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

DBRS Limited (DBRS Morningstar) confirmed all classes of Commercial Mortgage Pass-Through Certificates, Series 2016-667M issued by COMM 2016-667M Mortgage Trust, 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 loan is secured by a Class A trophy office property located in Midtown Manhattan at the corner of Madison Avenue and 61st Street, one block east of Central Park. The property was built in 1985 and consists of 248,667 square feet (sf) of office space and 16,681 sf of retail space. The $254.0 million whole loan is interest-only (IO) for the entirety of its 10-year term and served to refinance existing debt. This transaction consists of a $214.0 million trust loan, part of a $254.0 million whole loan that also consists of an additional senior $40.0 million A-2 pari passu note that was contributed to the CD 2016-CD2 transaction, not rated by DBRS Morningstar. The loan is sponsored by Hartz Financial, a subsidiary of Hartz Group, Inc., one of the largest privately held, full-service real estate companies in the U.S.

The rating confirmations reflect the overall stable performance of the transaction, which remains in line with DBRS Morningstar’s expectations. As of the December 2020 rent roll, the property reported an occupancy rate of 85.3% at an average rental rate of $173.42 compared with the YE2019 occupancy of 84.5% at an average rental rate of $167.70 per square foot (psf). The property has a diverse rent roll with the largest tenant, Loews Corporation (Loews), representing 15.5% of the net rentable area (NRA) with a lease expiry in May 2024 and the next-largest tenant, Servcorp Madison (Servcorp), occupying 11.5% of the NRA with a lease expiry in June 2024. Servcorp is a coworking company under a management and service agreement, which allows the borrower to collect a portion of the company’s operations and which generated a net operating income of $1.3 million in 2020 compared with the borrower’s projections of $125 psf to $130 psf, or $3.9 million to $4.1 million, once operations are stabilized.

The loan was placed on the servicer’s watchlist in October 2019 because of a large water main break that damaged the property’s electrical and elevator systems and resulted in all tenants receiving rent abatements. According to the servicer, restoration was completed with all the tenants resuming full rents by mid-2020. As of the April 2021 remittance, the loan remains current and the servicer reported a YE2020 debt service coverage ratio (DSCR) of 1.93 times (x) compared with the YE2019 DSCR of 1.71x, and the DBRS Morningstar DSCR of 2.53x. The YE2020 effective gross income improved year-over-year but was below the DBRS Morningstar figure of $42.2 million, a trend that was likely largely the result of the rent abatement periods granted following the water main break..

According to a Q4 2020 Reis report, the property fell under the Plaza submarket, which reported average asking rent of $100.00 psf and an average vacancy rate of 10.2%, with an absorption rate expected to average 297,000 sf annually through YE2022, amounting to 10.7% of the projected metropolitan total. Over the same period, vacancy rates are expected to rise to 12.2%. Although in-place cash flows have declined since issuance and the property has exposure to two tenants likely significantly affected by the pandemic in Loews and Servcorp, the property’s trophy status and strong sponsorship are considered mitigating factors. In addition, the DSCR remains healthy and there are significant reserves in place, including $3.7 million in tenant reserves and $423,090 in replacement reserves, as of the April 2021 loan level reserve report.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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.

The DBRS Viewpoint platform provides additional information on this transaction and underlying loans including DBRS Morningstar metrics, commentary, servicer-reported cash flows, and other performance-related data.

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com. The platform includes issuer and servicer 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 methodology is the North American CMBS Surveillance Methodology (March 26, 2021), which can be found on 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 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.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

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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