Morningstar DBRS Confirms Credit Ratings on All Classes of 225 Liberty Street Trust 2016-225L

DBRS Limited (Morningstar DBRS) confirmed the credit ratings on all classes of Commercial Mortgage Pass-Through Certificates issued by 225 Liberty Street Trust 2016-225L as follows:

-- Class A at AAA (sf)
-- Class B at AA (low) (sf)
-- Class X at A (sf)
-- Class C at A (low) (sf)

All trends are Stable.

The credit rating confirmations reflect the overall stable performance of the transaction, which remains in line with Morningstar DBRS' expectations since the previous credit rating action in April 2024 as evidenced by the stable occupancy rates and slight increase in net cash flow (NCF).

The loan is secured by a 2.4 million-square-foot (sf) Class A trophy office property across from the World Trade Center site in Lower Manhattan. The subject is the largest of the four Brookfield Place towers, a development that consists of 7.1 million sf of office space and approximately 340,000 sf of lifestyle-oriented retail and public space. The property is subject to a long-term ground lease with the Battery Park City Authority whereby the annual rent is fixed at $5.1 million through its June 2069 expiration date. The $900.0 million fixed-rate whole loan consists of a $778.5 million trust loan, which is composed of $337.5 million of senior debt and $441.0 million of junior debt with three companion notes totaling $121.5 million held outside of the trust. The loan is interest only (IO) for the entire 10-year term with a scheduled maturity date of February 2026. The loan benefits from experienced sponsorship in Brookfield Property Partners L.P. At issuance, the tenant improvements were fully guaranteed by a subsidiary of the sponsor, Brookfield Office Properties Inc., which has Senior Unsecured Notes rated BBB (low) with a Stable trend by Morningstar DBRS (confirmed on May 15, 2024).

As of the September 2024 rent roll, the property was 95.3% occupied, compared with 94.7% at YE2023 and 88.6% at YE2022. The largest collateral tenants include TI Gotham (28.8% of the NRA; lease expiry in December 2032), Bank of New York Mellon ((BNY); 13.4% of the NRA; lease expiry in December 2034), and Invesco Group Services (11.8% of the NRA; lease expiry in September 2028). BNY is an investment-grade tenant, rated AA (high) with a Stable trend by Morningstar DBRS (confirmed on September 25, 2024). Tenant rollover risk is minimal, with leases representing only 2.1% of the NRA scheduled to expire within the next 12 months.

BNY subleased its entire space to J.Crew on a 16-year agreement in June 2018; however, the tenant filed for Chapter 11 bankruptcy protection in May 2020. After J.Crew exited bankruptcy in September 2020, it continues to occupy the subleased space at the subject. TI Gotham formerly indicated plans to sublease its space as per media sources in September 2022; however, Morningstar DBRS has not received any additional information regarding the plan as of this review.

According to LoopNet, an additional 41,000 sf of space is available for sublease through December 2032. Current tenants subleasing space remain financially responsible for the rental payments, ensuring revenue stability for the property throughout the respective lease terms. BNY's lease was also structured with a one-time contraction option effective December 31, 2024. Morningstar DBRS has requested an update regarding the status of the contraction option but has not received a response as of this press release. According to Reis, office properties in the Downtown Manhattan submarket reported a YE2024 vacancy rate of 15.2% and an average asking rental rate of $61.86 psf, compared with YE2023 figures of 14.4% and $61.69 psf, respectively. For reference, the subject property reported an average in-place rental rate of $63.24 psf.

According to the most recent financials provided by the servicer, the annualized trailing nine-month period ended September 30, 2024, NCF was $76.2 million, compared with $63.2 million at YE2023 and $57.6 million at YE2022. For the same time periods, the debt service coverage ratio was reported at 1.79 times (x), 1.49x, and 1.35x, respectively.

For the previous Morningstar DBRS credit rating action in April 2024, Morningstar DBRS completed an updated collateral valuation. For more information regarding the approach and analysis conducted, please refer to the press release titled "Morningstar DBRS Takes Actions on North American Single-Asset/Single-Borrower Transactions Backed by Office Properties," published on April 15, 2024. For purposes of this credit rating action, Morningstar DBRS maintained the valuation approach from the April 2024 review, which was based on a capitalization rate of 7.62% applied to the Morningstar DBRS NCF of $60.8 million. Morningstar DBRS also maintained positive qualitative adjustments to the loan-to-value ratio (LTV) sizing benchmarks, totaling 6.0%, to reflect the subject property's trophy asset status in a high-growth submarket. The Morningstar DBRS concluded value of nearly $797.9 million represented a -43.0% variance from the issuance appraised value of $1.4 billion. Morningstar DBRS only rates the three most senior classes as well as the single IO class, implying a cumulative LTV of 65.0% at the most junior rated Class C.

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 Factors in Credit Ratings (August 13, 2024; https://dbrs.morningstar.com/research/437781).

Class X 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 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 (December 13, 2024; https://dbrs.morningstar.com/research/444617).

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 info-DBRS@morningstar.com.

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.

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

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
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.

-- North American Single-Asset/Single-Borrower Ratings Methodology (December 13, 2024), https://dbrs.morningstar.com/research/444612
-- Morningstar DBRS North American Commercial Real Estate Property Analysis Criteria (September 19, 2024), https://dbrs.morningstar.com/research/439702
-- Legal Criteria for U.S. Structured Finance (December 3, 2024), https://dbrs.morningstar.com/research/444064)
-- North American Commercial Mortgage Servicer Rankings (August 23, 2024), https://dbrs.morningstar.com/research/438283)

A description of how Morningstar DBRS analyzes 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 https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.