DBRS Morningstar Confirms Rating on Class A of BWAY 2015-1740 Mortgage Trust

DBRS Limited (DBRS Morningstar) confirmed the rating on the Commercial Mortgage Pass-Through Certificates, Series 2015-1740, Class A issued by BWAY 2015-1740 Mortgage Trust at AAA (sf).

The trend is Stable.

The rating confirmation reflects the stable outlook for the performance of the Class A certificate given the significant credit support and quality of the collateral property, despite challenges in an upcoming spike in the overall vacancy rate, as further described below.

The collateral consists of the fee interest in a 26-story office and retail tower at 1740 Broadway in Midtown Manhattan. The subject was built in the 1950s, designed by the same architects who worked on the Empire State Building, and was extensively renovated in 2007. The sponsor undertook a complete modernization of the lobby, which was completed in Spring 2020. With that renovation, the building added a wellness and fitness center, lockers and showers, a lounge, in-office catering, a restaurant, an open workspace area, and other amenities. At issuance, the building was noted to be of Class B+ quality, but online leasing listings for the property located by DBRS Morningstar quoted the property as Class A, possibly a reflection of the 2020 renovations. The $308.0 million trust loan is fully interest only for the entire 10-year term. The property is well located in the Columbus Circle/Midtown West submarket and is LEED Silver certified.

The property comprises 572,645 square feet (sf) of office space, 16,587 sf of ground-floor retail space, and 14,696 sf of storage space. The largest tenant at the property is L Brands, Inc. (L Brands; 69.3% of the net rentable area (NRA) through March 2022), which houses its regional headquarters and the division headquarters for its Victoria’s Secret and PINK brands. Historical credit metrics have been stable, showing a YE2020 debt service coverage ratio (DSCR) of 1.87 times (x) compared with the YE2019 DSCR of 1.85x and the issuance DSCR of 1.92x. The sponsor and guarantor of the loan is Blackstone Property Partners, L.P., an affiliate of the Blackstone Group (Blackstone). Blackstone is a well-capitalized and experienced owner/operator of commercial real estate with significant experience in the New York market. The subject loan financed the acquisition of the property and the sponsor retained cash equity of over $300 million at closing.

The loan was added to the servicer’s watchlist in April 2021 as L Brands does not plan to renew its lease past its March 2022 lease expiration. In late 2018, L Brands announced the sale and closure of two company divisions (La Senza and Henri Bendel) and has continued to report sales declines at its Victoria’s Secret and PINK stores. In 2020, L Brands permanently closed 241 Victoria’s Secret stores and plans to shutter another 30 to 50 stores throughout 2021. These well-publicized struggles have contributed to sharp drops in the company’s stock price in the last three years; however, its Bath & Body Works brand continues to perform well as the only division under L Brands’ umbrella to report year-over-year sales revenue growth in 2020.

According to the December 2020 rent roll, the property was 95.9% occupied, compared with the December 2019 occupancy of 94.8% and September 2018 occupancy of 98.2%. However, the former second-largest tenant David & Gilbert LLP (15.8% of the NRA through December 2020) vacated upon lease expiration, reducing in-place occupancy to approximately 80.1% as of January 2021. If the current vacancies remain available when L Brands departs in March 2022, the sponsor could be faced with backfilling a property that would be 10.8% occupied. As noted at issuance, there is no dedicated loan structure to mitigate the cash flow disruptions that will be seen with L Brands’ departure. The only feature that could come into play would be the availability of a springing cash management upon the property’s reported debt yield declining below 7.0% for two consecutive quarters, but that is quite unlikely as the cash flow decline with the loss of the L Brands rent will be abrupt, with no incremental declines to the trigger level expected.

According to the Q4 2020 Reis market report, asking rent in Midtown West was $70.64 per square foot (psf) with a vacancy rate of 8.7%, compared with an asking rent of $89.90 psf and vacancy rate of 14.1% the year prior. For buildings of a similar vintage, Reis is reporting an asking rent of $63.07 psf and 19.3% vacancy rate. Although market fundamentals have weakened amid the Coronavirus Disease (COVID-19) pandemic, the location and recent renovations should provide the sponsor some benefit as re-leasing efforts are made.

Although the lack of structure around the L Brands lease expiry is of concern, DBRS Morningstar notes the loan benefits from the strong sponsorship in Blackstone, the general desirability of the property’s location, the sponsor’s recent investment in property upgrades, and the dark value as derived in the issuance appraisal that suggests the Class A certificate remains well insulated. The appraiser assumed a discount rate of 7.0% with a terminal cap rate of 5.0% to determine the dark value of $400.0 million (or $644.20 psf). A significant haircut (roughly 60.6%) to the dark value would be needed before suggesting a loss on Class A, the senior most and only rated certificate in this transaction.

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.

The DBRS Viewpoint platform provides additional information on this transaction and underlying loans including DBRS Morningstar metrics, commentary, servicer-reported cash flows, and other performance-related data.

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com. The platform includes issuer and servicer 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 methodology is North American CMBS Surveillance Methodology (March 26, 2021), 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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