DBRS Morningstar Confirms All Ratings of SFAVE Commercial Mortgage Securities Trust 2015-5AVE With Negative Trends

DBRS Limited (DBRS Morningstar) confirmed the ratings of the Commercial Mortgage Pass-Through Certificates, Series 2015-5AVE issued by SFAVE Commercial Mortgage Securities Trust 2015-5AVE as follows:

-- Class A-1 at AAA (sf)
-- Class A-2A at AAA (sf)
-- Class A-2B 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 classes carry Negative trends. With this review, DBRS Morningstar removed all classes from Under Review with Negative Implications, where they were placed on October 8, 2020.

The transaction consists of a $1.25 billion fixed-rate loan that is interest only (IO) for the 20-year term. The loan is secured by the borrower’s interest in the condominium unit and related interests in the land and improvements that comprise the 12-story, 655,238-square foot Saks on Fifth retail building in New York. The building has served as the flagship store for the Saks Fifth Avenue brand since 1924 and has been a mainstay in the heart of Manhattan for over 90 years. The property is owned and occupied by affiliates of Hudson’s Bay Company (HBC; the sponsor), which owns the Saks Fifth Avenue brand. The sponsor bifurcated the land and improvements as part of this refinancing transaction.

The Negative trends are primarily driven by concerns with HBC, which had faced challenges even prior to the Coronavirus Disease (COVID-19) pandemic. In January 2020, HBC ownership went private with the acquisition of minority shareholders’ interests. Since privatization, HBC no longer publicly reports financial updates, but the retailer continues to face the same pressures as other department store chains, including a changing retail landscape that has been exacerbated by the coronavirus pandemic. During the pandemic, HBC closed all of its Lord & Taylor locations, downsized its workforce with the most recent round that included 600 Canadian employees, and struggled to make some of its rent payments. It continues to face lawsuits over unpaid rent and the downsizing of its Montréal and Calgary flagship stores. HBC recently announced that it will separate its store fleet and e-commerce business to accelerate its digital-first transformation. The e-commerce business will operate as The Bay and the store fleet will operate as Hudson’s Bay. Each business will have a dedicated leadership team. The bifurcation of business was done for its Saks Fifth Avenue business, and Saks Off 5th will follow suit.

The sponsor owns the fee interest on the land and executed a 99-year, absolute triple-net lease to the retail building owner, 12 East 49th Street LLC, which is also the ground lessee. At issuance, the ground lessee paid the borrower an annual rent of $62.5 million, which increases annually by the greater of 3.25% or CPI. According to the April 2021 rent roll, the 2021 annual rent is expected to amount to $75.9 million. The ground lessee pays all expenses related to the land and building.

The building is 100% occupied by Saks Fifth Avenue under an initial 30-year operating lease with 12 East 49th Street LLC, expiring in December 2044. At issuance, Saks Fifth Avenue paid $160.0 million in annual rent with an abatement of up to $20.0 million for capital improvements. The annual rent of the operating lease is subject to rent steps of 3.25% per year. The operating lease is not collateral for the loan, and the lender is not obligated to recognize it in the event of a mortgage foreclosure.

According to a news article published by “The Real Deal” on August 10, 2021, HBC is partnering with WeWork to convert some of its Saks and Lord & Taylor space into coworking locations called SaksWork. HBC plans to open five coworking spaces in New York in September 2021, which will be operated by WeWork. It appears that the subject building is a part of this initiative as the article reported that the 10th floor of the Midtown Manhattan flagship store will be converted. The fee to use these facilities is the same as the WeWork All Access membership at $299 per month; each location will include a cafe, a gym, an open layout, and mobile desks. DBRS Morningstar has requested confirmation from the servicer regarding SaksWork at the subject and a response is pending.

According to the YE2020 operating statement analysis report, the collateral net cash flow (NCF) was reported at $73.5 million, compared with the YE2019 NCF of $71.0 million. A $250.0 million renovation project has been ongoing at the subject for several years, with the most recent update made in 2019 to the main floor of the building. No further updates regarding the status of renovation were available.

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.

DBRS Morningstar ratings on Classes A-1, A-2B, B, C, and D vary by three or more notches from the results implied by the LTV Sizing Benchmarks on a look-through basis, which suggested a lower rating. The variances are warranted considering the loan remained current during the pandemic and the escalating ground rent sufficiently covers the debt service.

Class X-A 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.

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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