DBRS Morningstar Confirms All Classes of MAD 2015-11MD Mortgage Trust With Stable Trends, Removes Ratings From Under Review With Negative Implications

DBRS Limited (DBRS Morningstar) confirmed its credit ratings on the Commercial Mortgage Pass-Through Certificates, Series 2015-11MD issued by MAD 2015-11MD Mortgage Trust as follows:

-- Class 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. With this review, DBRS Morningstar removed all classes from Under Review with Negative Implications, where they were initially placed on March 24, 2023, following the announcement that the collateral property’s largest tenant, Credit Suisse AG (Credit Suisse), would be acquired by UBS AG (UBS).

Credit Suisse, which was widely reported to be having financial difficulties earlier this year, was ultimately acquired by UBS as part of a transaction that closed on June 12, 2023. Credit Suisse is the largest tenant at the collateral office property for the underlying loan in this transaction and DBRS Morningstar expressed concerns the tenant could downsize or vacate as part of the UBS acquisition. However, the servicer has since confirmed that UBS has been actively relocating its investment banking and trading operations to the subject property. Based on the servicer’s commentary in December 2023, there are no ongoing discussions between the borrower and UBS/Credit Suisse regarding the Credit Suisse lease and the servicer expects the space to continue to be fully used.

The borrower used the 10-year $1.08 billion interest-only whole loan to acquire the collateral office property. The trust debt totals $708.2 million, which is split between senior debt totaling $397.5 million and junior subordinate debt totaling $310.7 million. The whole-loan balance includes a $366.8 million senior companion loan that is pari passu with senior trust debt notes. There is also a $325 million mezzanine loan that is co-terminous with the mortgage trust. SL Green Realty Corp. is the mortgage loan sponsor and guarantor. The collateral property is composed of the fee, leasehold, and reversionary interest in the condominium units for 11 Madison Avenue, a Class A, 29-story, 2.3 million-square-foot office tower in Manhattan’s Midtown South submarket. The building is between 24th Street and 25th Street, occupying an entire city block that overlooks Madison Square Park.

According to the September 2023 rent roll, the subject was 96.2% occupied, remaining in line with the 97.0% occupancy rate as of year-end (YE) 2022. Credit Suisse is the largest tenant at the property, occupying 50.0% of the net rentable area (NRA), with a lease expiring in May 2037. In 2022, Credit Suisse gave back a floor of space representing approximately 3.5% of the NRA in exchange for a termination fee of $6.1 million, which was deposited into a reserve account. Credit Suisse has two remaining termination options, available in 2027 and 2032; each may be exercised for up to a full floor of space. Other major tenants at the property include Sony (24.5% of the NRA, lease expiry in January 2031) and Yelp (8.1% of the NRA, lease expiry in April 2025). Yelp appears to be vacating at lease expiry, as an online listing DBRS Morningstar located showed the full space available for lease beginning in May 2025. As of Q3 2023, the loan reported an annualized net cash flow (NCF) of $133.4 million, which remains in line with the YE2022 figure of $130.2 million. The Q3 2023 debt service coverage ratio (DSCR) was reported at 2.90 times (x), up slightly from the YE2022 DSCR of 2.84x. Financial performance has been stable and continues to improve year over year since issuance.

For purposes of this review, an updated DBRS Morningstar NCF of $91.9 million was analyzed, which is a decline from the $102.0 million DBRS Morningstar NCF derived in 2020 when DBRS Morningstar assigned credit ratings to the transaction. The updated DBRS Morningstar NCF reflects the removal of the long-term credit treatment for Credit Suisse, as well as increased tenant improvement and leasing commission costs over those assumed in 2020. These updates were deemed appropriate given the lack of confirmation with the servicer that UBS formally agreed to the terms of the Credit Suisse lease. Using a capitalization rate of 7.00%, DBRS Morningstar concluded an updated value of $1.31 billion; this value is a slight decline as compared with the DBRS Morningstar value of $1.6 billion derived in 2020, which considered a 6.5% capitalization rate. The DBRS Morningstar value of $1.31 billion represents a variance of 44.1% from the appraised value of $2.4 billion from issuance and implies a loan-to-value ratio (LTV) of 81.9%. In the analysis for this review, DBRS Morningstar made positive adjustments to the LTV sizing benchmarks totaling 4.5%. These are lower than the positive adjustments that totaled 5.0% when credit ratings were assigned in 2020 because of lower credits applied for cash flow volatility and property quality in the analysis for this review.

The DBRS Morningstar credit rating assigned to Class B is higher than the results implied by the LTV sizing benchmarks by more than three notches. The variance is warranted given the continued robust financial performance of the subject property since credit ratings were assigned in 2020 and the servicer’s confirmation that the Credit Suisse space is expected to be fully used following the UBS acquisition, as well as the high in-place DSCR that suggests the term default risk remains quite low. The 2025 maturity is upcoming and DBRS Morningstar will continue to monitor as the lending environment continues to evolve over the next year.

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/416784 (July 4, 2023).

All credit ratings are subject to surveillance, which could result in credit 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 (March 16, 2023; https://www.dbrsmorningstar.com/research/410912).

Other methodologies referenced in this transaction are listed at the end of this press release.

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 credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

DBRS Morningstar had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the credit rating process.

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

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

-- North American Single-Asset/Single-Borrower Ratings Methodology (October 19, 2023;
https://www.dbrsmorningstar.com/research/422174)

-- DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 22, 2023; https://www.dbrsmorningstar.com/research/420982)

-- North American Commercial Mortgage Servicer Rankings (August 23, 2023; https://www.dbrsmorningstar.com/research/419592)

-- Interest Rate Stresses for U.S. Structured Finance Transactions (June 9, 2023; https://www.dbrsmorningstar.com/research/415687)

-- Legal Criteria for U.S. Structured Finance (December 7, 2023;
https://www.dbrsmorningstar.com/research/425081/legal-criteria-for-us-structured-finance

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/417279.

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