DBRS Confirms Ratings on TMSQ 2014-1500 Mortgage Trust

DBRS Limited (DBRS) 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 (sf)

All trends are Stable.

The rating confirmations reflect the overall stable performance of the transaction, which remains in line with DBRS’s expectations at issuance. The loan is secured by the fee interest in a 33-story office and retail tower located at 1500 Broadway within the Times Square Bowtie of Manhattan. The subject was originaly constructed in 1974, and recently underwent a $6.3 million renovation to upgrade the property and modernize the exterior with a sculpted white aluminum facade. The renovation also included upgrades to the lobby and improvements to the Walt Disney Studio affiliate’s space, where Good Morning America is filmed.

The transaction is interest-only (IO) for the entire ten-year term and consists of a $335.0 million first mortgage loan and a subordinate senior mezzanine loan of $170.0 million.

According to the June 2017 rent roll the property was 92.5% occupied, a slight decrease as compared with the June 2016 occupancy rate of 93.2%. However, the 2017 occupancy rate remains an improvement over the issuance occupancy figure of 89.7%. There is minimal near-term rollover, with 3.4% of the net rentable area (NRA) scheduled to roll in the next 12 months. As of the June 2017 rent roll, the retail portion of the property averaged rents of $262.50 per square foot (psf) and the office component averaged rents of $55.17 psf. According to REIS, as of Q2 2017, office properties in the Midtown West submarket had an average vacancy rate of 8.8%, with an average asking rental rate of $70.02 psf, an improvement over the Q2 2016 figures of 10.3% and $69.51, respectively. Given the highly desirable location, market rental rates for the retail space at the subject are quite high, estimated by DBRS to be approximately $270 psf at issuance. DBRS noted the in-place rents at the subject were generally below market estimates by the appraiser and average rental rates reported for existing properties alike, suggesting upside for the property as renovations were completed and tenants were either renewed at higher rates or replaced with tenants paying market rental rates.

Major tenants at the property include Times Square Studios (TSS), a subsidiary of Walt Disney Studios, which occupies 14.8% of the NRA on a lease through April 2019; NASDAQ Inc., which occupies 10.4% of the NRA on a lease through August 2024; and About, Inc., which occupies 9.0% of the NRA on a lease through May 2023. The TSS space serves as the studio for the Good Morning America broadcast, which airs live six days a week on ABC. TSS occupies space from the basement to the fifth floor and pays a blended rate of $177.48 psf, which recently increased in May 2017, from its previous blended rate of $156.92 psf. This increase will bring an additional $1.2 million in revenue to the property annually, which will not be fully realized in the cash flows until the YE2018 reporting cycle.

According to the most recent year-end financials, the YE2016 debt service coverage ratio (DSCR) was 2.34 times (x), an improvement over the YE2015 DSCR of 2.22x. Cash flows remain depressed as compared with the DBRS NCF figure derived at issuance, which resulted in a DBRS Term DSCR of 2.65x. As free rent periods burn off and leased rates step up in accordance with contractual steps, cash flows are expected to continue to improve, with the property performing in line with the DBRS estimates by YE2018.

Assuming TSS exercises its extension option in April 2019, at the contractual rate in the renewal option, total rental revenue would increase by approximately $3.0 million over the current annual rate by 2024.

Class X-A is an IO certificate that references a single rated tranche. The IO rating mirrors the lowest-rated reference tranche adjusted upward by one notch if senior in the waterfall.

All ratings will be subject to ongoing surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed or discontinued by DBRS.

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

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 principal methodology is CMBS North American Surveillance, which can be found on dbrs.com under Methodologies. For a list of the Structured Finance related methodologies that may be used during the rating process, please see the DBRS Global Structured Finance Related Methodologies document on www.dbrs.com. Please note that not every related methodology listed under a principal Structured Finance asset class methodology may be used to rate or monitor an individual structured finance or debt obligation.

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

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

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