DBRS Morningstar Confirms All Ratings on COMM 2016-667M Mortgage Trust, Removes UR-Dev. Status

DBRS Limited (DBRS Morningstar) confirmed the ratings on the following classes of the Commercial Mortgage Pass-Through Certificates, Series 2016-667M issued by COMM 2016-667M Mortgage Trust:

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

All trends are Stable. The ratings have been removed from Under Review with Developing Implications, where they were placed on November 14, 2019.

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.

Prior to the finalization of the NA SASB Methodology, the DBRS Morningstar ratings for the subject transaction and all other DBRS Morningstar-rated transactions subject to the methodology in question were previously placed Under Review with Developing Implications, as the proposed methodology changes were material.

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 transaction consists of a $214.0 million trust loan, part of a $254.0 million whole loan that also includes a senior $40.0 million A-2 pari passu note contributed to the CD 2016-CD2 commercial mortgage-backed securities (CMBS) transaction. The loan is sponsored by Hartz Financial, a subsidiary of Hartz Group, Inc., one of the largest privately held, full-service real estate companies in the United States. The rating confirmations reflect DBRS Morningstar’s outlook for the performance of the collateral property, a trophy Class A office building located in Midtown Manhattan in New York, at the corner of Madison Avenue and 61st Street, one block east of Central Park. Although in-place cash flows have been down over the last few years, driven by occupancy declines since 2016, the debt service coverage ratio (DSCR) remains healthy and there are significant reserves in place ($2.6 million as of the March 2020 remittance) for leasing costs. In addition, DBRS Morningstar notes that the Plaza submarket Class A vacancy rate of 8.8% as reported by Reis as of YE2019 (down from 9.3% at YE2018) suggests the above-market availability of approximately 12.0% of the net rentable area (NRA) at the subject is not a factor of demand.

The property continues to command above-market rents, as recently signed office leases have averaged a gross rental rate of approximately $150 per square foot (psf), compared with submarket averages of approximately $103 psf. Concerns surrounding newly signed coworking tenant, Servcorp Limited (Servcorp; 11.5% of NRA, lease expires June 2024), persist because of the potentially volatile nature of the tenant’s business and the structure of its management agreement lease which provides for the sponsor to collect a percentage of revenues and profits generated from Servcorp’s coworking tenants (as opposed to a traditional lease structure). Prior to securing this lease, the space was reportedly being marketed at a gross rental rate of $100 psf. The space was previously occupied by Berenson Inc. (Berenson), the former second-largest tenant which terminated its lease and downsized shortly after provisional ratings were issued for this transaction, as noted by DBRS Morningstar in its final Rating Report at issuance.

At issuance, the property had a 10-year average occupancy rate of 96.3%; however, occupancy dropped when Berenson downsized its space in November 2016, to 1.2% of the NRA from 11.4% of the NRA. In conjunction with its downsizing, Berenson paid a $4.7 million lease termination fee and signed a new five-year lease through November 2021 at $175 psf gross. The collateral was 76.1% occupied as of March 2019, before Servcorp was signed. As of December 2019, the collateral was 87.6% occupied.

At YE2019, the loan reported a DSCR of 1.71 times (x), compared with the YE2018 DSCR of 2.23x, and the DBRS Morningstar Term DSCR at issuance of 2.93x. In July 2019, the property was closed to all tenants until September after a large water main break caused damage to the electrical and elevator systems of the building. All tenants received rent abatements during this period because of the disruption. The loan was added to the watchlist following the incident, with insurance proceeds of over $11 million collected. Restoration work is ongoing, with an estimated completion in late spring 2020. For the purposes of this review, DBRS Morningstar calculated an updated DBRS Morningstar NCF figure of $21.0 million, based on in-place leases as of the December 2019 rent roll and inclusive of a conservative revenue assumption for the Servcorp space, with the remaining vacancy grossed up to averages for recently signed leases at the subject and a vacancy factor of 10.0% applied.

The resulting NCF figure was $21.0 million and a cap rate of 6.5% was applied, resulting in a DBRS Morningstar Value of $322.8 million, a variance of -56% from the appraised value at issuance of $740.0 million. The DBRS Morningstar Value implies an LTV of 78.7%, as compared with the LTV on the issuance appraised value of 36.3%. The NCF figure applied as part of the analysis represents a -18% variance from the Issuer’s NCF, primarily driven by lower gross potential rent and higher tenant improvement and leasing commission assumptions. As of YE2019, the servicer reported a NCF figure of $14.1, a -32.8% variance from the DBRS Morningstar NCF figure, primarily a factor of lower revenue from rental abatements offered following the broken water main incident.

The cap rate applied is at the lower end of the range of DBRS Morningstar Cap Rate Ranges for office properties, reflective of the property’s status as a Class A trophy asset in a strong market. In addition, the 6.5% cap rate applied is substantially above the implied cap rate of 3.5% 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 totalling 5.0% to account for cash flow volatility, property quality, and market fundamentals. DBRS Morningstar also made other negative adjustments to account for the potential of future mezzanine financing and a high DBRS Morningstar 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.

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.

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 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.

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 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@dbrsmorningstar.com.

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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