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

DBRS Limited (DBRS Morningstar) confirmed the ratings on all classes of 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 since DBRS Morningstar’s last review, with cash flows for the underlying collateral steady year over year and no upcoming lease rollover or other factors that suggest near- to medium-term volatility. The loan is scheduled to mature in September 2022 and given the strength of the tenancy in place and the significant cash flow growth since issuance, DBRS Morningstar believes a refinance is likely.

The underlying seven-year $400 million first mortgage is interest only (IO) and is secured by two adjoining Class A, LEED Gold-certified office buildings totalling 1.1 million square feet (sf). The property is in the South of Market area of San Francisco and was fully occupied by Twitter at issuance in 2015. 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 financed the acquisition of the property for a total price of $918 million.

According to the January 2022 rent roll, the property was 96.7% occupied across both buildings. There is no meaningful rollover scheduled until 2026. Since the January 2022 rent roll date, one tenant, Thumbtack (7.3% of the net rentable area (NRA)), vacated after its lease expired in March 2022. The servicer has advised DBRS Morningstar that Twitter is expected to absorb the bulk of that vacancy.

The property serves as Twitter’s headquarters. The company occupies approximately 65% of the NRA, down from 100% of the NRA at issuance. Twitter has multiple leases with various expiry dates, and the lease soonest to roll expires in 2026. This lease, which is for a significant portion of the overall space, was renewed in 2019. At the time of the renewal, the rental rate on that space was increased to $75.50 per square foot (psf), which was well above the $37.00 psf the tenant was paying at issuance. In conjunction with the renewal, Twitter gave back 83,854 sf of space, which was subsequently backfilled by other tenants.

According to Reis, office properties in the Van Ness/Civic Center submarket of San Francisco reported a YE2021 vacancy rate of 14.4% and an effective rental rate of $47.68 psf, compared with the subject’s vacancy rate of less than 3.3% and average rental rate of $70.32 psf at January 2022. The submarket’s vacancy rate has improved significantly from 9.2% as reported at YE2020. The increase is even higher when compared with the pre-Coronavirus Disease (COVID-19) pandemic rate of 4.6% at YE2019. Reis expects vacancy rates to decline slightly over the next few years, with vacancy at YE2023 forecast at 12.6% because several companies are downsizing after adopting remote working.

The subject property’s primary tenant, Twitter, has been in the news for various reasons recently, but most prominently for reports that Elon Musk, Twitter’s second-largest shareholder after acquiring a 9.1% stake in the company, made a bid to acquire the company at a price that values the company at approximately $43.0 billion. This situation is still developing; however, DBRS Morningstar does not believe there is significant risk to the subject transaction associated with these events given the remaining terms for Twitter’s leases and the conservative structure of the underlying loan, which includes an implied loan-to-value ratio of 68% on the DBRS Morningstar value of $592.4 million that was determined in 2020 when the ratings were assigned.

The loan reported a YE2021 net cash flow (NCF) of $60.0 million, compared with the YE2020 NCF of $57.1 million and the DBRS Morningstar NCF of $38.5 million. At issuance, the rental rates for tenants in place were at rates below market, providing for substantial upside once leases were renewed, as was seen with the 2019 renewal for Twitter as previously outlined. As a result, the YE2021 effective gross income was up by almost 60% from the Issuer’s figure, with the in-place debt service coverage ratio (DSCR) at 3.70 times (x), up from the Issuer’s DSCR of 2.18x.

ESG CONSIDERATIONS
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.

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 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.

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

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