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 3.7 million-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% currently, 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 the companion note to a future commercial mortgage securitization transaction, but may do so. The five-year loan is interest-only throughout.

According to the Q1 2018 financials, the annualized debt service coverage ratio (DSCR) was 4.76 times (x), compared with the YE2017 DSCR of 4.44x, YE2016 DSCR of 3.88x and DBRS Term DSCR at issuance of 4.37x. The property also benefits from being low leveraged, with a 41.2% loan-to-value (LTV) ratio.

According to the April 2018 rent roll, the property was 97.9% occupied with an average rental rate of $33.63 psf, an increase over the DBRS issuance occupancy of 95.1%. The largest tenant at the subject is Motorola Mobility LLC (Motorola), which leases a total of 16.5% of NRA with a scheduled lease expiration date in August 2028 and had used the subject as its headquarters with approximately 2,000 employees. Upon the sale of Motorola from Google to Lenovo in 2014, the workface has been continually decreasing at the subject, with the most recent wave of layoffs occurring in March 2018 as an additional 200 employees were laid off, bringing the total head count to approximately 800, according to the Chicago Business Journal article published March 16, 2018. Motorola has been subleasing portions of its space since 2015 and according to two articles by Crain’s Chicago Business, published October 10, 2016, and August 13, 2018, VelocityEHS and Beam Suntory took over approximately 91,000 sf and 110,000 sf of Motorola’s space, respectively. In addition, the article noted that Project44 subleased approximately 42,000 sf of space in 2018 and other smaller tenants filled a portion of the remaining space. The August 2018 article noted that a maintenance supply company, W.W. Grainger, subleases approximately 100,000 sf of Motorola’s space with an option to expand up to 150,000 sf as the tenant will be consolidating its Chicago operations at the subject. The article goes on to state that Motorola’s physical occupancy is approximately 208,000 sf of the total 609,071 sf it directly leases.

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 the lease will continue to be guaranteed by Google until August 2028. Per the loan docs provided at issuance, the tenant has a termination option in September 2023 but is subject to a fee of $89 psf, or $54 million. 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 6.1% 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 are 48 office properties with at least one million sf of rentable space within a one-mile radius of the subject. These properties report average vacancy and availability rates of 11.0% and 13.5%, respectively. The subject continues to outperform the market and has maintained an average occupancy rate of approximately 95.0% since 2006.

Classes X-CP and X-NCP 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.