DBRS Morningstar Confirms All Ratings on TMSQ 2014-1500 Mortgage Trust, Removes UR-Dev. Status

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

-- 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 have been removed from Under Review with Developing Implications, where they were placed on November 14, 2019.

On March 1, 2020, DBRS Morningstar finalized its “North American Single-Asset/Single-Borrower Ratings Methodology” (the NA SASB Methodology), which presents the criteria for which ratings are assigned to and/or monitored for North American single-asset/single-borrower (NA SASB) transactions, large concentrated pools, rake certificates, ground lease transactions, and credit tenant lease transactions. For further information on the NA SASB Methodology, please see the press release dated March 1, 2020, on the DBRS Morningstar website at www.dbrsmorningstar.com.

Prior to the finalization of the NA SASB Methodology, the DBRS Morningstar ratings for the subject transaction and all other DBRS Morningstar-rated transactions subject to the methodology were previously placed Under Review with Developing Implications, as the proposed methodology changes were material.

The subject transaction is one of four NA SASB transactions (24 classes of certificates) publicly rated by both Morningstar Credit Ratings, LLC (MCR) and DBRS Morningstar. As noted in the March 1, 2020 press release, as part of the ongoing consolidation of DBRS Morningstar and MCR, MCR previously placed its outstanding ratings on NA SASB transactions Under Review – Analytical Integration Review. Please see MCR’s press release dated November 14, 2019, on MCR’s website at ratingagency.morningstar.com. In conjunction with these rating actions by DBRS Morningstar for the subject transaction, the MCR ratings will be withdrawn.

The subject DBRS Morningstar rating actions are the result of its application of the NA SASB Methodology in conjunction with the “North American CMBS Surveillance Methdology,” as applicable. Qualitative adjustments were made to the final loan-to-value (LTV) Sizing Benchmarks used for this rating analysis.

The collateral for the subject transaction consists of the fee interest in a 33-story Class A mixed-use (office and retail) building located at 1500 Broadway in New York City. There is a significant signage component to the property, a factor of its location in a prime spot within the middle of Times Square. The subject trust holds the entire $335.0 million senior note backed by the collateral, with a $170.0 million mezzanine loan held outside of the trust for a total debt amount of $505.0 million. The trust loan has a 10-year interest-only (IO) term, maturing in 2024. The property was built in 1974 and of the 506,412 square feet (sf) of space, approximately 438,108 sf is designated office space, with the remainder split between approximately 44,010 sf and 24,294 sf of retail and storage space, respectively. The sponsor, TREHI, a subsidiary of Tamares Group, a private investment company headquartered in London, acquired the property in 1995.

In the analysis for these rating actions, the DBRS Morningstar net cash flow (NCF) figure of $34.1 million derived at issuance was accepted and a cap rate of 6.5% was applied, resulting in a DBRS Morningstar Value of $523.9 million, a variance of -35.3% from the appraised value at issuance of $810.0 million. The DBRS Morningstar Value implies an LTV of 63.9%, as compared with the LTV on the issuance appraised value of 41.4%. The cap rate applied is at the low end of the range of DBRS Morningstar Cap Rates for office properties, which is reflective of the prime location and overall desirability of the collateral property.

The largest tenants at the property largely remain static from issuance, with a relatively granular tenant roster in place. Times Square Studios/Disney (TSS) is the largest tenant with 15.2% of the net rentable area (NRA) spread across the building’s first five floors. TSS is in place on a lease through May 2024 after signing a five-year renewal in 2019. The servicer is reporting an NRA for the tenant of 13.0%, but this appears to exclude an 11,487 sf ground-floor retail space also leased by TSS. The bulk of TSS’s space is configured for studio use, and the subject is the filming location for Disney-owned ABC’s Good Morning America program. There is one remaining five-year renewal option for TSS that would push the existing lease expiry five years beyond the loan maturity, to 2029.

