DBRS Confirms All Classes of COMM 2016-667M Mortgage Trust

DBRS Limited (DBRS) confirmed all classes of Commercial Mortgage Pass-Through Certificates, Series 2016-667M (the Certificates) issued by COMM 2016-667M, as listed below:

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

All trends are Stable.

The rating confirmations reflect the stable performance of the transaction, which remains in line with DBRS’s expectations at issuance. The transaction consists of a $214 million trust loan secured by the fee interest in one of Midtown Manhattan’s Class A trophy office buildings located at the corner of Madison Avenue and 61st Street, one block east of Central Park. The whole loan consists of an additional senior $40.0 million A-2 pari passu note that has been contributed to the CD 2016-CD2 CMBS transaction. The property contains 248,667 sf of office space as well as 16,681 sf of retail space, 7,565 sf of which is a half-block of prime Madison Avenue retail frontage. The loan has a ten-year term that is Interest-Only (IO) throughout.

The property was constructed in 1985 by Hartz Mountain Industries, Inc., a sponsor-affiliated firm, and has remained under the same ownership since, undergoing $6.5 million in upgrades and modernization since 2013. Hartz Financial Corporation, the loan’s sponsor, is wholly owned by The Hartz Group, Inc., an experienced commercial real estate owner and manager with an extensive real estate portfolio consisting of roughly 200 properties, totaling over 38.0 million sf. The property has colloquially been referred to as the “country club” of office properties, as each potential tenant is interviewed by the sponsor, which has chosen to not execute leases with trading firms. The sponsor is focused on maintaining the premier luxury brand it has established by being extremely particular about the tenant mix and using established word-of-mouth marketing to attract potential tenants to solidify the property’s position as one of New York City’s premier trophy office buildings.

At issuance, the property had a ten-year average occupancy rate of 96.3%; however, occupancy dropped when the former second-largest tenant, Berenson Inc. (Berenson), which had represented 11.5% of the net rentable area (NRA) at an average rental rate of $99.64 psf, terminated its lease early and downsized its space significantly in November 2016 to 1.2% of the NRA. In conjunction with its downsizing, Berenson paid a $4.7 million lease termination fee and signed a new five-year lease through November 2021 at $175 psf gross. As of the June 2018 rent roll, the property was 79.1% occupied with an average rental rate of $161.45 psf gross. The former Berenson space remains vacant and is currently listed as available on the sponsor’s website. According to CoStar, office properties greater than 100,000 sf within a half-mile of the subject reported an average vacancy rate of 13.0% and an average rental rate of $82.95 psf gross. While the subject trails the submarket in terms of occupancy, this appears to be a conscious choice by the sponsor, as it prefers to sign leases with high-profile tenants. The in-place average rental rate is significantly higher at $161.45 psf gross, confirming its status as a Class A premier office trophy property in the submarket. Given the experience of the sponsor, the attractiveness of the subject and the strong historical occupancy, DBRS expects the property will lease up to the submarket average vacancy rate and then return to its historical highs.

The largest tenants at the property are Loews Corporation (Loews; 15.6% of NRA; lease expires May 31, 2022), Crestview Advisors (Crestview) (7.4% of NRA; lease expires December 31, 2018) and Sciens Management (Sciens; 5.8% of NRA; lease expires July 31, 2024). The subject serves as the headquarters for both Loews and Sciens. Crestview will be vacating its space at the conclusion of its lease and will be moving its offices to 590 Madison Avenue for a top-floor space in January 2019. The June 2018 rent roll has indicated that two tenants will be commencing leases in September 2018 for a total of 6.3% of NRA. These tenants include Willoughby Capital Holdings (3.2% of NRA lease, expiring January 31, 2024) and Gulfstream Aerospace Corp. of Texas (3.1% of NRA lease, expiring August 31, 2028). The net effect on the occupancy rate, assuming no other leases are signed or current tenants vacate before the departure Crestview, results in an occupancy rate of 78.2%. Inclusive of Crestview, tenants totaling 13.6% of the NRA have lease expirations throughout 2018; however, in 2019 and 2020 tenants combining to occupy only 6.3% of the NRA have scheduled lease expirations, minimizing continued near-term rollover risk.

At YE2017, the amortizing debt service coverage ratio (DSCR) was 2.23 times (x), indicative of a 7.2% debt yield. In comparison, the DBRS term DSCR and debt yield are 2.93x and 9.4%, respectively. The decrease is directly attributable to the occupancy decline experienced since issuance.

Class X-A are interest-only (IO) certificates that reference 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.

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrs.com. The platform includes loan level-data for the entire CMBS universe, as well as deal and loan-level commentary for all DBRS rated transactions.

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.

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.

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