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

DBRS Limited (DBRS) confirmed the ratings of Morgan Stanley Capital Barclays Bank Trust 2016-MART as follows:

--Class A at AAA (sf)
--Class B at AA (low) (sf)
--Class C at A (low) (sf)
--Class X-CP at BBB (high) (sf)
--Class X-NCP at BBB (high) (sf)
--Class D at BBB (sf)

All trends are Stable.

The rating confirmations reflect the overall stable performance of the transaction, which remains in line with DBRS’s expectations at issuance. The loan is secured by the 3,648,730-square foot (sf) (based on DBRS analysis), 24-storey, Class B mixed-use building known as the Merchandise Mart situated on the bank of the Chicago River in the River North neighbourhood of Downtown Chicago. The LEED Gold certified building offers an extensive amenities package that consists of hundreds of premier showrooms, flexible and spacious floor plates, 325 surface and subterranean garage parking spaces and various retail tenants. Additionally, the property benefits by being directly accessible to the train platform for two Chicago Transit Authority elevated train lines (The L Train). At issuance, the collateral contained 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 and 21,227 sf of storage space. Given the decline in demand for showroom space, the property’s office and retail portion of the building has grown from approximately 30.0% of net rentable area (NRA) in 2010 to 57.7% as of September 2016, and is expected to continue to increase over time as the sponsor, Vornado Realty Trust, continues to transform the property.

The $675.0 million loan is split into a $550.0 million trust loan and a $125.0 million pari passu companion loan held outside the Trust. The companion loan holder is not expected to contribute to a future commercial mortgage securitization transaction, but may do so. The five-year loan is interest-only throughout.

According to the most recent year-end financials, the YE2016 debt service coverage ratio (DSCR) was 3.83 times (x), compared with the DBRS issuance DSCR of 4.37x. The Net Cash Flow (NCF) is depressed from the DBRS issuance figure as a result of large amounts of rent-free periods that were in place at closing. Approximately $14.37 million of rental abatements were owed to tenants throughout 2016. As the free rent periods come to an end, NCF is expected to increase. According to Q2 2017 reporting, the DSCR had already increaed to 4.24x. The property also benefits from being low leveraged with a 41.2% loan-to-value (LTV) ratio.

According to the July 2017 rent roll, the property was 98.9% occupied, an increase over the DBRS issuance occupancy of 95.1% as AllState Insurance Company (Allstate) moved into an expansion space of 57,112 sf in March 2017, and will move into an additional expansion space of 57,112 sf starting in October 2017. In total, Allstate will occupy 4.3% of the NRA (becoming the fourth-largest tenant) with its leases all due to expire coterminously in April 2026. The largest tenant at the subject is Motorola Mobility LLC (Motorola), which occupies a total of 16.7% of NRA with a scheduled lease expiration date in August 2028. According to an article in Crain’s Chicago Business dated October 10, 2016, Motorola agreed to subleasing agreements in late 2015 and early 2016, with VelocityEHS to take over 91,000 sf of its space and Beam Suntory to take an additional 112,803 sf. The article goes on to state that Motorola is looking to sublease an additional 113,260 sf , which would bring Motorola’s physically occupied space down to approximately 287,000 sf of its original 609,071 sf of space when it signed its lease in 2014.

Although Motorola is shrinking its footprint at the property, this should have no impact on performance as the loan is scheduled to mature in September 2021, and Motorola, an investment-grade tenant, will guarantee rent payments until August 2028. DBRS has requested the servicer provide the details of the subleasing activity for Motorola. Other major tenants at the property include MTS-MM L.L.C., which occupies a total of 5.9% of NRA with a scheduled lease expiration in December 2025 and Conagra Brands Inc., which occupies 4.6% of NRA with a scheduled lease expiration date in May 2031. Three of the four largest tenants at the property are investment-grade tenants with leases expiring past the loan term.

According to CoStar, there 46 office properties with at least one million sf of rentable space within a three-mile radius of the subject. These properties report average vacancy and availability rates of 12.5% and 18.3%, respectively. The subject continues to outperform the market and has maintained an average occupancy rate of approximately 95.0% since 2006.

The ratings assigned to Class D materially deviate from the higher ratings implied by the quantitative results. DBRS considers a material deviation to be a rating differential of three or more notches between the assigned rating and the rating implied by the quantitative results that is a substantial component of a rating methodology. The deviations are warranted given because of sustainability of loan trends has not yet been 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.

The principal methodology is CMBS North American Surveillance, which can be found on dbrs.com under Methodologies.

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

The rated entity or its related entities did participate in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

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