The ground-floor retail space leased to TSS was formerly subleased to Sephora, but that retailer moved to a larger suite at 1535 Broadway in May 2019. The TSS retail space has shown as available for sublease in a CBRE online listing by DBRS Morningstar since the Sephora vacancy was announced, and on March 6, 2020, a DBRS Morningstar analyst visited the property exterior and noted the space remains dark with leasing information listed on door and window glass-cling advertisements for CBRE. Retailers and restaurants in place on direct leases include Citizen Watch, which renewed in 2018, Brooklyn Diner, and Starbucks.

At issuance, DBRS Morningstar noted the in-place rent for TSS’s ground-floor retail space was just below $400 per sf (psf), well below market, even when DBRS Morningstar conservatively estimated a market rent of $1,000 in its analysis. Based on the scheduled rent steps in place at issuance and the terms of renewal that cap the renewal lease rates at 10% and 15% of the previous rate, depending on the point in time of the extended term, the in-place rent is still expected to be well below market with the recent renewal. In addition, it is noteworthy that Citizen Watch’s 2018 renewal rate was approximately $2,500 psf.

The second- and third-largest tenants are NASDAQ (10.4% of the NRA through August 2024) and About.com (now known as Dotdash; 9.0% of the NRA through May 2023). In October 2019, the servicer advised that two of the five floors leased by NASDAQ were subleased by two tenants who had been in place since 2004 and 2013, with both subleases coterminous with original lease to NASDAQ. The occupancy rate at issuance was 91.0% and through YE2018, the in-place occupancy figures held slightly above that figure.

The office component’s occupancy rate also declined slightly in 2019 (as most recently confirmed by the total leased rate reported by the servicer at 88.0% as of September 2019). The primary source of the decline was the loss of the former fourth-largest tenant in Videology, which previously represented 9.0% of the NRA on a lease through December 2023 and filed for Chapter 11 Bankruptcy in May 2018. An online listing of available office space located by DBRS Morningstar as of March 2020 suggested an availability rate of 13.2%, with a few smaller tenants appearing to have vacated with slightly less square footage and new tenants signed since the servicer’s reported September 2019 figures. According to Reis, the property’s Midtown West submarket reported an office vacancy rate of 7.7% at YE2019, where rates are expected to hover through the next few years.

The DBRS Morningstar NCF figure applied as part of the analysis represents a -5.4% variance to the Issuer’s NCF, driven by higher tenant improvement/leasing commission costs assumed by DBRS Morningstar. DBRS Morningstar analyzed the loan with a rental rate for TSS that reflected its leased rate at the loan maturity in 2024, giving credit to scheduled rent steps and the contractual renewal rate in 2019. The average underwritten rents at issuance for TSS of approximately $217 psf compared with DBRS Morningstar’s market rent estimate of $270 psf (averaged by space type and size for each). Although retail rents in the submarket have fallen since the 2014 issuance, DBRS Morningstar believes the TSS lease is still below market, with potential for upside also in the signage income that could be generated in the three signs currently used by TSS as part of its leased rate. At issuance, DBRS Morningstar estimated the potential upside in signage rent at $5.9 million, based on the appraiser’s market estimates.

The servicer reported a Q3 2019 debt service coverage ration (DSCR) of 2.51 times (x), up from 2.18x at YE2018, but below the Issuer’s underwriting DSCR of 2.76x. The annualized Q3 2019 NCF figure reported by the servicer represents a -3.8% variance from the DBRS Morningstar NCF figure, primarily a factor of higher in-place expenses for the property as compared with the issuance estimates. Although there have been occupancy declines and a nearly year-long vacancy for the ground-floor retail space formerly subleased to Sephora, DBRS Morningstar believes the risks remain stable from issuance and notes the property’s prime location, relatively low DBRS Morningstar LTV, and potential for upside in revenue as previously outlined.

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

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

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

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

The principal methodology is the North American Single-Asset/Single-Borrower Ratings 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 Morningstar 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 rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar 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. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The DBRS Morningstar long-term rating scale definition indicates that ratings of CCC or lower are assigned when the bond is highly likely to default or default is imminent, thereby prevailing over a sensitivity analysis.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at [email protected].

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