DBRS Morningstar Confirms Ratings of COMM 2016-787S Mortgage Trust

DBRS, Inc. (DBRS Morningstar) confirmed the ratings of the following Commercial Mortgage Pass-Through Certificates, Series 2016-787S issued by COMM 2016-787S Mortgage Trust:

--Class A at AAA (sf)
--Class X-A at AAA (sf)
--Class B at AA (sf)
--Class C at A (low) (sf)
--Class D at BBB (low) (sf)

All trends are Stable.

The rating confirmations reflect the overall stable performance of the transaction since the last review. The transaction continues to benefit from the loan collateral’s desirable location and historically high occupancy by high-quality tenants as investment-grade entities lease 50.4% of the property’s net rentable area (NRA). The 10-year interest-only (IO) loan provided whole-loan proceeds of $780.0 million to facilitate the $1.95 billion acquisition of 787 Seventh Avenue, a 1.7 million square foot (sf), Class A office building in Manhattan, within the Midtown West submarket. The whole loan is split into eight senior pari passu notes (A-1 through A-8) totalling $566.0 million and a junior B note totalling $214.0 million. This trust includes six of the senior pari passu notes totaling $426.0 million and the junior B note for a total trust balance of $640.0 million. Notes A-7 and A-8 were contributed to the DBJPM 2016-C1 Mortgage Trust (rated by DBRS Morningstar) and JPMDB Commercial Mortgage Securities Trust 2016-C2 (not rated by DBRS Morningstar) transactions, respectively. The loan is sponsored by Fifth Street Properties, LLC (Fifth Street), a joint venture between the California Public Employees’ Retirement System and Commonwealth Partners, LLC.

The servicer provided a rent roll dated September 30, 2021, that showed the property was 99.8% occupied. The top five tenants accounted for 87.7% of the NRA and approximately 89.8% of the office base rents, with an average rental rate of $67.30 per square foot (psf). According to the Reis Q4 2021 Midtown West submarket report, the average vacancy rate in the submarket was 11.5% and the average rental rate was $68.95 psf, with average effective rents of $56.60 psf. Although Midtown West has been generally resilient amid the Coronavirus Disease (COVID-19) pandemic, effective rents have been affected because of the significant concessions offered for leases signed in the last few years, much like other submarkets in New York and elsewhere in the country.

The largest tenant at the property is BNP Paribas SA (BNP) (29.4% of the NRA; rated AA (low) with a Stable trend by DBRS Morningstar). The property serves as BNP’s U.S. headquarters with signage on the building entries. The tenant currently occupies 517,200 sf; however, the servicer has confirmed that the tenant has been operating on temporary leases for 223,041 sf of that space and is expected to vacate those temporary spaces in 2022, reducing BNP’s footprint to about 290,000 sf (16.8% of NRA). The lease for the permanent space was renewed through December 2041 in the last few years. With the contraction of the BNP lease, total occupancy is expected to decline to 81.1%. In addition, several of the BNP spaces have been receiving temporary rental abatements as part of their original leases or as incentives for the renewal, a factor that will affect in-place cash flows through those terms. The March 2022 reserve report for the transaction recorded total reserves of $31.8 million.

The second-largest tenant, Sidley Austin LLP (20.1% of NRA), executed an amendment to its lease in 2017 that extended the lease term through May 2037.

As of June 2021, the servicer reported that the property had an annualized NCF of $56.1 million, with a debt service coverage ratio (DSCR) of 1.85 times (x) (inclusive of the subordinate loan, which is held in the subject trust) and occupancy rate of 99.8%. This compares with $89.3 million, 2.93x, and 97.0%, respectively, at YE2020 (fiscal year-end month is June 2020), and $77.8 million, 2.56x, and 98.3%, respectively, at issuance. Cash flows have declined largely as a result of free rents on the BNP renewal but, while the contraction of the BNP space is expected to further affect cash flows in the near term, the DSCR is expected to remain generally healthy. Further, DBRS Morningstar notes that the transaction benefits from very strong experienced sponsorship in Fifth Street, which should be well equipped to navigate re-leasing efforts.

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.

Classes 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 Morningstar 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 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 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].

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