DBRS Morningstar Assigns Ratings to VNDO Trust 2016-350P

DBRS Limited (DBRS Morningstar) assigned ratings to the Commercial Mortgage Pass-Through Certificates, Series 2016-350P issued by VNDO Trust 2016-350P 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.

These certificates are currently also rated by DBRS Morningstar’s affiliated rating agency, Morningstar Credit Ratings, LLC (MCR). In connection with the ongoing consolidation of DBRS Morningstar and MCR, MCR previously announced that it had placed its outstanding ratings of these certificates Under Review–Analytical Integration Review and that MCR intended to withdraw its outstanding ratings; such withdrawal will occur on or about May 15, 2020. In accordance with MCR’s engagement letter covering these certificates, upon withdrawal of MCR’s outstanding ratings, the DBRS Morningstar ratings will become the successor ratings to the withdrawn MCR ratings. Information about the MCR ratings, including the history of the MCR ratings, can be found at www.morningstarcreditratings.com.

On March 1, 2020, DBRS Morningstar finalized its “North American Single-Asset/Single-Borrower Ratings Methodology” (the NA SASB Methodology), which presents the criteria for which ratings are assigned to and/or monitored for North American single-asset/single-borrower (NA SASB) transactions, large concentrated pools, rake certificates, ground lease transactions, and credit tenant lease transactions. For further information on the NA SASB Methodology, please see the press release dated March 1, 2020, on the DBRS Morningstar website at www.dbrsmorningstar.com.

The subject rating actions are the result of the application of the NA SASB Methodology in conjunction with the “North American CMBS Surveillance Methodology,” as applicable. Qualitative adjustments were made to the final loan-to-value (LTV) sizing benchmarks used for this rating analysis.

The underlying loan is a first mortgage on 350 Park Avenue, a Class A office property located in the Plaza District submarket of Midtown Manhattan, New York, between 51st and 52nd Streets. The 30-story property totals 570,784 square feet (sf), including four ground-floor retail spaces totalling 17,144 sf and no on-site parking. Originally built in 1961, the property was last renovated in 2012, with several other capital improvement projects undertaken since.

The collateral for the trust consists of a $233.3 million portion of a $400.0 million whole loan amount, represented by four pari passu A notes ($296.0 million) and two subordinate B notes ($104.0 million). The trust collateral consists of two senior A notes totalling $129.3 million and the two subordinate B notes. The two remaining A notes, totalling $166.7 million, were contributed to the GSMS 2017-GS5 ($100.0 million) and JPMDB 2017-C5 ($66.7 million) transactions; DBRS Morningstar rates GSMS 2017-GS5. The interest-only (IO) fixed-rate loan, has a term of 10 years and one month, with maturity scheduled in January 2027. Whole loan proceeds $400.0 million were used to refinance existing debt and return $106.9 million of equity to the borrower. Based on the issuance appraisal of $710.0 million, the borrower had $310.0 million of implied equity remaining in the deal. The sponsor, Vornado Realty Trust (Vornado), is one of the largest publicly traded real estate investment trusts in the United States. Including 350 Park Avenue, which Vornado acquired in 2006, the sponsor currently owns 34 office properties in Manhattan that comprise nearly 20.0 million sf.

The most significant risk is the property’s tenant concentration, as the five largest tenants represent 81.5% of the net rentable area (NRA). These tenants include Ziff Brothers Investments (Ziff Brothers; 50.3% of NRA, expiring April 2021), Manufacturers & Traders (18.0% of NRA, expiring March 2023), Marshall Wace North America (4.9% of NRA, expiring August 2024), Egon Zehnder International (4.6% of NRA, expiring May 2022), and MFA Financial (3.7% of NRA, expiring June 2021).

The loan was added to the servicer’s watchlist in December 2019 following the announcement that Ziff Brothers would be vacating upon lease expiration in April 2021. While this suggests the possibility of a significant decline in the property’s leased rate in the near term, Ziff Brothers had slowly been reducing its footprint in the building over the last decade, and as of November 2019, had sublet approximately 65% of their space to other tenants. According to the servicer, a number of the tenants currently subletting have already signed direct leases while discussions are ongoing for others. The loan was also structured with a springing cash flow sweep to mitigate the Ziff Brothers’ lease rollover, subject to a cap of $25.0 million ($87 per sf (psf)). The cash sweep has been triggered, and as the April 2020 reporting, had built to a reserve amount of $16.9 million ($59 psf).

According to the January 2020 rent roll, the property had an occupancy rate of 8.9% and an average rental rate of $99.20 psf. As of Q4 2019, Reis reported that comparable Class A offices within a 0.25-mile radius of the subject had average rental and asking rates of $88.11 psf and $106.19 psf, respectively, and an average vacancy rate of 10.9%. As of the January 2020 rent roll, Ziff Brothers paid an average rental rate of $88.08 psf, indicating that there could be potential rental upside as the borrower signs direct leases and backfills the space, with tenant improvements and leasing commission costs mitigated by the availability of reserve funds. Several news articles located by DBRS Morningstar noted the sponsor’s plan to redevelop the subject site with a 1,500-foot tower to be built once all existing leases ended; however, those plans may have changed with the economic impact of the ongoing Coronavirus Disease (COVID-19) pandemic.

The DBRS Morningstar NCF derived at issuance was re-analyzed for the subject rating action to confirm its consistency with the “DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria.” The resulting NCF figure of $29.7 million and a cap rate of 6.75% was applied, resulting in a DBRS Morningstar Value of $439.5 million, a variance of 38.0% from the appraised value at issuance of $710.0 million. The DBRS Morningstar Value implies an LTV of 91.0%, as compared with the LTV on the issuance appraised value of 56.3%. The NCF figure applied as part of the analysis represents a -15.3% variance from the Issuer’s NCF, primarily driven by vacancy loss and tenant improvement and leasing commission (TI/LC) costs. As of YE2019, the servicer reported a NCF figure of $34.3, a 15.5% variance from the DBRS Morningstar NCF figure, primarily a factor of vacancy loss and TI/LC costs.

The cap rate applied is at the lower end of the range of DBRS Morningstar Cap Rate Ranges for office properties, reflective of the location, quality, and trophy-asset status. In addition, the 6.75% cap rate applied is above the implied cap rate of 5.1% based on the Issuer’s underwritten NCF and appraised value.

DBRS Morningstar made positive qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis, totalling 3.5% to account for cash flow volatility, property quality, and market fundamentals.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

Class X-A 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 Morningstar.

DBRS Morningstar provides 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.dbrsmorningstar.com. The platform includes loan-level data for most outstanding CMBS transactions (including non-DBRS Morningstar-rated), as well as loan-level and transaction-level commentary for most DBRS Morningstar-rated and -monitored transactions.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodologies are the North American Single-Asset/Single-Borrower Ratings Methodology and North American CMBS Surveillance Methodology, which can be found on www.dbrsmorningstar.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 Morningstar Global Structured Finance Related Methodologies document, which can be found on www.dbrsmorningstar.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.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

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 [email protected].

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar 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 Morningstar 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.dbrsmorningstar.com or contact us at [email protected].

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