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 that performance of the underlying property will rebound following the recent master lease agreement executed by the sponsor and the sponsor’s continued investment into the subject collateral. 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-story property totals 570,784 square feet (sf), including four ground-floor retail spaces totalling 17,144 sf.

With the November 2022 remittance, the loan transferred to special servicing as the servicer determined the loan was at risk of imminent default. More recently, however, the servicer noted the transfer was defined as a complex consent request in light of a new agreement between the sponsors, Vornado Realty Trust and Rudin with Citadel Enterprises America LLC (Citadel), which is an affiliate of Kenneth C. Griffin, the founder and CEO of Citadel. The servicer advised DBRS Morningstar of a loan modification under consideration in November 2022. The details of the proposal have not been included in the servicer’s commentary for the transaction to date; however, according to a December 9, 2022, press release from Vornado, major terms of the agreement include the following: (1) Citadel to enter into a master lease with Vornado for 350 Park (subject) on an “as is” basis for 10 years retroactive to June 2022 at an annual rent of $36 million ($63 per square foot gross); (2) Citadel to also enter into a master lease with Rudin for the adjacent property at 40 East 52nd (noncollateral); and (3)Vornado and Rudin to enter into a joint venture to purchase 39 East 51st Street for $40 million, with the eventual aim of creating a premier development site between the three aforementioned parcels.

From October 2024 to June 2030, Griffin will have the following options: acquire a 60.0% interest in a joint venture with Vornado and Rudin that would value the site at $1.2 billion to build a 1.7 million-sf office tower with Citadel occupying approximately 50.0% of the NRA on a prenegotiated 15-year lease or exercise an option to purchase the entire combined site for $1.4 billion without participation from Vornado and Rudin. According to a January 25, 2023, press release from Vornado, the agreement as described above has received all necessary third-party approvals with the master lease now in effect at the subject.

According to the October 2022 rent roll, the collateral was 64.6% occupied, a continued decline from the 74.0% occupancy rate at December 2021, and down from the 98.0% occupancy rate prior to former tenants Ziff’s departure in April 2021. The largest collateral tenants as of October 2022 included Citadel Enterprise Americas (20.4% of the net rentable area (NRA); lease expiry December 2023); Manufacturers & Traders Trust (17.5% of the NRA; lease expiry March 2023); and Marshall Wace North America (6.5% of the NRA; lease expiry September 2032). Through December 2023, tenants cumulatively occupying 43.4% of the subject’s NRA have scheduled lease expirations; however, with the recent master lease now in place, the risk is mitigated. As of the most recent financials provided by the servicer, the loan reported a debt service coverage ratio (DSCR) of 1.33 times (x) for the trailing six months ended June 30, 2022, a decline from the YE2021 and YE2020 figures of 2.21x and 3.03x, respectively.

Although the in-place rental rate and DSCR are expected to further decline with the new master lease in effect, the recent events are viewed as credit positive. The master lease agreement reflects the sponsors’ significant investment and long-term vision for the subject collateral. At issuance, the land beneath the improvements was valued at $410 million, while the fee-simple interest was valued at $710 million as compared with the DBRS Morningstar value of $439 million, derived in 2020. Given the projected post-development value estimates for the site implied by the purchase options cited in Vornado’s December 9, 2022 press release which ranged between $1.2 billion and $1.4 billion, DBRS Morningstar believes the whole loan balance of $400 million remains well insulated against loss. In addition, DBRS Morningstar notes there is significant equity behind the subject loan, with recent investments suggesting high commitment from the loan sponsors. These factors support the rating confirmations and continued Stable trends. DBRS Morningstar also expects the loan to be returned to the master servicer in the near-term.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/396929 (May 17, 2022).

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.

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

The principal methodology is North American CMBS Surveillance Methodology (October 3, 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].

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