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

DBRS Limited (DBRS) confirmed the ratings of the Commercial Mortgage Pass-Through Certificates issued by Morgan Stanley Capital Barclays Bank Trust 2016-MART (the Trust) as follows:

-- Class A at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (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. The loan is secured by a 3.7 million-square-foot (sf; based on DBRS analysis) 24-story Class B mixed-use building known as Merchandise Mart situated on the bank of the Chicago River in the River North neighborhood of downtown Chicago. The Leadership in Energy and Environmental Design 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 2.0 million sf of office space; 1.3 million 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 to 60.5% of the net rentable area (NRA) as of April 2019 from approximately 30.0% of the NRA in 2010, which 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 the $550.0 million Trust loan and the $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-backed security (CMBS) transaction but may do so. The five-year loan is interest-only (IO) throughout, and the companion note has not been contributed to a CMBS transaction as of the date of this press release.

According to the trailing three months ending March 31, 2019, financials, the annualized debt service coverage ratio (DSCR) was 4.78 times (x) compared with the YE2018, YE2017 and YE2016 DSCRs of 3.94x, 4.38x and 3.83x, respectively, and the DBRS Term DSCR at issuance of 4.31x. There was a 9.9% decrease in net cash flow from YE2017 to YE2018, primarily driven by an 84.3% increase in real estate taxes. The property was subject to a triennial reassessment by Cook County in 2018, and the assessed value increased by a 68.0%. The borrower was not able to fully recapture the increased common area maintenance costs in 2018; however, the associated costs have been recaptured thus far in 2019. DBRS considers the decline in the YE2018 DSCR to be a one-time event and for future DSCRs to rebound to previous levels.

According to the April 2019 rent roll, the property was 94.3% occupied with an average rental rate of $41.48 per sf (psf), a slight decrease over the occupancy rate of 95.1% at issuance and the April 2018 occupancy rate of 97.9%. The tenant profile is considered strong with four of the seven largest tenants (27.9% of NRA) being investment grade. The largest tenant is Motorola Mobility LLC (Motorola), which leases a total of 16.5% of the NRA, with a scheduled lease expiration date in August 2028. Motorola has been subleasing significant portions of its space since 2015, as the company continues to downsize. According to an August 13, 2018, article published by “Crain’s Chicago Business,” Motorola physically occupies approximately 208,000 sf of the 609,071 sf that is leased. Although Motorola is no longer owned by Google LLC (Google), Motorola’s lease continues to be guaranteed by Google until August 2028. Motorola has a termination option in September 2023, which is subject to a fee of $89.00 psf, or $54.2 million.

Other major tenants at the property include MTS-MM LLC, which occupies a total of 6.1% of the NRA with a scheduled lease expiration in December 2025, and Conagra Brands, Inc., which occupies 4.6% of the NRA with a scheduled lease expiration in May 2031. Furthermore, PayPal Holdings, Inc. increased its footprint at the collateral by 39,600 sf to 4.0% of the NRA, making it the fourth-largest tenant with a lease expiration in September 2022. Upcoming lease rollover risk is minimal, as 2.0% of the NRA had lease expirations in 2019.

Class X-NCP is an 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 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 the 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. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The DBRS long-term rating scale definition indicates that ratings of CCC or lower are assigned when the bond is highly likely to default or default is imminent, thereby prevailing over a sensitivity analysis.

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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