DBRS Morningstar Confirms All Classes of 225 Liberty Street Trust 2016-225L

DBRS Limited (DBRS Morningstar) confirmed the ratings on the Commercial Mortgage Pass-Through Certificates (the Certificates) issued by 225 Liberty Street Trust 2016-225L as follows:

--Class A at AAA (sf)
--Class B at AA (low) (sf)
--Class X at A (sf)
--Class C at A (low) (sf)

All trends are Stable.

The rating confirmations reflect the overall stable performance of the transaction, which has remained in line with DBRS Morningstar’s expectations since issuance. The loan is secured by a 2.4 million-square-foot (sf) Class A office property in Lower Manhattan. The subject is the largest of four towers that make up Brookfield Place, a mixed-use office development encompassing 7.1 million sf of office space and roughly 340,000 sf of lifestyle-oriented retail and public space. The property is subject to a long-term ground lease with Battery Park City Authority whereby the annual rent is fixed at $5.1 million through its June 2069 expiration date. The $900.0 million fixed-rate, whole loan consists of a $778.5 million trust loan, which is composed of a $337.5 million senior trust note and a $441.0 million junior trust note, and three companion notes totaling $121.5 million. The loan is interest only (IO) for the entire 10-year term.

According to the March 2021 rent roll, the property was 87.0% occupied at an average rental rate of $58.80 per sf (psf), compared with the YE2019 and YE2018 occupancy rates of 92.6% and 96.6%, respectively. The five largest tenants represent 69.0% of the net rentable area (NRA). These tenants include Ti Gotham, occupying the former Time space, (27.7% of the NRA; expiring in December 2032), Bank of New York Mellon (12.9% of the NRA; with expirations ranging from February 2031 to December 2034), OFI Global Asset Management (11.6% of the NRA; expiring in September 2028), Saks and Company (Saks) (9.3% of the NRA; expiring in December 2032), and Bank of America (7.5% of the NRA; with expirations ranging from September 2022 and April 2036).

Bank of New York Mellon subleased its entire space to J.Crew in June 2018 on a 16-year sublease agreement. J.Crew filed for Chapter 11 bankruptcy protection in May 2020 and exited bankruptcy in September 2020. The company appears to continue operations at the property as online job listings are advertising open positions at the subject address. In addition, Saks did close both its women’s department at the subject and its men’s department in the adjacent 250 Vesey Street building, which is noncollateral but part of the larger Brookfield Place, in 2019 and 2020, respectively. However, in a January 2020 online article from footwearnews.com, a Saks spokesperson stated that the company has no plans to relinquish the men’s department space and will eventually repurpose the space. No specifics on the company’s plans for the men’s department space have been provided to date, but the property’s rent roll does indicate a sublease tenant for the women’s department in Convene, an event space company, was executed for 73,000 sf. Bank of America occupied 318,000 sf of space at issuance but recently downsized to its current footprint of 190,000 sf on a new 15-year lease at a rental rate of $70.00 psf, an increase from its previous rental rate of $62.50 psf. The space Bank of America left behind is the contributor to the occupancy decline for the property since issuance; the space remained available for lease as of June 2021, according to the sponsor’s website.

According to the YE2020 financials, the loan reported a debt service coverage ratio (DSCR) of 1.56 times (x), compared with the YE2019 and YE2018 figures of 1.63x and 1.52x, respectively, and the DBRS Morningstar DSCR of 1.45x. The net cash flow decrease from 2019 to 2020 was driven primarily by a 11.9% increase in real estate taxes and a slight decline in base rent of 0.5%. DBRS Morningstar expects base rents to decline further in 2021 given the reduction in space for Bank of America.

According to the Q1 2021 Reis market report, the downtown submarket reported an average vacancy rate of 11.0% with an average rental rate of $60.22 psf, compared with the Q4 2019 vacancy rate of 10.7% and an average rental rate of $60.89. The loan benefits from a strong sponsor in Brookfield Property Partners L.P., which has a significant office presence in New York City, consisting of 26 office properties. At issuance, the tenant improvements were fully guaranteed by a subsidiary of the sponsor, Brookfield Office Properties Inc., which has DBRS Morningstar-rated Senior Unsecured Notes at BBB (low).

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.
Class X is an IO certificate that references 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 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 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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