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 as follows:

-- 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 ratings 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-storey Class A office and retail tower located at 1500 Broadway within the Times Square Bowtie of Manhattan. This property includes 411,029 square feet (sf) of office space (81.2% of net rentable area (NRA)), 68,542 sf of retail (13.6% of NRA) and 24,563 sf of storage (4.9% of NRA), for a total of 504,134 sf. 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 2018 rent roll, the property was 91.5% occupied, a slight decrease as compared with the June 2017 occupancy rate of 92.5%; however, the June 2018 occupancy rate remains an improvement over the issuance occupancy figure of 89.7%. There is minimal near-term tenant rollover, with two tenants, representing 3.2% of NRA, expiring prior to January 2019. As of the June 2018 rent roll, the retail portion of the property averaged rents of $262.97 per square foot (psf) and the office component averaged rents of $57.70 psf. According to Reis, as of Q2 2018, office properties in the Midtown West submarket had an average vacancy rate of 7.5%, with an average asking rental rate of $70.73 psf, an improvement over the Q2 2017 figures of 8.8% and $70.02, 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 at issuance the in-place rents at the subject were generally below market estimates, 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 2024; 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. According to the servicer, the tenant exercised its renewal option to extend the lease by an additional five years, as the lease was scheduled to expire in April 2019. TSS occupies space from the basement level to the fifth floor and pays a blended rate of $188.62 psf, which recently increased in May 2018 from its previous blended rate of $177.48 psf. This increase will bring an additional $830,000 in revenue to the property annually, which will not be fully realized in the cash flows until the YE2019 reporting cycle. In addition, DBRS noted at issuance Nasdaq, Inc. has never physically occupied the property and it subleases the majority of its space to LDI Color Toolbox, Hewitt Associates, LLC and Brand Connections. DBRS is verifying these sub-tenants continue to occupy the property.

The loan reported a YE2017 debt service coverage ratio (DSCR) of 2.23 times (x), compared with the YE2016 DSCR of 2.34x and the DBRS Term DSCR at issuance of 2.65x. The YE2017 figure is reflective of a 4.2% decrease in net cash flow (NCF) over the prior period and 18.5% decrease since issuance. Effective gross income increased by 0.7% year over year; however, operating expenses increased by 8.7%, which caused the NCF decline in 2017. Operating expense increases were attributed to a 9.0% increase in real estate taxes and a 99.0% increase in general and administrative costs. Cash flows remain below the DBRS NCF figure derived at issuance; however, as leased rates step up in accordance with contractual steps, cash flows are expected to continue to improve, with the property performing in line with DBRS estimates in the near term.

Class X-A is an interest-only (IO) certificate that references a single rated tranche. The IO rating mirrors the lowest-rated applicable reference obligation 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.

As part of this review, DBRS has provided updated analysis and in-depth commentary in the DBRS Viewpoint platform for this transaction. For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrs.com. The platform includes loan-level data for the entire CMBS universe, as well as deal and loan-level commentary for all DBRS rated transactions.

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

The principal methodology is North American CMBS 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.

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 under Related Documents or by contacting us at info@dbrs.com.

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

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

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