DBRS Morningstar Confirms All Classes of VNDO Trust 2016-350P

DBRS Limited (DBRS Morningstar) confirmed its ratings on all classes of 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.

The rating confirmations and Stable trends reflect DBRS Morningstar’s expectation of the continued stable performance of the underlying property and unchanged credit view since the last review. 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 loan is secured by the first mortgage on 350 Park Avenue, a Class A office property in the Plaza District submarket of Midtown Manhattan, New York, between 51st Street and 52nd Street. The 30-storey property totals 570,784 square feet (sf), including four ground-floor retail spaces totalling 17,144 sf. The loan has been on the servicer’s watchlist since December 2019 for a servicing trigger event, initially due to the lockbox activation following the downsizing of the former largest tenant, Ziff Brothers Investments (Ziff); however, the loan is currently being monitored for missing its minimum debt yield threshold of 7.25% for the period ended March 2021.

According to the December 2021 rent roll, the collateral is 73.6% occupied at an average rental rate of $89.85 per sf (psf), a decline from the 98.0% occupancy rate prior to Ziff’s departure in April 2021. The largest collateral tenants include Citadel Enterprise Americas (20.6% of the net rentable area (NRA); lease expiry December 2023), Manufacturers & Traders Trust (17.6% of the NRA; lease expiry March 2023), and Marshall Wace North America (6.5% of the NRA; lease expiry September 2032). By March 2023, 34.5% of the subject’s NRA has lease expirations, including the second-largest tenant, Manufacturers & Traders Trust. According to a Q4 2021 Reis report, the Plaza District submarket reported an office vacancy rate of 11.4% and an average asking rental rate of $99.77 psf.

As of the most recent financials, the loan reported a debt service coverage ratio (DSCR) of 1.74 times (x) for the trailing nine months ended September 30, 2021, a decline from the YE2020 and YE2019 DSCRs of 2.24x and 2.37x, respectively. The decline in DSCR and occupancy is due to the former largest tenant, Ziff (50.3% of the NRA), vacating upon its lease expiry in April 2021. At issuance, it was noted that Ziff had sublet approximately half of its space to numerous tenants, and, in January 2021, Vornado Realty Trust executed direct leases with Ziff’s subtenants, Citadel Securities and Square Mile Capital. In addition to the drop in occupancy, the subject’s operating expense ratio has continued to increase from 38.0% at issuance to 43.5% at YE2020 and 49.0% as of September 2021, driven primarily by increases in real estate taxes.

Although the loan’s economic vacancy has risen with Ziff’s departure, physical occupancy at the subject has in fact increased to 73.6% as of December 2021 from 63.6% at December 2019. Per Property Shark, the collateral has approximately 138,000 sf, representing 24.0% of the NRA, of space available for lease. Furthermore, as of the February 2022 reserve report, $3.2 million is held in the Ziff termination reserve account. The sponsor has also provided a $25 million guaranty in lieu of the 18-month cash flow sweep period, which was subject to a $25 million cap agreement providing some capital for the sponsor to re-lease the space. The lockbox was deactivated as a result of this guaranty being posted. DBRS Morningstar expects performance to gradually improve as leasing momentum continues to build and free rent abatements for newly signed tenants burn off.

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 interest-only (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.

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 North American CMBS Surveillance Methodology (March 4, 2022), 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.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482.

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.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577