Morningstar DBRS Downgrades Credit Ratings on Six Classes of Worldwide Plaza Trust 2017-WWP, Changes Trends on Four Classes to Negative

DBRS Limited (Morningstar DBRS) downgraded its credit ratings on six classes of the Commercial Mortgage Pass-Through Certificates, Series 2017-WWP issued by Worldwide Plaza Trust 2017-WWP as follows:

-- Class A to BBB (low) (sf) from AA (sf)
-- Class X-A to BBB (sf) from AA (high) (sf)
-- Class B to BB (low) (sf) from A (sf)
-- Class C to B (low) (sf) from BBB (sf)
-- Class D to CCC (sf) from BB (low) (sf)
-- Class E to CCC (sf) from B (low) (sf)

Morningstar DBRS also confirmed its credit rating on Class F at CCC (sf).

The trends on Classes A, X-A, B, and C have been changed to Negative. There are no trends on Classes D, E, or F, as these classes have credit ratings that do not typically carry a trend in commercial mortgage-backed securities (CMBS) credit ratings.

All credit ratings have been removed from Under Review with Negative Implications where they had been placed on April 15, 2024, as part of Morningstar DBRS' review of transactions secured by office properties within its North American commercial mortgage-backed securities single-asset/single-borrower (NA CMBS SASB) portfolio. The review was prompted by Morningstar DBRS' view that a shift in the use and demand for office space has been observed in the last few years. Amid the increase in remote work and hybrid schedules, tenant demand in urban markets, such as those most frequently represented in the NA CMBS SASB space, has been the most resilient for those higher-quality buildings that offer extensive amenity packages and are located close to transportation hubs with other nearby draws for commuters and city dwellers alike. These trends are expected to be sustained in the long term and their ripple effects of increased tenant improvement costs, capital improvement expectations, and decreased demand for some markets and neighborhoods will continue to influence investment activity for the office sector as a whole. For more information regarding the approach and analysis conducted, please refer to the press release titled "Morningstar DBRS Takes Rating Actions on North American Single-Asset/Single-Borrower Transactions Backed by Office Properties," published on April 15, 2024.

At the conclusion of the April 2024 review, several transactions, including the subject transaction, remained Under Review with Negative Implications. This generally reflected the existence of evolving factors for those credits for which Morningstar DBRS identified a need for more information to be gathered to inform the analysis. With this review of the subject transaction, Morningstar DBRS has resolved the Under Review with Negative Implications status. The full details of the credit rating action and rating rationale are outlined below.

The transaction is secured by a Class A office property in Manhattan. The credit rating downgrades reflect Morningstar DBRS' loss expectations for the loan, following updates to Morningstar DBRS' analysis with this review, which were made to capture the secular shift noted above in addition to the upcoming departure of the second-largest tenant at the property, Cravath, Swaine & Moore LLP (Cravath; 30.1% of the net rentable area (NRA)), which will vacate its space in August 2024. While the loan structure provides for a cash flow sweep to be initiated in certain circumstances involving the Cravath lease, which was activated in August 2023, the collected funds will be insufficient to cover the significant leasing costs associated with re-leasing the property to market levels. In addition, leasing momentum has been slow and the property's largest tenant, Nomura Holding America, Inc. (Nomura; 34.3% of the NRA, with a lease expiry in September 2033), which has already downsized once since issuance, has another option to downsize further or terminate its lease entirely in January 2027, ahead of the loan's scheduled maturity in November 2027. While the loan remains current and is not in special servicing, Morningstar DBRS analyzed this loan with a conservative liquidation scenario based on a newly derived dark value, as further detailed below, which suggests implied losses could be realized into the Class B certificate upon the eventual disposition of the loan, supporting the credit rating downgrades. Given the unknowns regarding the leasing momentum and general demand for the space to be vacated, Morningstar DBRS also assigned Negative trends to those classes with ratings not already indicative of loss.

Whole-loan proceeds of $940.0 million and $260.0 million of mezzanine debt facilitated the recapitalization financing of the collateral. The whole loan consists of $616.3 million of senior debt and $323.7 million of junior debt, of which the entirety of the junior debt and $381.3 million of the senior debt is held in the trust. The fixed-rate loan is interest only (IO) through its 10-year term and is sponsored by a joint venture between SL Green Realty Corporation and RXR Realty LLC. The property totals 1.8 million square feet (sf) and occupies an entire block between 49th Street and 50th Street at 825 Eighth Avenue in New York City's Midtown West submarket. The property also includes 10,592 sf of ground-level retail space, and the C and E subway lines are accessible via a station beneath the building.

The loan was added to the servicer's watchlist in September 2023 following Cravath's confirmation they would vacate at lease expiration, as anticipated. In 2019, Cravath announced its plans to relocate its footprint at the subject to Two Manhattan West at lease expiration. According to the March 2024 rent roll, the subject property was 91.4% occupied; however, implied vacancy would fall below 60% following the tenant's departure. Cravath currently pays a rental rate of $98.02 per sf (psf), well above the Midtown submarket's average asking rental rate of $69.20 psf according to Ries, and other comparable Class A properties within a 0.5 mile radius, which had asking rates of $88.35 psf, as of Q1 2024. One tenant, AMA Management Services LLC (1.5% of the NRA, lease expiry in February 2030), which currently subleases space from Cravath, has signed a direct lease well below the asking rates at an initial rate of $70.00 psf, with no other prospective tenants known to the servicer as of the date of this press release. As of the July 2024 reserve report, $17.1 million had been collected as part of the cash flow sweep associated with Cravath's lease expiration, well below the needed capital amount required to release the space.

