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 securing the underlying loan in the transaction, which remains in line with DBRS expectations at issuance. The transaction 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. Constructed in 1957, the property is considered one of the premier office towers in the Plaza District 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 April 2017 rent roll, the property was 87.4% occupied, remaining unchanged from June 2016 and slightly below the issuance level of 91.3%, due to the loss of the former third-largest tenant, Crate and Barrel (C&B), in August 2015. While C&B’s departure pushed the retail occupancy at the subject down to 36.2% from 100.0% at issuance, the office space is 94.0% occupied as of April 2017, an increase from 90.5% at issuance. The largest tenants at the property are Ralph Lauren Corporation (46.5% of the net rentable area (NRA)) and Memorial Sloan Kettering Cancer Center (16.9% of the NRA). Both tenants are investment grade and have long-term leases expiring in December 2024 and July 2023, respectively.

The sponsor executed leases with Moncler USA, Inc. (Moncler) and Bottega Veneta for a portion of the former C&B space, and both tenants are now paying rent as their respective free rent periods of 14 months and six months have burned off. Moncler signed a ten-year lease commencing in February 2016, paying a rental rate of $668 per sf (psf), and Bottega Veneta signed a lease at $703 psf commencing in August 2015 and expiring in February 2018. In March 2017, Bottega Veneta’s annual rent increased to $1,206 psf, resulting in an overall annual rent increase from $3.5 million to $6.0 million for its retail space. Combined, the two tenants account for only 29.0% of the former C&B space and 3.0% of the NRA, but their combined annual rents of $12.0 million exceed the $7.5 million previously paid for the entire space 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 2017 remittance, that reserve had a balance of $15.2 million. In addition, a leasing reserve was funded with monthly contributions required through the loan term; as of the June 2017 remittance, that reserve had a balance of $5.5 million. The sponsor 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, which burned off in March 2017, and paid an additional $6.8 million to fund C&B’s outstanding leasing costs, Moncler’s tenant improvement/leasing 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, reported an occupancy rate of 94.0% as of April 2017, an increase from 90.3% at issuance. Since August 2016, one tenant expanded its existing space and three office tenants signed leases at the property, totalling 22,301 sf (3.8% of the NRA) on leases ranging from five to ten years, at a weighted-average (WA) rental rate of $83.23 psf. The resulting in-place WA office rental rate is $92.55 psf, which is a modest increase over $91.89 psf at issuance and compares favourably with the $72.54 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 YE2016 financials, the loan reported a debt service coverage ratio (DSCR) of 1.17 times; however, this figure is not reflective of the distributions provisioned by the C&B Rent Restructuring Reserve and the sponsor guarantee to cover rental shortfalls for the former C&B space. In the analysis for this review, DBRS applied an adjusted net cash flow figure to factor current occupancy and rents at the property, with expenses based on the YE2016 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 with the recent leasing activity and potential income for the vacant retail space.

The ratings assigned to Classes D and E materially deviate from the higher ratings implied by the quantitative results. The deviations are warranted due to sustainability of loan performance trends not yet demonstrated.

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 principal methodology is CMBS North American Surveillance (March 2017), which can be found on dbrs.com under Methodologies.