DBRS Confirms Ratings of Madison Avenue Trust 2013-650M

DBRS Limited (DBRS) confirmed the ratings for all classes of Commercial Mortgage Pass-Through Certificates Series 2013-650M (the Certificates) issued by Madison Avenue Trust 2013-650M (the Trust) 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-story Class A office and retail tower consisting of 523,608 square feet (sf) of office space 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 is interest-only (IO) for the entire seven-year term and the trust mortgage loan is supplemented by an IO mezzanine loan in the amount of $125 million.

The loan sponsor is a joint venture between Vornado Realty L.P., OP USA Debt Holdings L.P. and other institutional investors. The sponsors are highly experienced real estate professionals with a significant presence in Manhattan. At issuance, the sponsor retained approximately $594.0 million of cash equity in the deal.

According to the April 2018 rent roll, the property was 89.6% occupied at an average base rent of $142.40 per square foot (psf). The occupancy rate has increased year over year over by 2.5%; however, it has decreased since issuance by 1.7%. The office portion of the collateral was 96.4% occupied, compared with 94.0% in April 2017 and 90.5% at issuance. The average rental rate for the office space was $99.42 psf, compared with $100.08 psf in April 2017. The retail space was 25.2% occupied, a decline from both the April 2017 and issuance figures of 36.2% and 100%, respectively. Occupancy in the retail portion of the property has been depressed since the anchor tenant in place at issuance, Crate & Barrel (C&B), vacated the property in August 2015. C&B’s exit was contemplated at issuance, with several reserves and guarantees provided for in the loan document to mitigate risks surrounding the C&B lease and the tenant’s potential exit. In April 2018, the average rental rate for the retail portion was $655.66 psf, compared with the April 2017 average rental rate of $658.59 psf.

A portion of the C&B space was temporarily occupied in 2017 and early 2018, but the only permanent tenant signed to date is Moncler, which was signed for a space representing 14.6% of the vacant space on a ten-year lease that began in February 2016, paying a rental rate of $668 psf expiring August 2026. Its annual rent of $6.0 million represents 27.7% of C&B’s annual rent. The sponsor reports that similar luxury retailers are being targeted for the remainder of the vacant retail space; however, the sponsor noted the retail conditions on Madison Avenue are still not ideal in the face of a difficult retail environment, making it a slow go for backfilling with those targets. The sponsor also reports that restaurants have shown interest in the second-floor space, but the cost to build out the space is unfeasible given high construction cost and expected low rent. The property does benefit from a strong location with desirable adjacent properties, suggesting market improvements will be particularly beneficial for the subject.

As at May 2018, CoStar reports that the Plaza District submarket had a vacancy rate of 10.1% and an average rental rate of $88.75 psf, suggesting that, overall, the property is outperforming the market. The CoStar market report also noted the area has experienced an increase in vacancy of late, but still maintains premium average rents as compared with other New York City submarkets.

The three largest tenants at the property, representing 67.7% of the net rentable area (NRA), include Ralph Lauren Corporation (46.5% of the NRA, through December 2024), MSKCC (16.9% of the NRA, through July 2023) and Willett Advisors (4.3% of the NRA, through December 2024). Both Ralph Lauren Corporation and MSKCC are investment-grade tenants. There are two tenants rolling in 2018 totaling 2.2% of the NRA, and notably, no tenants are rolling in 2019. Recent leasing activity includes three small tenants signed, collectively representing 2.5% of the NRA.

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 at the May 2018 remittance, that reserve had a balance of $14.0 million. In addition, a leasing reserve was funded with monthly contributions required through the loan term; as of the May 2018 remittance, that reserve had a balance of $4.9 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 the future re-letting of any space previously leased by C&B.

As at YE2017, the debt service coverage ratio (DSCR) was 1.54x, compared with the YE2016 DSCR of 1.17x and the DBRS Term DSCR derived at issuance of 2.05. The YE2017 figure is reflective of a 32% increase in NCF over the prior year and a 22.8% decrease over the issuer’s UW figure. However, the borrower's reported figures, and the servicer's analysis, do not include the distributions provisioned by the C&B rent-restructuring reserve and the sponsor guarantee to cover rental shortfalls for the former C&B space. Although in-place cash flows are not expected to improve to issuance levels in the near term given the high remaining vacancy in the retail portion of the property, DBRS believes the healthy submarket dynamic, as well as the property’s premier location within Manhattan, will serve to mitigate those risks in the near term. Longer term, these factors should improve the likelihood of replacement tenants signed for the vacant retail portion as retail dynamics shift and stabilize with current shopper trends.

Class X-A is an interest-only (IO) certificate that references a single rated tranche or multiple rated tranches. The IO rating mirrors the lowest-rated applicable reference obligation tranche adjusted upward by one notch if senior in the waterfall.

All ratings will be subject to ongoing surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed or discontinued by DBRS.

As part of this review, DBRS has provided updated analysis and in-depth commentary in the DBRS Viewpoint platform for this transaction.
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Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is CMBS North American Surveillance, which can be found on dbrs.com under Methodologies. For a list of the Structured Finance related methodologies that may be used during the rating process, please see the DBRS Global Structured Finance Related Methodologies document on www.dbrs.com. Please note that not every related methodology listed under a principal Structured Finance asset class methodology may be used to rate or monitor an individual structured finance or debt obligation.

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 under Related Documents or by contacting us at info@dbrs.com.

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 for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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