Morningstar DBRS Confirms Credit Ratings on All Classes of MAD 2015-11MD Mortgage Trust, Changes Trend on One Class to Negative from Stable

DBRS Limited (Morningstar DBRS) 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)

The trend on Class D was changed to Negative from Stable. All other trends are Stable.

Morningstar DBRS changed the trend assigned to Class D to Negative from Stable with this review to reflect concerns with the loan's upcoming maturity date in September 2025. Although performance of the underlying property remains stable, as discussed further below, Morningstar DBRS notes the potential for significant gap financing needs on the senior loan because of the current lending environment and lack of investor appetite for the office property type. These factors combined could complicate the sponsor's ability to secure takeout financing next year. Mitigating some of this concern is the overall resolution of Credit Suisse AG's (Credit Suisse) merger with UBS AG (UBS) and the continued performance of the underlying asset, which remains in line with Morningstar DBRS' expectations since the last credit rating action in December 2023. As noted in previous credit rating actions, the largest tenant, Credit Suisse, was acquired in June 2023 by UBS. According to a July 2024 press release from UBS that the merger is officially complete and UBS has succeeded to all the rights and obligations of Credit Suisse. The servicer previously confirmed that UBS has been actively relocating its investment banking and trading operations to the subject property. 

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. 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 loan has an upcoming final maturity date in September 2025 with no extension options available.

According to the June 2024 rent roll, the subject was 96.2% occupied, which is static from the YE2023 figure. Credit Suisse remains as the largest tenant at the property, occupying 50.0% of the net rentable area (NRA), with a lease expiry in May 2037. As part of its lease Credit Suisse gave back 3.5% of its NRA in 2022 subject to a $6.1 million termination fee with two remaining termination options, available in 2027 and 2032; each may be exercised for up to a full floor of space or 7.0% of NRA cumulatively. 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, based on an online listing marketing its three floors of space available for lease beginning in May 2025. As of the June 2024 financial statement, the loan reported a trailing twelve month net cash flow (NCF) of $118.9 million for the period ended June 30, 2024, which remains in line with the YE2023 figure of $119.0 million. The debt service coverage ratio (DSCR) for those same periods were reported at 2.59 times (x) and 2.60x, respectively. Based on communications with the servicer, the real estate tax line item was adjusted for the YE2022 and YE2023 reporting periods noting an approximate increase of 40% from what was previously reported. According to Reis, the Midtown South submarket reported a Q3 2024 vacancy rate of 12.7%, which has increased the Q3 2023 figure of 10.7%; however, Reis projects submarket vacancy will decline over the next five years.

Morningstar DBRS maintained its sizing approach for purposes of this review. The Morningstar DBRS value of $1.31 billion, derived in December 2023, is based off of the Morningstar DBRS NCF of $91.9 million and a capitalization rate of 7.00%. The Morningstar DBRS 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%. Morningstar DBRS made positive adjustments to the LTV-sizing benchmarks totaling 3.5% to reflect the historically stable NCF and quality of the improvements, which underwent a $280 million renovation between 2015 and 2017. In the analysis for this review, Morningstar DBRS lowered the market fundamentals adjustment to 1.0% from 2.0% given the increasing vacancy rate in the Midtown South. This resulted in downward credit ratings pressure to the junior bonds in the capital stack, which contributed to the trend change for Class D.

The Morningstar DBRS credit rating assigned to Classes B, C, and D 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, strong occupancy, as well as the high in-place DSCR. As noted, Morningstar DBRS changed the trend on Class D to Negative to reflect the credit ratings pressure indicated by the LTV-sizing benchmarks as well as concerns with the loan's upcoming maturity in September 2025. Should performance of the underlying property decline or the loan default at maturity, Morningstar DBRS may take additional credit rating actions.

Morningstar DBRS' credit ratings on the applicable classes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. Where applicable, a description of these financial obligations can be found in the transactions' respective press releases at issuance.

Morningstar DBRS' long-term credit ratings provide opinions on risk of default. Morningstar DBRS considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued. The Morningstar DBRS short-term debt rating scale provides an opinion on the risk that an issuer will not meet its short-term financial obligations in a timely manner.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS  
There were no Environmental/Social/Governance factor(s) that had a significant or relevant effect on the credit analysis.
 
A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings (August 13, 2024), https://dbrs.morningstar.com/research/437781.

All credit ratings are subject to surveillance, which could result in credit ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by Morningstar DBRS.

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

The principal methodology is North American CMBS Surveillance Methodology (March 1, 2024), https://dbrs.morningstar.com/research/428798.

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

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 info-DBRS@morningstar.com.

The credit ratings were initiated at the request of the rated entity.

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

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

These are solicited credit ratings.

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

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS' outlooks and credit ratings are monitored.

DBRS Limited
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Tel. +1 416 593-5577

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

-- North American Single-Asset/Single-Borrower Ratings Methodology (September 19, 2024), https://dbrs.morningstar.com/research/439699
-- Morningstar DBRS North American Commercial Real Estate Property Analysis Criteria (September 19, 2024), https://dbrs.morningstar.com/research/439702
-- North American Commercial Mortgage Servicer Rankings (August 23, 2024), https://dbrs.morningstar.com/research/438283
-- Legal Criteria for U.S. Structured Finance (October 28, 2024), https://dbrs.morningstar.com/research/441840

A description of how Morningstar DBRS analyzes structured finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/417279 (July 17, 2023).

For more information on this credit or on this industry, visit https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.