DBRS Correction: COMM 2014-PAT Mortgage Trust

DBRS Limited (DBRS) corrected a June 26, 2017, press release that did not include language identifying the material deviation for the rating actions taken on Commercial Mortgage Pass-Through Certificates, Series 2014-PAT. The press release has been amended with the correct material deviations identified and is available on the DBRS website.

On June 26, 2017, DBRS Limited (DBRS) 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 (sf)

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

The rating confirmations reflect the performance of the transaction. 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. The loan is structured with a full cash flow sweep reserve to address planned building improvements and anticipated leasing costs associated with a significant amount of rollover that has occurred over the past 12 months. The loan is also structured with an original $53.2 million payment guarantee from the sponsor, Blackstone Real Estate Partners VII, L.P. (Blackstone), which decreases dollar for dollar as funds are applied for tenant improvement/leasing commission (TI/LC) costs for applicable leases.

The loan is secured by the fee interest in a 586,926-square-foot (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. 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. An affiliate of Blackstone acquired the property in July 2014 for $750.0 million, including $263.0 million in cash equity. Since acquisition, Blackstone has renovated and rebranded the subject as the “Equity Office,” with lobby renovations ($5.1 million), plaza renovations ($3.9 million), amenity upgrades ($7.4 million) and ongoing elevator modernization ($5.0 million) projects totaling $21.4 million. Additionally, Blackstone has completed high-end pre-tenant build-outs to display the property to prospective tenants.

As of the December 2016 rent roll, the property had an occupancy and average base rental rate of 35.0% and $86.24 per square foot (psf), respectively, down from 90.0% occupied and $74.12 psf, respectively, at issuance. Historically, the property has maintained stable performance, with an average occupancy rate of 98.5% from 2000 through 2013. Based on leasing updates, the property is currently 46.0% leased, with an average base rental rate of $102.38 psf. Four tenants, representing 58.2% of the NRA, have vacated the property in the past few years, relocating to other Class A properties in Manhattan. The most notable tenants to vacate include Paul Hastings LLP (Paul Hastings; 41.0% of the NRA at issuance), Davidson Kempner Capital Management LLC (Davidson Kempner; 8.0% of the NRA at issuance), Olshan Grundman Frome Rosenzweig & Wolosky LLP (5.8% of the NRA at issuance) and the National Association for Stock Car Auto Racing (3.4% of the NRA at issuance). Prior to their departure, these tenants had an average base rental rate of approximately $75.00 psf, which provides the borrower with upside revenue potential if new tenants sign leases at higher rental rates. At issuance, DBRS expected the vacancy rate at the subject to increase, 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 totaled approximately $16.9 million but has since been depleted and is not being funded, as there is currently no excess cash flow given shortfalls because of the increased vacancy rate. Funds have been used to fund operating expenses, mezzanine debt service and approved capital expenditures from the budget as allowed by the loan agreement. In 2016, approximately $12.2 million in building improvements were approved, while the remaining disbursements from the reserve were used to fund monthly shortfalls from June 2016 onward. DBRS has requested the updated balance of the Blackstone guarantee, as the sponsor has spent an undisclosed amount of money on TI/LC costs and building renovations since issuance.

Two tenants at the property, EOTFR, LLC (5.8% of the NRA through January 2033) and Stephens Inc. (4.3% of the NRA through November 2022) have recently extended their leases and marginally increased their footprints at the subject. Additionally, EOTFR, LLC has increased its base rental rate to $95.00 psf from $85.00 psf. The tenant will receive nine months of rental abatements from June 2017 through March 2018 totaling $2.5 million, as well as annual abatement periods averaging $0.6 million throughout the remainder of its leasing term. Blackstone has also signed a new tenant, ICM Partners (11.4% of the NRA), which will occupy 71,000 sf through February 2033 at a gross rate of $110 psf. Blackstone has also held several tours of the property and is in negotiations with four prospective tenants ranging from 17,000 sf to 33,000 sf; however, no tenant has signed a letter of intent at this time. According to the servicer, potential rental rates for prospective tenants range from $90.00 psf to $200.00 psf. According to CoStar, Class A office properties in the Plaza District submarket of New York report an average gross rental rate of $74.51 psf with an average vacancy and availability rate of 9.8% and 14.8%, respectively. When compared with the Plaza District submarket of New York, the subject property maintains a competitive rental rate. The growth in the tenants’ rental rate is indicative of the subject’s desirability and feasibility of the sponsor’s business plan.

As of YE2016, the loan reported a net cash flow (NCF) of $11.5 million, down from $30.0 million as of YE2015 and the DBRS issuance figure of $30.6 million. While the YE2016 NCF represents a 62.5% decline from the DBRS issuance figure, the recent performance decline is mitigated by the recent capital investments made at the subject, the potential revenue upside from increased rental rates, the low market vacancy rate, the amount of cash equity in the transaction and the strength and experience of the sponsor.

The ratings assigned to Classes D, E and F materially deviate from the higher ratings implied by the quantitative results. The deviations are warranted because sustainability of loan trends has not yet been demonstrated.

For more information on this rating action, please contact DBRS 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 principal methodology is CMBS North American Surveillance (December 2016), which can be found on dbrs.com under Methodologies.

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