DBRS Morningstar Assigns Ratings to GRACE 2014-GRCE Mortgage Trust

DBRS, Inc. (DBRS Morningstar) assigned ratings to the GRACE 2014-GRCE Commercial Mortgage Pass-Through Certificates issued by GRACE 2014-GRCE Mortgage Trust as follows:

-- Class A at AAA (sf)
-- Class X-A at AA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (high) (sf)

All trends are Stable.

These certificates are currently also rated by DBRS Morningstar’s affiliated rating agency, Morningstar Credit Ratings, LLC (MCR). In connection with the ongoing consolidation of DBRS Morningstar and MCR, MCR previously announced that it had placed its outstanding ratings of these certificates Under Review–Analytical Integration Review and that MCR intended to withdraw its outstanding ratings; such withdrawal will occur on or about June 11, 2020. In accordance with MCR’s engagement letter covering these certificates, upon withdrawal of MCR’s outstanding ratings, the DBRS Morningstar ratings will become the successor ratings to the withdrawn MCR ratings. Information about the MCR ratings, including the history of the MCR ratings, can be found at www.morningstarcreditratings.com.

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.

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

The assigned ratings reflect the consistent performance metrics for the transaction since issuance. The collateral consists of the fee-simple interest in the Grace Building: a Class A, 48-story, 1.564 million-square-foot (sf) office building located at 1114 6th Avenue, in the heart of Midtown Manhattan, New York. The property has a LEED Silver certification and is located across from Bryant Park between 42nd and 43rd Streets. The $900 million ($575 per sf (psf)) seven-year, interest-only (IO) loan provided funds to refinance existing debt of $344.5 million, fund upfront reserves of $35.3 million, pay transaction costs of $20.6 million, and return $499.5 million of equity to the borrower. The sponsor, 1114 6th Avenue Co., LLC, is a joint venture between TRZ Holdings LLC (TRZ) and The Swig Company. The property is managed by Brookfield Properties Management LLC, an affiliate of TRZ, which has $184 billion of assets under management. The Swig Company’s interest in the property dates back to its construction and development in 1971.

Since loan issuance, several large leases have been signed by major tenants at significantly higher rents. The Bank of America, Israel Discount Bank, Campari America, The Trade Desk, iStar, Humanscale, and Vinson & Elkins LLP have combined to lease more than 500,000 sf in the last three years. Moreover, at loan issuance, the top five tenants blended to an in-place rent of $73 psf while recent leases of approximately 60,000 sf and 40,000 sf were signed at $118 psf and $130 psf, respectively, according to CompStak, Inc. Approximately $35 million was spent in capital expenditures with $26 million of that going into the lobby.

The DBRS Morningstar net cash flow (NCF) was re-analyzed for the subject rating action to confirm its consistency with the “DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria.” The NCF figure applied as part of the analysis represents a -9% variance from the Issuer’s NCF at issuance, primarily driven by vacancy, tenant improvement allowances, and operating expenses.

The cap rate applied is at the lower end of the range of DBRS Morningstar Cap Rate Ranges for Manhattan office properties, reflective of the Tier 1 market and urban core location in proximity to major transit hubs and world-class shopping, entertainment, and corporate demand. In addition, the 6.5% cap rate applied is substantially above the appraiser’s cap rate of 3.6% at the time of issuance.

DBRS Morningstar made positive qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis, totaling 5% to account for cash flow volatility, property quality, and market fundamentals.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

Class X 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.

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com. The platform includes loan-level data for most outstanding CMBS transactions (including non-DBRS Morningstar-rated), as well as loan-level and transaction-level commentary for most DBRS Morningstar-rated and -monitored transactions.

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

The principal methodologies are the North American Single-Asset/Single-Borrower Ratings Methodology and North American CMBS Surveillance Methodology, which can be found on www.dbrsmorningstar.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.dbrsmorningstar.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.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

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.dbrsmorningstar.com or contact us at [email protected].

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