DBRS Morningstar Assigns Ratings to the GS Mortgage Securities Corporation Trust 2012-TMSQ

DBRS, Inc. (DBRS Morningstar) assigned ratings to the Commercial Mortgage Pass-Through Certificates, Series 2012-TMSQ issued by GS Mortgage Securities Corporation Trust 2012-TMSQ as follows:

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

All classes carry a Negative trend because the underlying collateral continues to face performance challenges associated with the Coronavirus Disease (COVID-19) global pandemic.

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 October 22, 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upon withdrawal of MCR’s outstanding ratings, the DBRS Morningstar ratings will become the successor ratings to the withdrawn MCR ratings.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, at www.dbrsmorningstar.com. On April 24, 2020, DBRS Morningstar placed the ratings on its outstanding SASB transactions secured by retail properties Under Review with Negative Implications while MCR placed the ratings on its outstanding SASB transactions secured by retail properties Under Review Negative as the global shelter-in-place and mandatory retail closures related to the coronavirus have contributed to retail bankruptcies and anticipated vacancies in retail centers. For further information on these rating actions, please see the DBRS Morningstar press release dated April 24, 2020, at www.dbrsmorningstar.com and the MCR press release dated April 24, 2020, at www.morningstarcreditratings.com.

To assign ratings to this transaction, DBRS Morningstar considered both the impact of the updated NA SASB Methodology and its scenarios attributable to the ongoing coronavirus pandemic on the ratings.

Because of the coronavirus’ significant impact on retail performance, DBRS Morningstar first considered the application of the updated NA SASB Methodology in conjunction with the “North American CMBS Surveillance Methodology” to arrive at a baseline result, which incorporated qualitative assumptions, capitalization rates, and loan-to-value (LTV) ratio sizing benchmark quality/volatility adjustments and excluded any potential changes in current or future expected asset performance resulting from the coronavirus.

DBRS Morningstar would then typically overlay scenarios to incorporate additional reductions in net cash flow (NCF) to account for exposure to bankrupt or closed tenants; however, considering the unique collateral type which will be discussed below, no additional stress to the collateral value was applied. For more information on macroeconomic scenarios related to COVID-19, please refer to projections related to “Global Macroeconomic Scenarios: September Update” (https://www.dbrsmorningstar.com/research/366542). The global macroeconomic scenarios include a moderate decline of 15% for all commercial real estate (CRE), which acts as an average for all CRE property types. However, DBRS Morningstar expects a greater range of value decline for retail properties, ranging from 10% to 45% based on the type of tenant composition, exposure to bankrupt or challenged retailers, asset sponsorship, and asset location. DBRS Morningstar expects that lower-tier regional malls with in-line sales generally less than $300 per square foot (sf) will be the most affected.

LOAN/PROPERTY OVERVIEW
The subject transaction is backed by a $208.0 million fixed-rate, interest-only (IO), first-lien mortgage loan on the fee-simple interests of One Times Square, a retail building adorned with rental signs at the center of Times Square, New York City. The refinancing transaction returned $154.0 million of cash equity back to the sponsor and the loan is scheduled to mature in December 2022.

The loan is secured by a 23-story retail building with 93,263 sf of net rentable area situated on a 5,400-sf parcel of land. Walgreens Company (Walgreens) leases the entire building square footage, but only uses the ground, second, and third floors for retail sales activities. The remainder of the floors are vacant. The largest component of rental income are the 20+ vinyl and electronic signs on the outside of the building at the time of loan origination, which accounted for 85% of revenue at origination while the Walgreens lease represented the remaining 15% of revenue at origination.

The New York Times (The Times) used the building, constructed in 1904, as its headquarters until 1961 when The Times sold the property and moved out. The annual New Year’s Eve ball drop ceremony began in 1907 at the subject property and continues to be held every year. This notoriety allows the building to generate interest in the exterior signage, which millions of tourists to Times Square see each year and hundreds of millions of viewers watch at home for the annual New Year’s Eve event.

In 2019, the sponsor completed a $12.0 million renovation to replace three signs on the property’s north facade with a single 350-foot LED sign. The signs were offline in Q1 and Q2 2019 because of the renovation and the new sign came online in July 2019. In connection with the new sign, the borrower signed a 10-year master sublicense agreement with New Tradition Media, LLC (New Tradition) to sublicense all signs at One Times Square with the exception of the signs leased to Walgreens as part of its retail lease. This agreement will likely eliminate approximately 10% of annual leasing costs related to the sign revenue that the borrower was previously paying.

Additionally, the sponsor executed an early termination of Walgreens’ lease on December 1, 2019, as the space was leased well below market, which resulted in Walgreens vacating the space at the end of May 2020. The sponsor is looking to increase the potential upside for the property by locating a new tenant at market rents.

The sponsor of the transaction is Jamestown L.P. (Jamestown), a real estate investment firm with headquarters in Atlanta. The building’s ownership entity/borrower owns all trademarks and intellectual property related to the New Year’s Eve event, which ensures that the building’s reputation and desirability for display signage will be maintained. The property is managed by a Jamestown-affiliate company.

As a result the of the coronavirus pandemic, the loss of tourist traffic in New York City as well as a mandatory corporate requirement to work from home and not commute to Manhattan offices greatly reduced traffic to Midown and Times Square. The lockdown could severely affect advertising and signage demand as the lockdown’s effects continue and leases at the property expire. The borrower continues to support the debt obligations even though revenue was considerably down in 2019 while the signage upgrades were completed. As of June 2020, the servicer reported a trailing 12-month in-place debt service coverage ratio (DSCR) of 2.60 times (x), which is down from the DSCR of 3.79x at issuance in 2012. The borrower noted that a majority of signage revenue comes in Q4 because of the New Year’s Eve celebration at the property. Because this year’s celebration will be hosted virtually and because of the major reduction in holiday foot traffic in Times Square related to the coronavirus, DBRS Morningstar expects signage revenue for 2020 to be negatively affected.

DBRS Morningstar reanalyzed the NCF derived at issuance for the subject rating action to confirm its consistency with the “DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria.” The resulting NCF figure was $19.5 million and DBRS Morningstar applied a cap rate of 6.35%, which resulted in a DBRS Morningstar Value of $306.9 million, a variance of -38.0% from the appraised value of $495.0 million at issuance. Because of the uncertainty around the signage revenue in the near term, given that the coronavirus has greatly reduced traffic in Times Square and pushed the New Year’s Eve celebration to be a virtual event, DBRS Morningstar used issuance base rent of signage in the new Master Sublicense structure to estimate total signage revenue of $19.8 million. The DBRS Morningstar Value implies an LTV of 67.8% compared with the LTV of 42.0% on the appraised value at issuance.

The cap rate DBRS Morningstar applied is at the low end of the range of DBRS Morningstar Cap Rate Ranges for retail properties, reflecting the subject’s iconic location in Times Square.

DBRS Morningstar made negative qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis, totaling -2.50% to account for the cash flow volatility and overall reduction of foot traffic in the area in response to concerns about the coronavirus. DBRS Morningstar did not apply additional stress related to the coronavirus impact considering the unique nature of the revenue sources, the property’s exceptional location in Times Square, and DBRS Morningstar’s conservative approach when deriving the DBRS Morningstar NCF.

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 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 (March 1, 2020) and North American CMBS Surveillance Methodology (March 6, 2020), 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.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.

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

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