DBRS Confirms Ratings on TMSQ 2014-1500 Mortgage Trust

DBRS Inc. (DBRS) has today confirmed the ratings on the following classes of Commercial Mortgage Pass-Through Certificates (the Certificates), Series 2014-1500, issued by TMSQ 2014-1500 Mortgage Trust:

-- Class A at AAA (sf)
-- Class X-A 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 rating confirmations reflect that the current performance of the transaction remains in line with DBRS’s expectations at issuance. The collateral consists of the fee interest in a 33-story office and retail tower located at 1500 Broadway in Times Square. The transaction is interest-only for the entire ten-year term and consists of a $335 million first mortgage loan and a subordinate senior mezzanine loan of $170 million. The property is well-located in the Times Square Bowtie and benefits from potential significant cash flow and value upside related to the below-market rental rate of Time Square Studios (TSS)/Disney, the property’s largest tenant. The TSS space is discussed in greater detail below. The subject was originally constructed in 1974 and is currently undergoing a $6.3 million lobby renovation to upgrade and modernize the appearance of the asset. As of October 2016, the servicer noted that the interior renovation has been completed and that upgrades to the exterior, the addition of an illuminated sculpted white aluminum façade, were delayed as a result of the general contractor going out of business, but should be completed by YE2015.

According to the June 2016 rent roll, the property is 93.0% occupied with minimum tenant rollover risk within the next 12 months, as tenants occupying a total of 5.9% of the net rentable area (NRA) have lease expirations. Major tenants at the property include TSS (15.2% of NRA), The NASDAQ Stock Market, Inc. (10.4% of NRA) and About, Inc. (9.0% of NRA). These tenants’ leases expire in April 2019, August 2024 and May 2023, respectively. The retail component of the collateral is achieving an average rental rate of $198.45 per square foot (psf) with the office component reporting an average rental rate of $56.18 psf. TSS currently occupies space from the basement to the fifth floor, paying a blended rental rate of $156.29 psf. At issuance, DBRS estimated that this is below the blended market rental rate of $270.00 psf for its space (because of the tenant signing a long-term lease before the renaissance of the Times Square market), which could potentially provide an increase of $8.8 million in rental revenue. TSS has a ten-year extension option at 97.5% of fair market rent that DBRS expects the tenant to execute as the rental rate will likely remain below market. The next scheduled rent step for TSS is in May 2017, when TSS will begin to pay $171.92 psf, increasing rental revenue by $1.2 million annually. Assuming TSS exercises its extension option in April 2019, DBRS estimates that total rental revenue would be projected to increase by $4.7 million when the loan matures in 2024, based on the contractual rental rate increase for the tenant.

While the YE2015 debt service coverage ratio (DSCR) of 2.22 times (x) is below the DBRS underwritten DSCR of 2.65x, the cash flow coverage remains strong and the loan benefits from an ending reserve balance of $3.8 million, including $0.9 million for tenant reserves as of October 2016. As previously highlighted, it is the opinion of DBRS that there is significant rental revenue and value upside associated with the TSS space. Net cash flow is expected to increase going forward as scheduled rent is realized.

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 applicable methodologies are North American CMBS Rating Methodology (March 2016) and CMBS North American Surveillance Methodology (October 2016), which can be found on our website under Methodologies.

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