DBRS Confirms Rating for Class A of BWAY 2015-1740 Mortgage Trust

DBRS Limited (DBRS) confirmed the rating on the Commercial Mortgage Pass-Through Certificates, Series 2015-1740 (the Certificates) issued by BWAY 2015-1740 Mortgage Trust as follows:

-- Class A at AAA (sf)

The trend is Stable.

The rating confirmation reflects the healthy performance metrics for the transaction since issuance. The collateral consists of the fee interest in a 26-storey Class B+ office and retail tower located at 1740 Broadway in Midtown Manhattan. The $308.0 million loan is fully interest-only (IO) for the entire ten-year term. The property is well located in the Columbus Circle submarket and is LEED Silver certified. The sponsor and guarantor of the loan is Blackstone Property Partners, L.P., an affiliate of the Blackstone Group (Blackstone). Blackstone is a well-capitalized, experienced owner/operator of commercial real estate with significant experience in the New York market. The subject loan financed the acquisition of the property, and the sponsor retained cash equity of over $300 million at closing.

The property comprises 572,645 square feet (sf) of office space, 16,587 sf of ground-floor retail space and 14,696 sf of storage space. Major tenants at the property include L Brands Inc. (69.3% of the net rentable area (NRA)) and Davis & Gilbert LLP (15.8% of the NRA), with lease expirations in March 2022 and December 2020, respectively. The largest tenant, L Brands, houses its regional company headquarters and the headquarters for its Victoria’s Secret and PINK brands at the subject property.

L Brands recently announced the sale or closure of two company divisions (La Senza and Henri Bendel, respectively) and has reported sales declines at its Victoria’s Secret and PINK stores. These well-publicized struggles have contributed to sharp drops in the company’s stock price in the last year. However, the company’s Bath & Body Works division continues to perform well and was the only division under the L Brands umbrella to report year-over-year sales revenue growth in 2018. Despite declines for some of its brands, market analysts appear confident that L Brands will be able to execute strategies to stabilize sales and company profits. L Brands has a one-time termination option for cumulative leased space on any one floor leased for a minimum of five years, with a 15-month notice required. It is noteworthy that leases were recently signed for the 14th and 15th floors, which were dark but leased to L Brands at issuance. DBRS has requested confirmation from the servicer of any such request from the tenant and/or any subleased space at the property, and the response is currently pending. Given the La Senza sale and closure of the Henri Bendel division, DBRS believes it is likely the tenant has space that is currently not in use. The strong sponsorship and management in Blackstone, as well as the healthy market conditions, should be conducive to backfilling any space should it become vacant either prior to or at the 2022 lease expiry for L Brands.

According to the September 2018 rent roll, the property was 98.2% occupied compared with the September 2017 occupancy rate of 92.1%. The subject averages rental rates of $65.45 per square foot (psf) for the office space, which is in line with office properties within the Midtown West submarket that are reporting an average asking rental rate of $70.66 psf and an effective rate of $58.11 psf, according to the Q3 2018 Reis market report, which showed an overall submarket vacancy rate of 8.1% for the period. The two newest tenants signed to the subject are Thesys Technologies, LLC and RGN, LLC, which were secured for the remaining space on the 14th and 15th floors as previously mentioned, collectively representing 6.1% of the NRA and both in place at above-market rental rates with lease expirations past loan maturity.

The Q3 2018 debt service coverage ratio (DSCR) is 2.03 times (x) compared with the YE2017 DSCR of 1.86x and the DBRS Term DSCR of 1.92x. The net cash flow increase in 2018 was driven by a 5.6% increase in EGI, largely a result of the higher rental rates for the new tenants taking occupancy in 2018.

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

DBRS provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for this transaction.

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

The principal methodology is North American CMBS Surveillance Methodology, which can be found on www.dbrs.com under Methodologies & Criteria. 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, which can be found on www.dbrs.com in the Commentary tab under Regulatory Affairs. 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.

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