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 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 rating confirmations reflect the overall stable performance of the collateral property, which has recently improved with new leasing activity, with cash flows expected to move back in line with DBRS expectations at issuance. The transaction consists of a $675.0 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. The subject was constructed in 1957 and is considered one of the premier office towers in the Manhattan Plaza District. 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 $125.0 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, New York. Vornado alone owns and operates over 23.0 million sf of Leadership in Energy and Environmental Design–certified office and retail product. At issuance, the sponsor retained approximately $594.0 million of cash equity in the deal.

According to the January 2019 rent roll, the subject was 92.6% occupied. The retail portion of the collateral, representing approximately 10.6% of the net rentable area (NRA), has been struggling to maintain stable long-term retail tenants after the vacancy of Crate and Barrel (C&B) in August 2015, which was contemplated at issuance. The retail space was 46.5% occupied at an average rental rate of $709.16 per square foot (psf) as of the most recent rent roll compared with the respective figures of 25.2% and $655.55 in January 2018. CELINE is the newest retail to take occupancy since last review; the tenant signed a lease starting August 2018 that runs through February 2029 at an average rental rate of $782.55 psf. The tenant is occupying 10,223 sf (1.7% of the building NRA and 16.1% of the retail NRA). The remaining 53.5% of the retail NRA was recently leased to Sotheby’s at the end of 2018. The tenant signed a 15-year lease at an average rental rate of $91.60 psf, occupying 37,772 sf until December 2023, with 11 months of rent abated. With these developments, the total occupancy rate for the property is expected to improve to approximately 98.9%.

The office portion of the property represents roughly 89.4% of the total NRA and has achieved consistently high occupancy levels since issuance. Per the January 2019 rent roll, the office space was 97.4% occupied at an average rental rate of $100.00 psf compared with the respective figures of 96.4% and $100.08 psf. Investment-grade tenants on long-term leases occupy 63.4% of the NRA, including Ralph Lauren and Memorial Sloan Kettering Cancer Center (MSKCC). Ralph Lauren, at the property since 1989, has corporate headquarters at the subject on a lease through December 2024. MSKCC operates a medical office at the subject on a lease through July 2023. New office tenants signed in the last year include Lomas Capital Management, LLC (1.1% of the NRA; from December 2018 through January 2023) at $95.00 psf and BC Partners (1.1% of the NRA; from June 2018 through January 2027) at $98.00 psf. Notably, there are no tenants rolling in 2019, and rollover is minimal through the next year as well, with tenants representing 6.6% of the NRA scheduled to roll.

As C&B’s exit was contemplated at issuance, several reserves and guarantees were provided to mitigate risks surrounding its lease and potential exit. 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 March 2019 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 March 2019 remittance, that reserve had a balance of $5.0 million. The sponsor also provided a guaranty to fund all leasing costs incurred in connection with future re-letting of any space previously leased by C&B.

At Q3 2018, the debt service coverage ratio (DSCR) was 1.60 times (x) compared with the YE2017 DSCR of 1.54x and the DBRS Term DSCR derived at issuance of 2.05x. The Q3 2018 figure is reflective of a 3.6% increase in net cash flow (NCF) over the prior year-end reporting and a 27.0% decrease over the DBRS Term NCF figure. For the purposes of this review, DBRS calculated an updated DBRS NCF figure, factoring in recent leasing activity (excluding Sotheby’s, as the tenant is not in occupancy), historical operating expense ratios and below-the-line deductions for capital expenditures and leasing costs. This adjusted DBRS NCF figure results in a DBRS Term DSCR of 2.01x, just below the DBRS Term DSCR derived at issuance of 2.06x. Given the property’s concentration of long-term investment-grade tenancy, the asset’s prominent status within the submarket and the sponsors’ significant equity in the transaction, as well as the expected rebound in in-place cash flows over the next year, DBRS expects the loan will be successfully repaid at loan maturity in 2020.

The Class X-A certificates are 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 are subject to surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed or discontinued by DBRS.

DBRS provides 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 North American CMBS Surveillance Methodology, which can be found on www.dbrs.com under Methodologies & Criteria. 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, which can be found on www.dbrs.com in the Commentary tab under Regulatory Affairs. 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.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

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

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