DBRS Morningstar Confirms Ratings on All Classes of BBCMS Trust 2015-MSQ

DBRS Limited (DBRS Morningstar) confirmed its ratings on 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.

The rating confirmations reflect the overall stable performance of the transaction, which remains in line with DBRS Morningstar’s expectations from when the ratings were initially assigned. The transaction is collateralized by a $400 million first mortgage secured by two adjoining Class A 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 (IO) at a fixed rate of 3.996% through maturity. In addition to the trust debt, there is a $50 million co-terminous 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. As of YE2020, the property was 100% occupied with the largest tenant, Twitter (65.0% of the net rentable area (NRA)), 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 back-filled by other tenants, and the property quickly returned to 100% occupied.

According to a September 2020 news article, Twitter announced that it was looking to sublease 104,850 sf (9.6% of NRA) of its space. The move to downsize stems from the company’s new permanent work-from-home option it introduced in 2020 as a result of the Coronavirus Disease (COVID-19) pandemic. The space was available for sublease starting in December 2020 on terms ranging from two to five years. A Twitter spokesperson has stated that the company will maintain a significant footprint at the property and that a majority of its workforce will be based in San Francisco for the foreseeable future. Additionally, one of Twitter’s leases at the subject, which encompassed 12.7% of the NRA, was originally scheduled to expire in October 2021. That lease has since been renewed through to 2026, further showing Twitter’s commitment to the property.

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. Additionally, multiple other tenants have renewed or executed leases at higher rates, which, as of YE2020, has led to a 62% increase in net cash flow (NCF) when compared with the Issuer’s underwritten figures and a 29% increase compared with the YE2019 NCF.

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.

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.

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].

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577