DBRS Morningstar Confirms Ratings on TMSQ 2014-1500 Mortgage Trust

DBRS Limited (DBRS Morningstar) confirmed its ratings on the Commercial Mortgage Pass-Through Certificates, Series 2014-1500 issued by TMSQ 2014-1500 Mortgage Trust as follows:

-- 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 confirmations reflect the overall stable performance of the transaction, which remains in line with DBRS Morningstar’s expectations at issuance. The collateral for the underlying loan consists of the fee interest in a 33-story Class A mixed-use (office and retail) building 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 in 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 in 2018 underwent an extensive $6.3 million renovation of the lobby to give the property an upscale and modern appearance. Of the 506,412 square feet (sf) of space, approximately 438,108 sf is designated office space, with 44,010 sf of retail and 24,294 sf of storage space. The sponsor, TREHI, a subsidiary of Tamares Group, a private investment company headquartered in London, acquired the property in 1995.

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 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. According to the servicer’s September 2020 site inspection, the retail space remains vacant and available for sublease. As a result of the Coronavirus Disease (COVID-19) pandemic, the retail space will likely remain vacant in the short to medium term until tourism in the city rebounds. 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’ ground-floor retail space was just below $400 per square foot (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. Although rental rates have fallen significantly prior to and amid the pandemic with the market challenges for New York retail, the prime location of the subject property and the association with the Good Morning America broadcast will likely bolster interest in the vacant space and support higher rents once the market stabilizes.

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.

According to the September 2020 rent roll, the property was 88.6% occupied compared with the 88.3% occupancy rate as of the June 2019 rent roll and 91.0% at issuance. The office space is 90.8% occupied, while the retail space is 89.8% occupied. An online listing of available office space located by DBRS Morningstar as of February 2021 suggested an availability rate of 18.6%, implying a lower in-place occupancy rate than the servicer’s reported September 2020 figures. The listing suggested the third-largest office tenant, Pearl Cohen (3.0% of the NRA) will be vacating its 12th floor space in February 2021. Per Reis data, the property’s Midtown West submarket reported an office vacancy rate of 8.5% at YE2020, slightly up from the prior year’s rate of 7.7%. Reis expects this submarket vacancy rate to increase through 2021.

The servicer reported a YE2019 debt service coverage ratio (DSCR) of 2.35 times (x), up from 2.18x at YE2018, but below the DSCR at issuance of 2.65x. The annualized Q3 2020 NCF figure reported by the servicer represents a -4.5% 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 two-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.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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

On February 9, 2022, DBRS Morningstar removed a note from this press release erroneously stating there was a material deviation from its principal methodology when assigning the rating to the Class A tranche.

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

The principal methodology is North American CMBS Surveillance Methodology (March 6, 2020), which can be found on 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 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 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 [email protected].

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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