DBRS Morningstar Assigns Ratings to BBCMS Trust 2015-MSQ

DBRS, Inc. (DBRS Morningstar) assigned ratings to the Commercial Mortgage Pass-Through Certificates, Series 2015-MSQ issued by BBCMS Trust 2015-MSQ as follows:

-- Class A at AAA (sf)
-- Class B at AAA (sf)
-- Class C at AA (high) (sf)
-- Class D at AA (low) (sf)
-- Class E at BBB (high) (sf)
-- Class F at BBB (low) (sf)
-- Class X-A at AAA (sf)
-- Class X-B at AAA (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 July 16, 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upon withdrawal of MCR’s outstanding ratings, the DBRS Morningstar ratings will become the successor ratings to the withdrawn MCR ratings.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.

DBRS Morningstar has requested an update from the servicer regarding any potential request for relief, but has not received a response to date.

The transaction is collateralized by a $400 million first mortgage secured by two adjoining Class A, Leadership in Energy and Environmental Design Gold-certified office buildings totaling 1.1 million square feet (sf) in the South of Market submarket of San Francisco. The loan has a seven-year term and pays interest only at a fixed rate of 3.996% through maturity. In addition to the trust debt, there is a $50 million coterminous subordinate B note held outside of the trust. The whole loan plus $477 million of the borrower’s cash equity was used to finance the acquisition of the property for a total price of $918 million.

This high-quality trophy asset was extensively renovated between 2011 and 2015 for $229 million and is in new condition. At issuance, the property was 100% occupied with the largest tenant, Twitter, headquartered at the property. Twitter is in place on multiple leases with various expiry dates. A large portion of the Twitter space was set to expire in 2019 and was renewed through 2028 at a rate of $75.50 per sf (psf), which is well above the $37.00 psf range the tenant was paying at issuance. In conjunction with the renewal, Twitter gave back 83,854 sf of space, which was subsequently backfilled by other tenants and the property quickly returned to 100% occupied.

At issuance, the in-place leases were at rates significantly below market providing for substantial upside once the leases were renewed at market rent, as evidenced by the Twitter renewal mentioned above. In addition to Twitter, multiple tenants have renewed or executed leases at this higher rent which, in turn, has led to a 26% increase in net cash flow (NCF) when compared with the Issuer’s underwritten figures.

For the purpose of this analysis, the DBRS Morningstar NCF was adjusted to give credit for the renewal of the Twitter lease at market rent. To be conservative, DBRS Morningstar’s analysis gave no credit for rent steps and, although other tenants have executed leases at higher rates, applied no adjustments for those leases. The DBRS Morningstar average base rent of $55.00 psf remains well below the market average and is still lower than the appraiser’s estimate of $65.00 psf back in 2015.

The DBRS Morningstar 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 $38.5 million DBRS Morningstar NCF applied as part of the analysis represents a +9.0% variance over the Issuer’s NCF, primarily driven by the renewal of the Twitter lease. As of YE2019, the servicer reported a NCF figure of $44.4 million, a +13.0% variance over the DBRS Morningstar NCF figure, primarily a factor of below-market leases renewing at the much higher market rents. DBRS Morningstar applied a cap rate of 6.5%, resulting in a DBRS Morningstar Value of $592.4 million, a variance of 38% from the appraised value at issuance of $949 million. The DBRS Morningstar Value implies an LTV of 68%, as compared with the LTV on the issuance appraised value of 42%.

The cap rate applied is at the lower end of the range of DBRS Morningstar Cap Rate Ranges for office properties, reflective of the high-end quality of the property and strong market. In addition, the 6.5% cap rate applied is substantially above the implied cap rate of 3.7% based on the Issuer’s underwritten NCF and appraised value.

DBRS Morningstar made positive qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis, totaling 6% 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.

Classes X-A and X-B are interest-only (IO) certificates that reference 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.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

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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