DBRS Confirms Ratings on Madison Avenue Trust 2013-650M

DBRS Limited (DBRS) has today confirmed all classes of Commercial Mortgage Pass-Through Certificates Series 2013-650M issued by Madison Avenue Trust 2013-650M as follows:

-- 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 DBRS expectations at issuance. The collateral consists of a $675 million fixed-rate loan secured by 650 Madison Avenue, a 27-storey Class A office and retail tower consisting of 523,608 square feet (sf) of office and 70,862 sf of retail space for a total of 594,470 sf. Originally built in 1957, it is considered one of the premier office towers in the Plaza District office 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. The loan sponsor is a joint venture between Vornado Realty L.P., OP USA Debt Holdings L.P. and other institutional investors.

As of the June 2016 rent roll, the property was 87.4% occupied, slightly below the issuance level of 91.3%, because of the loss of the former third-largest tenant, Crate and Barrel (C&B), in August 2015, which is discussed in greater detail below. While this pushed the retail occupancy at the subject to 39.2% from 100.0% at issuance, the office space is expected to be 94.3% occupied as of August 2016, an increase from 90.5% at issuance. The largest tenants at the property are Ralph Lauren Corporation (occupying 46.5% of the net rentable area (NRA)) and Memorial Sloan Kettering Cancer Center (occupying 16.9% of the NRA). Both tenants are investment grade and have long-term leases expiring in December 2024 and July 2023, respectively.

C&B, which previously occupied 10.3% of the total NRA and 86.6% of the retail NRA at the subject, vacated the property in August 2015, ahead of its March 2019 lease expiration, as the sponsor exercised a provision in the loan agreement allowing for the termination of the C&B lease in the event that replacement tenancy paying equal or higher rent had been secured with all related leasing costs covered by reserves and/or guarantees. As part of the lease termination, the sponsor paid C&B an $11.0 million termination fee. The sponsor has executed a re-tenanting strategy that was contemplated at issuance for the retail space in an effort to increase rental rates to market, as C&B’s rental rate of $124 per square foot (psf) was well below the market rental rate of $326 psf for that space. The sponsor has executed leases with Moncler USA, Inc. (Moncler), which signed a ten-year lease and will pay a rental rate of $668 psf, and Bottega Veneta, which signed a two-year lease at $703 psf. Combined, the two tenants account for only 29.0% of the former C&B space, but their combined annual rents of $9.5 million exceed the $7.5 million previously paid by C&B. 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 this retail space will be able to generate between $25.0 million and $30.0 million in rental revenue annually.

At issuance, a reserve in the amount of $55.8 million was established to fund the difference between the C&B rental rate and the market rental rate through the original lease expiry in 2019. As of the June 2016 remittance, that reserve had a balance of $27.7 million. In addition, a leasing reserve was funded with monthly contributions required through the loan term; as of the June 2016 remittance, that reserve had a balance of $11.1 million. The sponsor has also provided a guaranty to fund the $7.5 million shortfall between Moncler’s rent and C&B’s rent during Moncler’s free rent period of 14 months and paid an additional $6.8 million to fund C&B’s outstanding leasing commissions (LCs), Moncler’s tenant improvement/LC costs and the cost of demolishing the remaining C&B space. Finally, a guaranty was also provided to fund all leasing costs incurred in connection with future re-letting of any space previously leased by C&B.

The office portion of the subject, which amounted for 63.3% of the rental income at issuance, has seen improved leasing momentum in recent months, with occupancy to increase to 94.3% once the most recently signed lease takes effect in August 2016, compared with 86.2% at YE2014 and 90.3% at issuance. Since December 2015, five office tenants signed leases at the property, totalling 42,600 sf (7.2% of the NRA) on leases ranging from five to ten years, at a weighted-average (WA) rental rate of $139.00 psf. The resulting in-place WA office rental rate is $96.25 psf, which is a modest increase over $91.89 psf at issuance and compares favourably with the $77 psf average asking rent for Class A properties in the Plaza District office submarket, according to CoStar, while the vacancy level at the subject is also lower than the 10.0% vacancy in the submarket. The remaining office space is being marketed by the sponsor to high-net-worth private financial companies and individuals at market rents.

According to the YE2015 financials, the loan reported a debt service coverage ratio (DSCR) of 1.13 times; however, this figure is not reflective of the increased rental revenue that will be generated with the new office and retail leases secured at the property, as previously discussed. DBRS modelled an adjusted net cash flow figure to current occupancy and rents at the property, with expenses based on the YE2015 figures reported by the servicer. The resulting term and refinance DSCR figures are in line with issuance figures and are expected to increase over the near term as cash flows are expected to continue to improve on the back of strong office leasing momentum and the presence of significant upside for the vacant retail units at the property.

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.

The applicable methodologies are North American CMBS Rating Methodology (March 2016) and CMBS North American Surveillance (December 2015), which can be found on our website under Methodologies.

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