DBRS Confirms Provisional Ratings of COMM 2016-667M Mortgage Trust

DBRS, Inc. (DBRS) has today confirmed, but not finalized, its provisional ratings of the following classes of Commercial Mortgage Pass-Through Certificates, Series 2016-667M (the Certificates) to be issued by COMM 2016-667M. The trends are Stable.

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

All classes will be privately placed.

The Class X-A balance is notional and interest accrual will be calculated based on the balance of the Class A certificate. 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 Class E certificate now represents the Eligible Horizontal Residual Interest (EHRI) and is intended to meet the risk retention requirements of Section 15G of the Exchange Act, which has yet to take effect. PR Cap IV Risk Retention Ptd. Ltc. is expected to be the Retaining Third-Party Purchaser upon the closing date of the transaction.

The collateral for the transaction consists of the fee interest in one of Midtown Manhattan’s premier office buildings, located at the corner of Madison Avenue and 61st Street, one block east of Central Park. In addition to the subject’s 248,667 sf of office space, the property has a half-block of prime Madison Avenue retail frontage totaling 16,681 sf. The property was constructed in 1985 by Hartz Mountain Industries, Inc., a sponsor-related firm, and has remained under the same ownership ever since. Hartz Financial Corporation (Hartz Financial) serves as the loan’s sponsor, which is wholly owned by The Hartz Group, Inc. (Hartz Group), a private investment company holding interests in the real estate, oil, gas and financial management industries. New York businessman and real estate investor Mr. Leonardo Stern serves as the CEO and Chairman of the Hartz Group and has operated personal offices at the subject since the building opened.

As of the September 1, 2016, rent roll, the subject was 90.8% occupied by 18 office tenants and four retail tenants. The retail space is fully occupied and office vacancy is limited to four units on floors 12, 15, 17 and 24 of the building, respectively. All vacant office space has recently been, or is in the process of being fully pre-built and upgraded with white marble floors, LED lighting, moveable glass-partition walls, electronically controlled window shades and top-of-the-line kitchens. Over the past five years, the building has reported a strong average occupancy of 96.3%. According to the sponsor representatives, being unable to accommodate expanding or contracting needs is the primary reason tenants move from the subject.

On October 7, 2016, following the publication of the DBRS presale report, the sponsor provided notice that the second-largest tenant, Berenson (11.5% of the NRA), requested the termination of its current leases (consisting of 31,408 sf, $99.64 base rent psf). The tenant did not have a termination option within its existing leases. Reportedly, the sponsor is also finalizing a new five-year lease with Berenson for 3,250 sf on the 24th floor at $175.00 base rent psf with a targeted effective date of November 16, 2016. Occupancy is expected to decline to 80.3% in November 2016 after Berenson completes its downsizing. Over the past ten years, the building has reported a strong average occupancy of 96.3%. As a result of Berenson's downsizing, the subject will be substantially underperforming the local submarket and its direct competitive set in the near term. Given the trophy quality of the building and the sponsor’s long-term history with the property, DBRS expects the subject to outperform the Class A Plaza District submarket in both occupancy and achieved rents over the loan term. Therefore, DBRS concluded value remains unchanged at $340.5 million and the provisional ratings are confirmed.

Nicknamed the “Country Club” building, the property’s current in-place WA gross office rent is $145.20 psf, nearly double the average gross rent for Class A buildings in the Plaza District Submarket of $74.92 psf (CoStar) but inside the appraiser’s WA modified gross estimate of $150.19 psf. The property’s retail space consists of 7,565 sf of grade-level space and 6,104 sf of lower-level retail space, and the remaining area consists of mezzanine and tenant storage space. The appraiser concluded market rents of $1,750 psf and $1,850 psf for the subject’s grade-level and corner-grade-level space, respectively. Total market rent for all retail space was valued at $890.27 psf by the appraiser, 32.1% above the in-place level. With the largest retail tenant, Macklowe Gallery (2.0% of total NRA and 32.1% of retail NRA) expiring in August 2017, approximately $1.7 million of additional rental revenue for the property could be achieved as the landlord has opted to not renew the tenant and, according to the appraiser, Macklowe Gallery’s in-place rent is estimated to 45.5% below market.

Office suites boast generous ceiling heights, ranging from 13 feet to nearly 15 feet, with the top nine floors being column-free. Unobstructed Central Park and city skyline views, primarily to the north, abound for tenants on floors 15 and above. Tenant amenities include a fully-equipped fitness center, a golf simulator and seven usable private terraces. The subject also benefits from being situated within the Special Park Improvement District, which among other restrictions, limits building heights in the area and ensures that the property’s views to the north, west and east sides will be preserved. The top-tier rents commanded at the subject and strong historical occupancy performance evidence the property’s high level of desirability and prestige.

Loan proceeds refinanced prior existing debt of $254.4 million that was securitized in the GCCFC 2007-GG9 transaction. As of the December 2006, the building had an appraised value of $470.0 million ($1,875 psf based on the 250,731 sf at prior securitization) and YE2006 NCF totaled $15.8 million. Nearly ten years later, the subject’s most recent NCF was reported at $22.9 million as of T-12 ending June 30, 2016, representing a 44.7% increase. DBRS NCF is $23.8 million, representing a -6.8% variance to the Issuer’s NCF, primarily due to higher underwritten TI/LCs and rent steps only being accepted through March 2017. Cushman & Wakefield has determined the as-is value of the property to be $740,000,000 ($2,701 psf), utilizing a 3.5% cap rate. The DBRS concluded value of $340.5 million ($1,243 psf) equates to a 54.0% discount to the appraiser’s value and is based on a 7.0% cap rate. With the Berenson downsizing, this DBRS concluded value remains unchanged. The resulting DBRS LTV of 74.6% is indicative of leverage that is considered to be very favorable and is further supported by the loan’s strong 9.4% DBRS Debt Yield. No cash equity was distributed in connection with the $254.0 million ($927 psf) subject loan. The ten-year loan is IO throughout the term.

The ratings assigned to Class E differs from the lower rating implied by the quantitative model. DBRS considers this difference to be a material deviation, and in this case, the ratings reflect the qualitative loan-level factors that are not precisely captured in the quantitative model.

The ratings assigned to the Certificates by DBRS are based exclusively on the credit provided by the transaction structure and underlying trust assets. All classes will be subject to ongoing surveillance, which could result in upgrades or downgrades by DBRS after the date of issuance.

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

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

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

With regard to due diligence services, DBRS was provided with the Form ABS Due Diligence-15E (Form 15-E) 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 15-E, DBRS did use the Data File outlined in the Independent Accountant’s Report in its analysis to determine the ratings.

The full report providing additional analytical detail is available by clicking on the link below or by contacting us at info@dbrs.com.