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

DBRS Limited (DBRS Morningstar) confirmed the rating on the Commercial Pass-Through Certificates, Series 2015-1740 issued by BWAY 2015-1740 Mortgage Trust as follows:

-- Class A at AAA (sf)

The trend is Stable.

The rating confirmation reflects the stable outlook for the $157.5 million ($261 per square foot (psf)) Class A certificate given the significant credit support and desirable location of the property within Midtown Manhattan, despite the collateral’s current performance challenges. The loan transferred to special servicing in March 2022 following the departure of the former largest tenant, L Brands (formerly 70.9% of the net rentable area (NRA)). According to a New York Post article dated March 23, 2022, the sponsor, Blackstone Property Partners was evaluating loan resolution options, with the possibility of executing a deed-in-lieu of foreclosure for the property. The subject’s current value is likely considerably lower than the issuance valuation of $605.0 million because of the elevated vacancy rate and expected costs necessary to re-lease the vacant space. At issuance, DBRS Morningstar derived a value of $303.4 million ($502 psf), representing a 51.9% loan-to-value ratio for the Class A balance. This valuation is conservative relative to the recent comparable property valuations backing other commercial mortgage-backed securities (CMBS) loans issued in the past few years. While demand for office space has weakened since the pandemic, the property’s desirable location suggests investor and tenant demand should be healthy relative to the rated class.

The 10-year interest-only loan is secured by a 26-story office and retail tower at 1740 Broadway in Manhattan, New York, with a scheduled maturity date in January 2025. The sponsor undertook a complete modernization of the lobby, which was completed in spring 2020. 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. A short-term forbearance agreement was executed in May 2022 and extended through December 2022. During that time, the borrower continued making interest payments from the cash management account, which was reportedly exhausted by September 2022 at which point the payments were paid out of pocket by the borrower. As of the January 2023 remittance, the loan remains current and with the special servicer. As per the most recent servicer commentary, negotiations are ongoing regarding the resolution strategy; however, the servicer also noted that no potential leases are currently in discussion.

As of the September 2022 rent roll, the property was 10.5% occupied. The most recent financial statement available reported a YE2021 debt service coverage ratio (DSCR) of 1.42 times (x), which does not account for the loss of revenue from L Brands, which accounted for 78% of the base rental revenue at issuance. As L. Brands paid a below-market rental rate, the re-leasing of this space could present an opportunity to boost revenue if the new leases are executed at market rates; however, the overall capital cost to execute new leases could be substantial. Amid several company downsizings and the rise of the hybrid work model, major metropolitan markets, including the subject’s submarket, have been reporting increasing vacancies. According to Q3 2022 Reis data, office properties in the Midtown Manhattan submarket reported a vacancy rate of 11.7% compared with the subject property’s Q3 2021 and Q3 2020 vacancy rates of 9.5% and 8.1%, respectively.

Given the current landscape of the office/retail market, coupled with the general lack of liquidity for the property type, DBRS Morningstar analyzed recently securitized Manhattan office loans in CMBS transactions and determined the property’s dark value of $400.0 million ($662 psf) and land value of $220.0 million (as derived by the appraiser at issuance) remain well supported. DBRS Morningstar identified nine land comparables that traded from March 2020 through YE2022 at prices ranging from $491 psf to $991 psf with a median of $553 psf. These comparables provide support for the subject’s $497 psf land value concluded at issuance. Only one comparable loan, 909 Third Avenue (backs the NYC 2021-909 transaction rated by DBRS Morningstar), securitized during the pandemic had a dark value included in its appraisal. The concluded dark value of $637 psf for the comparable loan is similar to the $662 psf appraised dark value for the subject at issuance.

Environmental, Social, and Governance Considerations
There were no environmental, social, or 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 (May 17, 2022).

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 the 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.

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

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