DBRS Confirms Rating of BWAY 2015-1740 Mortgage Trust

DBRS Limited (DBRS) has today confirmed the rating on the Commercial Mortgage Pass-Through Certificates, Series 2015-1740, Class A (the Certificates) issued by BWAY 2015-1740 Mortgage Trust (BWAY 2015-1740 or the Trust) at AAA (sf). The trend is Stable.

The rating confirmation reflects the healthy performance metrics for the transaction, which remain in line with DBRS’s expectations at issuance. The transaction closed in February 2015 and is interest only for the entire ten-year term. The collateral consists of the fee interest in a 26-story office and retail tower located at 1740 Broadway in Midtown Manhattan with a loan balance of $308.0 million. The property is well located in the Columbus Circle submarket and benefits from potential cash flow and value upside related to signage income and the underused bicycle storage space, which the sponsor plans to reposition. At issuance, the sponsor noted that approximately $2.0 million of additional net operating income could be generated by upgrading the property’s rooftop signage and leasing it to an existing office tenant. The sponsor plans to execute this strategy in conjunction with a future renewal lease or include it with a repositioning of the ground-floor retail space. As of February 2016, the borrower has noted that the marketing efforts for the rooftop signage are ongoing and that new signage will be provided to incoming retailers at the subject.

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. According to the September 2015 rent roll, the property is 98.8% occupied with nominal tenant rollover risk within the next 12 months as only one tenant, occupying 1.0% of the net rentable area (NRA), will roll in the next year. The subject’s occupancy rate has remained relatively unchanged since issuance. Major tenants at the property include L Brands Inc. (L Brands; 77.3% of NRA), which uses the subject as its regional headquarters, and Davis & Gilbert LLP (15.8% of NRA) with lease expirations in March 2022 and December 2020, respectively. Although these tenants are scheduled to expire during the ten-year loan term, both tenants have established critical operations for their respective companies at the subject and have expanded their spaces at the property over the years. In addition, the subject has historically maintained high occupancy, averaging a 6.0% direct vacancy rate over the past 20 years.

In October 2012, L Brands exercised its right of first offer on the 15th, 16th and 17th floors to maintain its ability to expand and consolidate its New York City footprint at the subject property in the future. The tenant has expanded into the 16th and 17th floors as the 16th floor is currently being built out as a high-end showroom. As of February 2016, the borrower has gained control of the 14th and 15th floors and L Brands continues to pay rent through mid-November for these spaces. The subject is averaging rental rates of $62.12 per square foot (psf) for the office space, slightly below Class A office properties within the submarket that are reporting average rental rates of $64.24 psf, according to February 2015 CoStar data. The Q3 2015 debt service coverage ratio (DSCR) of 2.06 times (x) has improved compared with the DBRS underwritten DSCR of 1.92x and the loan benefits from a replacement reserve balance of $1.8 million ($3.00 psf) as of the January 2016 remittance.

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

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 to the right under Related Research or by contacting us at info@dbrs.com.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodologies are North American CMBS Rating Methodology (June 2015) and CMBS North American Surveillance (December 2015), which can be found on our website under Methodologies.