DBRS Morningstar Confirms All Classes of BWAY 2021-1450 Mortgage Trust

DBRS Limited (DBRS Morningstar) confirmed its ratings on all classes of the Commercial Mortgage Pass Through Certificates issued by BWAY 2021-1450 Mortgage Trust as follows:

-- Class A at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class X-NCP at BBB (sf)
-- Class D at BBB (low) (sf)
-- Class E at BB (low) (sf)
-- Class F at B (low) (sf)

All trends are Stable.

The rating confirmations are reflective of the collateral office property’s stable performance with a recent increase in the occupancy rate and steady property cash flows, suggesting the credit profile has remained in line with DBRS Morningstar’s expectations since issuance. The property’s exposure to WeWork is noteworthy, but the footprint is relatively small and the recent leasing activity suggests the subject property remains attractive to prospective tenants despite the general disruption to office leasing in recent years.

The $215.0 million transaction is secured by the fee simple interest in 1450 Broadway, a Class A office tower located at the southeast corner of 41st Street and Broadway in Manhattan’s Times Square South submarket. The collateral primarily consists of office space, with a relatively small ground-floor retail component. The floating-rate loan has initial loan term of five years, with three one-year extension options available for a fully extended maturity date of August 2029. The sponsor, ZG Capital Partners (the Zar Group), is a New York-based real estate investment firm with extensive ownership and operating experience.

According to the March 2023 rent roll, the property was 85.9% occupied with average rental rate of $65.11 per square foot (psf), compared with the year-end (YE) 2022 occupancy rate of 80.0% and 82% at issuance. The largest tenants at the property include WeWork (14.2% of the net rentable area (NRA), lease expiry in September 2035), Shazdeh Fashion Inc (10.4% of the NRA, lease expiry in January 2029), and Iconix Brand Group (8.1% of the NRA, lease expiry in June 2024). The fourth-largest tenant, Tarrant Apparel Group (7.9% of the NRA), shows a lease expiry of April 2022 in the rent roll but is still listed as a tenant. DBRS Morningstar found information online suggesting the tenant was acquired and has requested clarification from the servicer on the status of the space in question.

Per a Reis report, the Midtown West submarket reported a Q1 2023 vacancy rate of 13.6% with an asking rent of $70.04 psf and effective rent of $56.56 psf, compared with a Q4 2022 vacancy rate of 12.6% with an asking rent of $69.36 psf and effective rent of $56.20 psf. According to the March 2023 rent roll, the rental rate for the most recent lease signed at the property is slightly above both the effective rental rate reported for the submarket by Reis as of Q1 2023 and the property’s in-place average rental rate of approximately $65 psf.

As of the YE2022 financials, the subject reported net cash flow (NCF) of $14.8 million with a debt service coverage ratio (DSCR) of 1.42 times (x), compared with the DBRS Morningstar NCF of $13.3 million and DBRS Morningstar DSCR of 1.82x at issuance. The floating rate structure and recent increases in interest rates are the primary source of the decline in coverage since issuance. The loan documents require the borrower to purchase a rate cap at a price that will ensure a minimum DSCR of 1.20x in the event the loan is extended beyond the initial loan term.

WeWork’s lease includes a corporate guarantee from the parent company, WeWork Companies Inc. At issuance, the guarantee was approximately $6.1 million ($97 psf) and per the terms of the guaranty, that amount will reduce annually before falling to a minimum level of $3.6 million ($53 psf). According to the May 2023 reserve report, the loan reports $9.7 million in leasing reserves and $2.9 million in tenant reserves on hand. Based on recent news articles, WeWork recorded $2.4 billion in total revenue for the period spanning January to September 2022, with lease obligations accounting for $1.9 billion. According to an article published by New York Times in March 2023, WeWork secured an agreement with SoftBank and other investors to significantly reduce its debt burden, through the cancellation or conversion of about $1.5 billion of debt into equity. An article by the Wall Street Journal published in November 2022 stated that WeWork announced the closure of 40 locations across the United States, but the subject property was not included as part of the closure. However, across other properties with WeWork exposure that back CMBS loans, there have been some closures or space reductions.

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 (May 17, 2022).

Class X-NCP 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 (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 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

Legal Criteria for U.S. Structured Finance (December 7, 2022)
https://www.dbrsmorningstar.com/research/407008

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 12, 2022)
https://www.dbrsmorningstar.com/research/402646

North American Commercial Mortgage Servicer Rankings (September 8, 2022)
https://www.dbrsmorningstar.com/research/402499

Interest Rate Stresses for U.S. Structured Finance Transactions (June 9, 2023) https://www.dbrsmorningstar.com/research/415687

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