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

DBRS, Inc. (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 $157.5 million ($261 per square foot (psf) Class A certificate given the significant credit support and stable demand for Manhattan properties like the collateral relative to issuance. Per a Commercial Observer article dated March 21, 2022, the sponsor, Blackstone Property Partners, L.P., plans on completing a deed-in-lieu of foreclosure for the property, a 26-story office and retail tower in Midtown Manhattan, and the loan will transfer to special servicing. The collateral is likely to be largely vacant in April 2022 after the largest tenant, L Brands (70.9% of net rentable area), vacates upon its March 2022 lease expiration. DBRS Morningstar estimates the property will have to be at least 65% occupied at market rents for a breakeven debt service coverage ratio. The subject’s as-is value is likely to be considerably lower compared with issuance as a result of the vacancy and costs expected to be incurred with the lease-up. The DBRS Morningstar value derived at issuance was $303.4 million ($502 psf), representing a 51.9% loan-to-value ratio for the Class A balance. This value is conservative relative to the recent comparable properties backing other commercial mortgage-backed securities (CMBS) loans issued in the past few years. While demand for office space weakened since the pandemic, the property’s desirable location suggests investor and tenant demand should be healthy relative to the rated class.

Given the considerable impact of the Coronavirus Disease (COVID-19) pandemic on New York City office demand, DBRS Morningstar analyzed recently securitized Manhattan office loans in CMBS transactions and determined the $400.0 million ($663 psf) as-dark value and $220.0 million land value derived by the appraiser at issuance remains well supported. Both values suggest significant cushion for the rated bond. DBRS Morningstar located nine land comparables that traded since March 2020 ranging from $491 psf to $991 psf with a median average of $553 psf. These comparables provide strong support for the subject’s $497 psf land value at issuance. There was only one comparable loan, 909 Third Avenue (backs the NYC 2021-909 transaction rated by DBRS Morningstar), securitized during the pandemic that had a dark value included in its appraisal. The dark value of $637 psf for the comparable loan is in line with the $662 psf appraised dark value for the subject at issuance. Overall, current market demand for Manhattan office properties appears to remain stable, particularly for those assets well located within the market.

According to Q4 2021 Reis data, the Midtown West submarket reported an average asking rent of $69 psf and an average vacancy rate of 11.5%, which compares with the Q4 2014 average asking rent and average vacancy rate of $66 psf and 10.7%, respectively. Reis projects the average asking rent to remain flat and for the vacancy rate to slightly improve throughout the remainder of the loan term. Reis also projects nominal office inventory to be added in 2022 and 2023, which should limit competitive products.

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 recently 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 Class B+ in quality, but DBRS Morningstar found online leasing listings quoting 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 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 December 2021 rent roll showed the property was 79.8% occupied with an average rent of $66 psf, compared with the 98.3% occupancy rate and $70 psf average rent at issuance. DBRS Morningstar projects the occupancy rate to decrease to 11.9% following L Brands’ departure. L Brands paid a gross rent that was at market; however, a large-user tenant may be difficult to locate given the high availability rate in Manhattan. The borrower has been actively listing the space for lease, but no new leases were executed as of February 2022. The servicer noted proposals have been extended to three tenants, including one large user, but prospective tenants no longer appear to be interested in the space given the sponsor’s decision to not invest additional capital for leasing costs. The loan did not include any cash sweep provisions around the L Brands lease or tenancy, and there are no reserves in place to cover the debt service payments.

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.

DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for this transaction.

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 4, 2022), 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.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482.

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.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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