DBRS Morningstar Confirms Ratings on All Classes of Morgan Stanley Capital I Trust 2014-150E

DBRS Limited (DBRS Morningstar) confirmed its ratings on classes of the Commercial Mortgage Pass-Through Certificates, Series 2014-150E issued by Morgan Stanley Capital I Trust 2014-150E as follows:

-- Class A at AAA (sf)
-- Class A-S at AAA (sf)
-- Class X-A at AAA (sf)
-- Class X-B at AA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class D at BB (high) (sf)
-- Class E at BB (sf)
-- Class F at B (sf)
-- Class G at B (low) (sf)

All trends are Stable.

The rating confirmation reflects the overall stable performance of the transaction, which remains in line with DBRS Morningstar's expectations. Despite concerns surrounding the weakened office market conditions and the underlying loan’s near-term maturity in September 2024, the collateral property benefits from strong investment-grade tenancy and a favorable location within Midtown Manhattan. In addition, the loan benefits from a significant amount of reserves on hand with the servicer.

The $525.0 million transaction is secured by the leasehold interest and sub-leasehold interest in 150 East 42nd Street, a 42-story Class A office tower totaling 1.7 million square feet (sf) located directly across from Grand Central Terminal. The tower occupies the entire block bounded by Lexington Avenue, East 42nd Street, Third Avenue, and East 41st Street. The total debt stack of $700 million includes a $175 million mezzanine loan that is co-terminus with the trust’s interest-only 10-year loan. The ground lease spans 99 years, expiring in 2113, and the borrower sub-ground leases the entire parcel to a condominium board, which created a 47-unit condominium, with the sub-ground lease expiring in 2046. Currently, the borrower is paying an annual ground rent payment of $21.9 million, a figure that will increase to $24.0 million in 2025.

The property was 96.9% occupied as of the October 2022 rent roll, with investment-grade tenants Wells Fargo Bank, N.A. (Wells Fargo; rated AA with a Stable trend by DBRS Morningstar) (27.0% of the net rentable area (NRA), lease expiry in December 2028) and Mount Sinai Hospital (28.8% of the NRA, lease expiry in March 2046). The third-largest tenant is Dentsu Aegis Network (Dentsu) (12.7% of the NRA, lease expiry in December 2028). The loan exhibits minimal near-term rollover risk with tenants representing only 5.8% of the NRA having lease expirations within the next 12 months. One of the tenants rolling in the next year includes the fourth-largest tenant, Marubeni America (5.1% of the NRA, lease expiry in May 2023). The tenant has confirmed its intention to vacate upon lease expiration in May 2023. Previously, DBRS Morningstar noted concerns regarding the relocation plans of the two largest tenants. The servicer verified that it has no knowledge of either tenant either downsizing or vacating space ahead of the respective lease end dates.

Based on DBRS Morningstar’s concluded value of $506.3 million, the DBRS Morningstar loan-to-value ratio (LTV) is high, at 104.0%. However, DBRS Morningstar notes conservative assumptions, including a cap rate of 8.0% and a cash flow of $40.3 million (based on the YE2019 figures reported by the servicer), which is less than the most recently reported figures, as discussed below. In addition, the DBRS Morningstar value is much less than the appraised value at issuance of $900.0 million. The 8.0% cap rate is within DBRS Morningstar's Cap Rate Ranges for office properties and is chosen based on the property's location and leasehold interest.

According to the most recent financials, the loan reported a debt service coverage ratio (DSCR) of 1.85 times (x), compared with the YE2021 DSCR of 1.82x and DBRS Morningstar DSCR of 1.91x. The trailing nine months ended September 30, 2022, annualized net cash flow (NCF) was reported at $42.3 million, compared with YE2021 NCF of $41.6 million and DBRS Morningstar NCF of $40.3 million. According to Q4 2022 Reis, the Grand Central submarket reported a vacancy rate of 12.8% with asking rents of $76.27 per square foot (psf), compared with YE2021 vacancy of 10.7% with asking rents of $75.50 psf.

Given the current lending environment, the sponsor could encounter difficulty securing a replacement loan at maturity in 2024, despite the stable performance and limited near-term rollover risk. The loan reports capital and leasing reserves of approximately $10.0 million, and also benefits from a sizable equity injection from the sponsors at issuance of $260 million, stable cash flow and tenancy since 2020, and a prime location in the Midtown Manhattan submarket.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no environmental, social, and 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).

Classes X-A and X-B are interest-only (IO) certificates that reference 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 (March 16, 2023; https://www.dbrsmorningstar.com/research/410912).

Other methodologies referenced in this transaction are listed at the end of this press release.

The credit ratings assigned to Classes A-S and B were higher than the results implied by the LTV Sizing Benchmarks. Although there are significant challenges for office properties in today’s market and lending environment, DBRS Morningstar notes the subject is generally well positioned with stable performance and strong sponsorship. The Classes in question remain well insulated against loss should a default ultimately occur.

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 rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process for this rating action.

DBRS Morningstar had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This is a solicited credit rating.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577

The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

North American Single-Asset/Single-Borrower Ratings Methodology (February 23, 2023)
https://www.dbrsmorningstar.com/research/410191

Rating North American CMBS Interest-Only Certificates (December 19, 2022)
https://www.dbrsmorningstar.com/research/407577/rating-north-american-cmbs-interest-only-certificates

Legal Criteria for U.S. Structured Finance (December 7, 2022)
https://www.dbrsmorningstar.com/research/407008/legal-criteria-for-us-structured-finance

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 12, 2022)
https://www.dbrsmorningstar.com/research/402646/dbrs-morningstar-north-american-commercial-real-estate-property-analysis-criteria

North American Commercial Mortgage Servicer Rankings (September 8, 2022)
https://www.dbrsmorningstar.com/research/402499/north-american-commercial-mortgage-servicer-rankings

Interest Rate Stresses for U.S. Structured Finance Transactions (August 30, 2022)
https://www.dbrsmorningstar.com/research/402153/interest-rate-stresses-for-us-structured-finance-transactions

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