At issuance, Nomura occupied 819,906 sf (40.0% of NRA) of space but exercised its right to reduce its space in January 2022. The tenant gave back two floors and paid a termination fee of $11.2 million, which is currently held outside of the reserve accounts. The tenant now occupies 34.3% of NRA but has another option to reduce its footprint further or terminate its lease in whole or in parts in January 2027, on the condition that 18 months' notice is provided along with a termination fee equal to six months of fixed rent on the terminated space, equating to $18.5 million. The tenant will pay a below-market rental rate of $52.50 psf until the second option, when the rate would increase to $56.32 if they chose to renew. Although there is no confirmation to date that Nomura will be exercising its termination option in 2027, its previous downsize and timing of the future option closely coincides with the loan's maturity date.

As of the YE2023 financials, the subject property reported a net cash flow (NCF) and debt service coverage ratio (DSCR) of $73.5 million and 2.14 times (x), respectively, in line with historical figures. Although the loan remains current and historical financials display steady performance, Morningstar DBRS expects a precipitous NCF decline in the coming months, as the borrower works to lease up Cravath's space. In addition, Nomura's option in 2027 is worrisome, as the tenant has already downsized, and has the option to further downsize or vacate its space entirely, introducing a significant refinance risk shortly before loan maturity. During the April 2024 rating action, the Morningstar DBRS value for the subject collateral was updated to $789.3 million based on a Morningstar DBRS NCF of $63.1 million and a capitalization rate of 8.0%, reflecting a loan-to-value (LTV) ratio of 119.0%. The April 2024 Morningstar DBRS value reflects a 27.1% decline from the $1.08 billion Morningstar DBRS value derived when the credit ratings were assigned in 2020. Based on the updated inputs from the April 2024 rating action, Morningstar DBRS downgraded all seven classes.

As a result of the upcoming vacancy, Morningstar DBRS conducted a dark value analysis for the July 2024 review, assuming the tenant does not renew its lease in order to analyze the potential for principal recoverability. This analysis found that the dark value was insufficient to cover the outstanding loan balance, which does not benefit from amortization. To determine the dark value, Morningstar DBRS assumes that, upon the time of maturity, the property is fully vacant, and after two years of downtime, the property is re-leased to a market occupancy. The concluded market rent for the space was $70.00 psf and a stabilized vacancy rate of 15.0%, which recognizes the current vacancy level of the submarket. An expense ratio of 45.6% was applied, based on the YE2023 figure, resulting in a Morningstar DBRS stabilized NCF of $79.0 million. A cap rate of 9.0% was applied, supported by market trends and incorporating a 100 basis point dark value adjustment to account for the time and risk to re-tenant the space. Tenant improvements of $90 psf and leasing commissions of 4.0% were assumed, based on available comparable leases on file with Morningstar DBRS. The total leasing cost to stabilize was $374.6 million, based on a two-year downtime adjustment given the size of the property, resulting in a dark value of $503.6 million and a whole-loan LTV of 186.6%. Based on the whole loan amount of $940.0 million, a 1.0% liquidation fee, and one year of principal and interest advances, the total trust exposure could reach approximately $980.0 million. The results of liquidation analysis suggested a loss severity exceeding 45%, which would fully reduce the balance of Class C through the unrated Class HRR and nearly 50% of Class B, supporting the credit rating downgrades.

Although losses could be realized as high as Class B, Morningstar DBRS does note that there is no impending loan maturity and that the sponsor has time to secure tenants to backfill the upcoming vacant space. However, recent leasing trends at the subject property and declining submarket dynamics do suggest the sponsor will have difficulty securing a meaningful number of leases, supporting the Negative trends on Classes A, X-A, B, and C, which suggest further downgrades could occur in the future.

Morningstar DBRS' credit ratings on the applicable classes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. Where applicable, a description of these financial obligations can be found in the transactions' respective press releases at issuance.

Morningstar DBRS' long-term credit ratings provide opinions on risk of default. Morningstar DBRS considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued. The Morningstar DBRS short-term debt rating scale provides an opinion on the risk that an issuer will not meet its short-term financial obligations in a timely manner.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS   
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.
 
A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024; https://dbrs.morningstar.com/research/427030).

Class X-A is an interest-only (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 credit ratings are subject to surveillance, which could result in credit ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by Morningstar DBRS.

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

The principal methodology is North American CMBS Surveillance Methodology (March 1, 2024; https://dbrs.morningstar.com/research/428798).

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

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 credit rating was initiated at the request of the rated entity.

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

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

This is a solicited credit rating.

The credit ratings of this transaction are highly subject to the asset's liquidation value. As a result, a sensitivity whereby Morningstar DBRS stresses the Morningstar DBRS Cap Rate and Morningstar DBRS NCF to evaluate the impact of a Morningstar DBRS value decline based on the LTV sizing benchmarks was not completed. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The Morningstar DBRS Long-Term Obligation Rating Scale definition indicates that credit ratings of CCC or lower are assigned when the bond is highly likely to default or default is imminent, thereby prevailing over a sensitivity analysis.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS' outlooks and credit ratings are monitored.

DBRS Limited
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Tel. +1 416 593-5577

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

Rating North American CMBS Interest-Only Certificates (June 28, 2024; https://dbrs.morningstar.com/research/435294)

North American Single-Asset/Single-Borrower Ratings Methodology (March 1, 2024; https://dbrs.morningstar.com/research/428799)

Morningstar DBRS North American Commercial Real Estate Property Analysis Criteria (June 28, 2024; https://dbrs.morningstar.com/research/435293)

North American Commercial Mortgage Servicer Rankings (August 23, 2023; https://dbrs.morningstar.com/research/419592)

Legal Criteria for U.S. Structured Finance (April 15, 2024; https://dbrs.morningstar.com/research/431205/legal-criteria-for-us-structured-finance)

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/417279 (July 17, 2023).

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