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, issued by COMM 2014-PAT Mortgage 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 since closing in September 2014, remaining in line with DBRS underwriting expectations. The transaction consists of a $425.0 million interest-only single-mortgage loan that is structured with an initial two-year term, followed by three one-year extension options. The whole loan also consists of senior mezzanine ($35.0 million) and junior mezzanine ($100.0 million) loan components. The loan is structured with a full cash flow sweep reserve, which totalled approximately $16.9 million as at June 2016, and a $53.2 million payment guarantee from the sponsor, Blackstone Real Estate Partners VII, LP (Blackstone), to address planned building improvements and anticipated leasing costs as a result of the significant amount of rollover that will occur in the next 12 months. At issuance, Blackstone had $263.0 million in cash equity behind the loan, inclusive of the Blackstone guarantee.

The loan is secured by the fee interest in a 586,926-square-foot (sf) 36-storey Class A office tower located in Midtown Manhattan, New York City. The subject property is well situated between Park Avenue and Madison Avenue at East 55th Street with public entrances on both sides. The collateral 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 2015, the property was 90.0% occupied with an average rental rate of $74.12 per square foot (psf), comparable with other Class A office properties within the Plaza District submarket.

In its August 6, 2015, press release, DBRS noted that five tenants, representing approximately 60.2% of the NRA, had either signed new leasing agreements elsewhere or had given notice that they would vacate upon their respective lease expiration dates. The most notable of these tenants included 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 LLP (Olshan Grundman; 5.8% of the NRA) and the Grant Company (2.0% of the NRA). As of June 2016, both Paul Hastings and Olshan Grundman vacated their spaces, while the Grant Company indicated it would vacate upon its August 2016 lease expiration. At issuance, DBRS was aware of the potential for increased vacancy, anticipating that there would be approximately $17.1 million swept into the leasing reserve prior to the Paul Hastings and Davidson Kempner lease expirations. As of June 2016, the reserve held approximately $16.9 million, which will be utilized for the noted tenant rollover. Blackstone is in negotiations with five prospective tenants for various spaces and has held several tours of the property since August 2015; however, no tenant has signed a letter of intent at this time. Potential rental rates for prospective tenants range from $85.00 psf to $125.00 psf. While the borrower has yet to sign any new tenants, one of the property’s current tenants, Avista Capital Holdings, LP (2.2% of the NRA), recently signed a five-year lease extension beginning in May 2016 at a rental rate of $125.00 psf, which is significantly higher than its previous rental rate of $81.00 psf. According to CoStar, Class A office properties in the Plaza District submarket of New York City report an average gross rental rate of $77.15 psf with an average vacancy and availability rate of 9.4% and 13.0%, respectively. When compared to the Plaza District submarket of New York City, the subject property maintains a competitive rental rate. The growth in the tenant rental rate is indicative of the subject’s desirability and the feasibility of Blackstone’s business plan.

At issuance, Blackstone planned to renovate the property in order to achieve higher in-place rental rates. As a result, Blackstone funded a $53.2 million payment guarantee to cover future leasing costs and other building improvements. As confirmed by the servicer, the upgrades will include a new lobby, an updated 55th Street Plaza, a renovation of the 24th floor to create a marketing centre (commencing August 2015) and a renovation of floor C1 (10,428 sf) to create an amenity centre featuring a gym, lounge, locker room, game centre and food service area. To date, the lobby renovation is underway and the entire west wall has been replaced with new limestone. According to the servicer, the borrower anticipates that construction of the C1 amenity floor will commence shortly, with an expected completion date of November 30, 2016. In regards to the updates to 55th Street Plaza, once a permit has been received, the construction is expected to take approximately 16 weeks. In addition to the noted renovations, Blackstone is preparing to white box five full floors to make the upcoming vacant space lease ready, with an expected completion date close to year-end 2016. While the building’s improvement costs and re-leasing costs 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 Blackstone’s guarantee to all be positive factors.

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

The related regulatory disclosures pursuant to the National In¬strument 25-101 Designated Rating Organizations are hereby in¬corporated 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 methodologies are North American CMBS Rating Methodology (March 2016) and CMBS North American Surveillance (December 2015), which can be found on our website under Methodologies.

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