DBRS Finalizes Provisional Ratings on Morgan Stanley Capital Barclays Bank Trust 2016-MART

DBRS, Inc. (DBRS) has today finalized its provisional ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2016-MART (the Certificates) issued by Morgan Stanley Capital Barclays Bank Trust 2016-MART. The trends are Stable.
-- Class A at AAA (sf)
-- Class X-CP at AAA (sf)
-- Class X-NCP at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (sf)

The Class X-CP and X-NCP balances are notional. DBRS ratings on interest-only (IO) certificates address the likelihood of receiving interest based on the notional amount outstanding. DBRS considers the IO certificates’ position within the transaction payment waterfall when determining the appropriate rating.

The subject property is a 3,648,730-square foot (sf) (based on DBRS analysis), 24-story, Class B mixed-use building situated on the bank of the Chicago River in the River North submarket of Downtown Chicago. At the time of its construction in 1930, the property -- known colloquially as theMART -- was the largest building in the world. Today, theMART acts as a uniquely recognizable fixture in the Chicago landscape; it is one of the world’s largest buildings and is a resource for custom home furnishings, interior design and office furniture showrooms, and the corporate headquarters for five companies.

The collateral, which is LEED Gold certified, offers an extensive amenities package that consists of hundreds of premier showrooms, flexible and spacious floor plates, a food court with several fast-casual restaurants scattered on the first and second floors, 325 surface and subterranean garage parking spaces, a hair and nail salon and on-site, time-saving services such as a FedEx Kinko’s and a U.S. Post Office. Furthermore, the building has direct access to the train platform for two CTA elevated train (the L) lines that stop at the Merchandise Mart. The subject has very large floor plates, which are approximately 200,000 sf on floors one through 18 and step back to roughly 8,000 sf on the 24th floor. In addition, the property boasts ceiling heights ranging from 12 to 20 feet. Currently, the collateral contains roughly 1,996,195 sf of office space, 1,328,319 sf of showroom space, 214,545 sf of trade show space, 84,507 sf of retail space, 21,227 sf of storage space and 3,937 sf of riser space. Based on DBRS analysis, the office/retail portion of the building (57.7% of total net rentable area (NRA)) is 93.8% leased, while the showroom/tradeshow space is 97.2%, leased. Overall, DBRS undwrote the property as 95.2% leased as of September 1, 2016.

As a reaction to a decline in market demand for gift and accessory showroom space, since 2010, office and retail space at the collateral has grown from roughly 30.0% of the NRA in 2010 to a forecasted 58.0% of NRA in 2018. Vornado Realty Trust (Vornado) invested $188.0 million between 2011 and 2015 on capital improvements and tenant allowances, with an additional $43.0 million in capital expenditures budgeted for 2016. These investments have transformed the lobby space, upgraded the food court, improved building systems and attracted a number of new office tenants. In total, the property has renewed 75 leases totaling 359,379 sf since 2015 and executed 49 new or expanded leases totaling 501,322 sf, approximately half of which has been for office tenants.

The $675.0 million Whole Loan is split into a $550.0 million Mortgage Loan to be held within the Trust and a $125.0 million pari passu Companion Loan to be held outside the Trust. The Whole Loan refinanced $550.0 million of debt, returned $100.0 million of equity to the sponsor, allocated $23.6 million in upfront reserves and covered $1.3 million in closing costs. The five-year loan is IO throughout. In total, the Whole Loan encompasses seven separate notes: A-1-A, Note A-1-B, Note A-1-C, Note A-1-D, Note A-1-E, Note A-1-F and Note A 1-G. Notes A-1-A, A-1-B and A-1-C will be contributed to the Trust, and the remaining Notes will be held by the Companion Loan Holder outside of the Trust. The Companion Loan Holder is not expected to contribute the Companion Loan to a future commercial mortgage securitization transaction, but may do so. The Trust Notes and the Companion Notes are pari passu with each other.

DBRS loan-to-value is 69.9%. Based on an 8.24% blended cap rate, the DBRS value represents a 41.1% discount to the appraised value. While the DBRS cap rate is low by rating agency standards, it is far above the current market cap rate (as estimated by the appraisal) of 6.0%. DBRS research has found that issuance cap rates (issuer underwritten net cash flow divided by Appraised Value) for Chicago central business district office properties securitized in CMBS transactions, regardless of location or quality, have not exhibited an average cap rate above 7.00% since 2007. For the 2015 vintage, the average cap rate was 6.7%. Assuming a refinance constant of 8.49%, 578 basis points above the current, contractual fixed rate, the DBRS refinance debt service coverage ratio is moderately strong at 1.39 times, indicating lower refinance risk. The loan is a non-recourse loan without a sponsor entity carveout guarantor. The sponsor is an institutional entity with market capitalization of $19.5 billion (as of September 2016). Furthermore, the property is professionally managed by a sponsor-related entity with over 20 years of experience at the building.

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

All classes will be privately placed.

The applicable methodology is North American CMBS Rating Methodology, which can be found on our website under Methodologies.

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

With regard to due diligence services, DBRS was provided with the Form ABS Due Diligence-15E (Form-15E), which contains the description of the information that the third party reviewed in conducting the due diligence services and a summary of the findings and conclusions. While DBRS did not rely on the due diligence services outlined in Form-15E, DBRS did use the Data File outlined in the Independent Accountant’s Report in its analysis to determine the ratings.