DBRS Morningstar Assigns Ratings to COMM 2016-787S Mortgage Trust

DBRS, Inc. (DBRS Morningstar) assigned ratings to the Commercial Mortgage Pass-Through Certificates, Series 2016-787S issued by COMM 2016-787S Mortgage Trust (the Issuer) as follows:

-- 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.

These certificates are currently also rated by DBRS Morningstar’s affiliated rating agency, Morningstar Credit Ratings, LLC (MCR). In connection with the ongoing consolidation of DBRS Morningstar and MCR, MCR previously announced that it had placed its outstanding ratings of these certificates Under Review–Analytical Integration Review and that MCR intended to withdraw its outstanding ratings; such withdrawal will occur on or about May 7, 2020. In accordance with MCR’s engagement letter covering these certificates, upon withdrawal of MCR’s outstanding ratings, the DBRS Morningstar ratings will become the successor ratings to the withdrawn MCR ratings. Information about the MCR ratings, including the history of the MCR ratings, can be found at www.morningstarcreditratings.com.

On March 1, 2020, DBRS Morningstar finalized its “North American Single-Asset/Single-Borrower Ratings Methodology” (the NA SASB Methodology), which presents the criteria for which ratings are assigned to and/or monitored for North American single-asset/single-borrower (NA SASB) transactions, large concentrated pools, rake certificates, ground lease transactions, and credit tenant lease transactions. For further information on the NA SASB Methodology, please see the press release dated March 1, 2020, on the DBRS Morningstar website at www.dbrsmorningstar.com.

The subject rating actions are the result of the application of the NA SASB Methodology in conjunction with the “North American CMBS Surveillance Methodology,” as applicable. Qualitative adjustments were made to the final loan-to-value (LTV) sizing benchmarks used for this rating analysis.

The 10-year interest-only (IO) loan provided whole-loan proceeds of $780.0 million to facilitate the $1.95 billion acquisition of the 1.7 million square foot (sf), 50-story, Class A office building in Manhattan. A $220.0 million mezzanine loan with a coterminous maturity date and $950.0 million of sponsor equity also supported the acquisition. The whole loan is split into eight senior pari passu notes (A-1 through A-8) totaling $566.0 million and a junior B note totaling $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 a joint venture between the California Public Employees’ Retirement System and Commonwealth Partners, LLC.

The property is located in the Midtown West submarket, between the Plaza District and Columbus Circle areas, and comprises 1.6 million sf of office space, 53,000 sf of ground-floor retail, and 68,000 sf of storage and auditorium space on the concourse level. The property’s seventh and eighth floors connect via an eight-story annex building. The second through sixth floors are not connected to the main building, but are considered part of the collateral. The property has benefited from historically high occupancy rates with high-quality tenants as investment-grade entities lease 47.0% of the net rentable area (NRA). The largest tenants are BNP Paribas SA (26.0% of NRA; rated AA (low) with a Stable trend by DBRS Morningstar) whose lease expires in December 2022, Sidley Austin LLP (20.2% of NRA) whose lease expires in May 2037, and Willkie Farr & Gallagher LLP (17.3% of NRA) whose lease expires in August 2027, which collectively represent 63.5% of NRA. The property serves as BNP Paribas SA’s U.S. headquarters with signage on the building entries. BNP Paribas SA had an early lease termination option in December 2019, which it did not exercise.

The December 31, 2019, rent roll reported an occupancy rate of 95.6% with a weighted-average rental rate of $75.38 per sf (psf), which aligns with the historical average occupancy rate in the mid-90% range since 1995; this indicates stable demand. The property benefits from its location in the Midtown West submarket, which reported an average vacancy rate of 7.7% per a Q4 2019 Reis, Inc. (Reis) report. In-place average rents also fall within the Q4 2019 Reis average asking rent of $80.41 psf. The property continues to perform on par with its competitors, benefitting from its proximity to public transportation, Central Park, Times Square, the Plaza District, and Rockefeller Center. Significant new supply was recently added to the submarket as the Rockefeller Group completed a $600 million conversion of the 2.1 million sf 1271 Avenue of the Americas into a multitenant office property delivered in Q4 2019. The converted office property was predominately preleased and should not compete with the collateral for tenants in the near term. Reis projected that 203,000 sf of new supply will be delivered by 2022 as there are high barriers to entry. The collateral will be well insulated over the near to medium term.

DBRS Morningstar is monitoring BNP Paribas SA’s upcoming lease expiry in December 2022. BNP Paribas SA has one 10-year extension option and must provide 18 months’ notice. The tenant has historically shown its long-term commitment to the collateral with numerous space expansions and a signage agreement. As a mitigant, the loan is structured with a full cash sweep if BNP Paribas SA opts to vacate upon lease expiry.

In the analysis for these rating actions, the DBRS Morningstar net cash flow (NCF) figure of $65.4 million derived at issuance was accepted and a cap rate of 6.5% was applied, resulting in a DBRS Morningstar Value of $1.0 billion, a variance of 48.0% from the appraised value at issuance of $1.9 billion. The DBRS Morningstar Value implies an LTV of 77.6% compared with the LTV of 40.3% on the appraised value at issuance.

The DBRS Morningstar NCF was reanalyzed for the subject rating action to confirm its consistency with the “DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria.” The NCF figure applied as part of the analysis represents a -16.0% variance from the Issuer’s NCF, primarily driven by gross potential rents and reserves for tenant improvements (TI) and leasing commissions (LC). As of YE2019, the servicer reported a NCF figure of $79.5 million, a 21.7% variance from the DBRS Morningstar NCF figure, primarily a factor of TI and LC reserves.

DBRS Morningstar applied a cap rate at the lower end of the DBRS Morningstar Cap Rate Ranges for office properties, reflecting the property’s desirable location, high barriers to entry, high-quality tenancy, and stable operating history. In addition, the 6.5% cap rate DBRS Morningstar applied is substantially above the implied cap rate of 4.0% based on the Issuer’s underwritten NCF and appraised value.

DBRS Morningstar made positive qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis, totaling 5.0% to account for cash flow volatility, property quality, and market fundamentals. DBRS Morningstar also made other negative adjustments to account for the debt structure and all-in LTV.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

Classes X-A is an 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.

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com The platform includes loan-level 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 methodologies are the North American Single-Asset/Single-Borrower Ratings Methodology and North American CMBS Surveillance Methodology, which can be found on www.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 www.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.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

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. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The DBRS Morningstar long-term rating scale definition indicates that ratings of CCC or lower are assigned when the bond is highly likely to default or default is imminent, thereby prevailing over a sensitivity analysis.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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