DBRS Confirms Ratings on Madison Avenue Trust 2013-650M

DBRS Limited (DBRS) has today confirmed its ratings on the following classes of Commercial Mortgage Pass-Through Certificates Series 2013-650M issued by Madison Avenue Trust 2013-650M:

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

All trends are Stable.

The confirmations reflect the stable performance of the property, which remains in line with expectations. The collateral consists of a $675 million fixed-rate loan secured by 650 Madison Avenue, a 595,348 square foot (sf), 27-story, Class A office and retail tower built in 1957. It is considered one of the premier office towers in the Plaza District submarket because of its unobstructed views of Central Park starting at the 15th floor and its 200 feet of ground-floor retail frontage along Madison Avenue. According to the YE2014 financials, the loan reported a debt service coverage ratio (DSCR) of 2.04 times (x), which is similar to the DBRS underwritten DSCR at issuance of 2.02x.

As of the December 2014 rent roll, the property was 89.1% occupied; however, occupancy will decrease to 80.5% after the third-largest tenant, Crate & Barrel (C&B) vacates the subject in August 2015, which is discussed in greater detail below. The remaining largest tenants are Ralph Lauren Corporation (occupying 46.5% of the NRA) and MSKCC (occupying 16.9% of NRA). Both tenants are investment grade and have long-term leases expiring in December 2024 and July 2023, respectively.

C&B currently occupies 10.3% of the total NRA and 86.6% of the retail NRA at the subject and will vacate the property in August 2015 ahead of its March 2019 lease expiration as the loan sponsor, a joint venture between Vornado Realty L.P., OP USA Debt Holdings L.P. and other institutional investors, will pay the tenant a $11.0 million termination option. The sponsor is pursuing a re-tenanting strategy for the retail space in an effort to increase rental rates to market. C&B is currently paying a rental rate of $124 per square foot (psf), well below the current market rental rate of $326 psf. The sponsor has already executed a lease with Moncler USA, Inc. (Moncler), which signed a ten-year lease for 15% of the C&B space, which represents 1.6% of NRA. Moncler will pay a rental rate of $613 psf or $6 million per year through year five of the lease with rent steps in effect thereafter. In comparison, C&B pays annual base rent of $7.5 million. Moncler is expected to open for business in January 2016. The remainder of the retail space is anticipated to be filled by similar luxury retailers at rental rates comparable to market. The sponsor has estimated that the retail space will be able to generate between $25.0 million and $30.0 million in rental revenue annually.

As part of the retail space transition, the sponsor has provided a guaranty to fund the $1.5 million shortfall between Moncler’s rent and C&B’s rent and it will also pay an additional $6.8 million to fund C&B’s outstanding leasing commissions (LCs), Moncler’s tenant improvements and LCs and the demolition of the remaining C&B space. A guaranty will also be provided to fund all leasing costs incurred by the Borrower in connection with future re-letting of any space previously leased by C&B. DBRS expects property performance to improve as the sponsor is successful in signing new leases to tenants, which will be able to capitalize on the subject’s location as a premier retail location in Manhattan.

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 CMBS North American Surveillance (January 2015) and North American CMBS Rating Methodology (June 2015), which can be found on our website under Methodologies.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.