leasing agreements outside of the building; Olshan Grundman currently sublets its space from Paul Hastings. While Paul Hastings, Olshan Grundman and the Grant Company will all vacate their spaces upon their respective lease expiration dates in June 2016 and August 2016, Davidson Kempner has already relocated to 520 Madison Avenue and sublet its space through the end of its lease term in February 2016. At issuance, DBRS was aware of the future increase in vacancy and as a result, the loan is structured with a full cash flow sweep reserve, which will be utilized for future leasing. As of July 2015, the reserve totaled $13.9 million and is projected by the sponsor to grow to $27.9 million by June 2016. To date, no prospective tenants have been established; however, according to the servicer, Newmark Grubb Knight Frank will officially begin its marketing campaign for the property shortly. While the borrower has yet to sign new tenants, one of the property’s current tenants, Avista Capital Holdings (2.2% of the NRA), signed a five-year lease extension through May 2021 at a rental rate of $125.00 psf, significantly higher than its current rental rate of $88.37 psf. The growth in the tenant’s rental rate is indicative of the subject’s desirability and feasibility of the sponsor’s business plan.

At issuance, Blackstone planned to renovate the property extensively in order to achieve higher in-place rental rates. As a result, Blackstone funded a $53.2 million payment guarantee for the future renovations. The servicer reports that the borrower is currently in the process of finalizing the plans and scope for the upcoming capital projects. The upgrades will include a new lobby, an updated 55th Street Plaza, a renovation of the 24th floor (commencing August 2015) and the creation of a full floor (10,428 sf) amenity center featuring a gym, lounge, locker room, game center and food service. Paul Hastings currently occupies the floor (C1), which would be used for the amenity center. Discussions have begun regarding the tenant giving back this space by December 2015 prior to their original lease expiration date (June 2016) in order to start construction on the amenity level. The borrower reports the project will likely begin sometime in Q4 2015 and be completed in the early part of 2016.

While the buildings improvement costs and re-leasing costs of the property will be substantial in the near future, DBRS considers Blackstone to be a well-capitalized and experienced commercial real estate operator with a considerable presence in the Manhattan market. Furthermore, DBRS considers the quality and liquidity of the asset, the borrower’s amount of cash equity in the transaction and the sponsors guarantee to all be positive factors.

DBRS continues to monitor this transaction in its Monthly CMBS Surveillance Report, with additional information on the DBRS viewpoint for this transaction, including details on the largest loans in the pool. The July 2015 Monthly CMBS Surveillance Report for this transaction will be published shortly. If you are interested in receiving this report, contact us at info@dbrs.com.

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

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

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 to the right under Related Research or by contacting us at info@dbrs.com.

The applicable methodologies are CMBS North American Surveillance (January 2015) and North American CMBS Rating Methodology (June 2015), which can be found on our website under Methodologies.