DBRS Morningstar Changes Trends to Negative on Two Classes and Confirms Ratings on All Classes of TMSQ 2014-1500 Mortgage Trust

DBRS Limited (DBRS Morningstar) confirmed its ratings on all classes of the Commercial Mortgage Pass-Through Certificates, Series 2014-1500 issued by TMSQ 2014-1500 as follows:

-- Class A 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)

DBRS Morningstar changed the trends on Classes C and D to Negative from Stable. All remaining classes have Stable trends.

The Negative trends are reflective of sustained performance declines coupled with tenant rollover risk tied to the second-largest tenant, Nasdaq. In addition, there is increased refinance risk as the loan is scheduled to mature in October 2024, and it is unlikely that the subject’s performance will rebound to near issuance levels, considering softening office submarket fundamentals and general uncertainty surrounding demand trends. There are mitigating factors that support the rating confirmations, which includes the strong sponsorship, a well-performing retail segment, and the significant signage component to the property, which is regarded as one of the most prominently positioned advertising assets in the world, a factor of its prime location in Times Square.

The loan is secured by the borrower’s fee-simple interest in a 33-story Class A mixed-use building located within the Times Square Bowtie in New York City. The whole loan of $505.0 million consists of $335.0 million of senior debt held within the trust and $170.0 million of mezzanine debt held outside of the trust. The loan is structured with a 10-year interest-only (IO) term and is scheduled to mature in October 2024. The sponsor, TREHI, is a subsidiary of Tamares Group, a private investment company headquartered in London with more than $3.0 billion of assets under management. Based on the September 2022 rent roll, the majority of the building is designated as office space while approximately 106,000 square feet (sf) is designated as retail and storage space.

Occupancy at the property has declined from 95.0% at issuance to 76.6% as of September 2022. Several tenants vacated the subject in 2021, most notably Dotdash (formerly known as About.com; 9.0% of net rentable area (NRA)) and Pearl Cohen (3.0% of NRA). According to the September 2022 rent roll, the office portion of the property was 74.8% occupied, a marginal increase from 72.8% in September 2021. In contrast, the retail segment continues to perform well, with a 100.0% occupancy rate, up from 93.5% the prior year. The largest tenants at the property, Times Square Studios/Disney (TSS) and Nasdaq, occupy 15.3% and 10.4% of the NRA at rental rates of $172.04 per square foot (psf) and $74.68 psf, respectively. The remainder of the tenant roster is relatively granular, with no other tenant accounting for more than 4.0% of NRA.

The TSS lease runs through May 2024 and carries one remaining five-year renewal option that would push the existing lease expiry to 2029, five years beyond the loan’s maturity. The bulk of the TSS space is configured for studio use and it is the filming location for Disney-owned ABC’s Good Morning America program. Nasdaq currently subleases its space to several tenants and the subleases are coterminous with Nasdaq’s lease, which expires in August 2024. Although Nasdaq has a 10-year lease renewal option, it is unlikely to be exercised, potentially leaving 53,000 sf of additional office space vacant, prior to loan maturity. Leases representing approximately 6.0% of the NRA are scheduled to roll within the next 12 months, while leases representing approximately 4.0% of NRA had expiration dates between September 2022 and January 2023, suggesting the physical occupancy rate could be slightly lower than reported in the September 2022 rent roll. In addition, the submarket exhibited signs of softening with Reis reporting the Q3 2022 office vacancy rate for the Midtown West submarket at 12.1%, compared with the Q3 2021 vacancy rate of 11.5%. The vacancy rate is forecasted to remain elevated at 11.8% through 2024 and 2025.

Based on financial reporting for the trailing nine-month period ended September 30, 2022, the loan reported net cash flow (NCF) of $20.7 million, compared with the year-end (YE) 2021 NCF of $28.9 million and the DBRS Morningstar NCF at issuance of $34.1 million. The average blended (office and retail) rental rate at the property declined 14.2% between issuance and September 2022, from $80.23 psf to $68.83 psf. Despite the declines in occupancy and cashflow, the loan continues to cover debt service obligations, with a debt service coverage ratio of 2.11 times (x) as of September 2022, a marginal decline from the YE2021 figure of 2.21x.

In its analysis, DBRS Morningstar applied the YE2021 NCF of $28.9 million and a 6.5% cap rate, resulting in a DBRS Morningstar value of $444.6 million, a -15.1% variance from the DBRS Morningstar value in March 2020 during the North American Single-Asset/Single-Borrower Methodology update, and a -45.1% variance from the appraised value at issuance of $810.0 million. The DBRS Morningstar value implies a loan-to-value ratio (LTV) of 78.9% on the senior debt, compared with the LTV of 41.4%, based on the appraised value at issuance. The DBRS Morningstar rating assigned to Class A had a variance that was higher than the results implied by the LTV Sizing Benchmark. Despite applying a stressed value in the analysis, the proceeds sufficiently cover the outstanding bond balance; as such, the variance is warranted. In the event of further performance deterioration, the risk exposure will likely affect the lower-rated bonds. DBRS Morningstar will continue to monitor this loan for updates.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS

There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis. 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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022).

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.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is North American CMBS Surveillance Methodology (October 3, 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.

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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