DBRS Morningstar Confirms Ratings on MAD Mortgage Trust 2017-330M, Removes Under Review with Developing Implications Status

DBRS Limited (DBRS Morningstar) confirmed all classes of Commercial Mortgage Pass-Through Certificates, Series 2017-330M issued by MAD Mortgage Trust 2017-330M (the Issuer) as follows:

-- Class 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 (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 rating confirmations reflect the overall stable performance of the transaction. The loan is interest only over its seven-year term and is collateralized by the fee and leasehold interests in an 849,372-square foot (sf) Class A Leadership in Energy and Environmental Design Gold office property at 330 Madison Avenue in Midtown Manhattan, New York.

The subject property is one block west of Grand Central Terminal and two blocks east of Bryant Park on the corner of Madison Avenue and 42nd Street. Originally constructed in 1965, the 39-story building has a progressive, tiered floor design with the largest floorplates (approximately 42,000 sf) on Floors 2 through 12, various setbacks on Floors 13 through 21, and the smallest floorplates (approximately 9,700 sf) on Floors 22 through 39, making it a great fit for smaller boutique firms. In 2014, the sponsor funded a $121.0 million award-winning renovation and reposition, which included a new exterior glass facade and reconfigured/modernized lobby. Postrenovation, the sponsor executed over 600,000 sf of new and renewal leases.

According to the servicer, the borrower noted that the subject property remained closed as of June 2020 because New York City shut down as a result of the Coronavirus Disease (COVID-19). The borrower continues to work on a plan to reopen the building, which would include changes to elevator capacity and adjustments to the HVAC system for fresh air intake. In addition, the borrower noted that operating expenses have reduced by approximately $350,000 following the shutdown in March 2020. All tenants remain current on rent payments except for Ann Taylor (less than 1.0% of the net rentable area (NRA)), which has not made rent payments from April 2020 to June 2020; however, the borrower noted that the tenant would resume paying rent in July 2020.

Recent news reports have stated that Munich Reinsurance Company has closed its acquisition of the subject property from majority interestholder, Abu Dhabi Investment Authority (ADIA), as part of a transaction in November 2019. According to a March 6, 2020, “Daily Beat” article, the deal implies a total asset value of $900.0 million, down from the as-is appraised value of $950.0 million at issuance. DBRS Morningstar requested the terms of the transaction and, as of the date of this press release, a response is pending. ADIA has held an ownership interest in the property for over 30 years and is one of the largest sovereign wealth funds in the world with an estimated $700 billion in assets under management.

According to the December 31, 2019, rent roll, the property was 95.1% occupied with an average gross rental rate of $76.83 per sf (psf) compared with the issuance occupancy rate of 95.3% and the base rent of $76.05 psf. The ground-floor retail portion and office portion had an average rental rate of $281.37 psf and $64.83 psf, respectively. The DBRS Morningstar Base Rent at issuance was $71.81 psf. The three largest tenants, representing a combined 51.2% of the NRA, are Guggenheim Partners (28.2% of the NRA), which uses the property as its headquarters and whose lease expires in March 2028; HSBC Bank USA, National Association (13.3% of the NRA), which recently extended its lease an additional five years to April 2025; and Jones Lang Lasalle Incorporated (9.8% of the NRA), whose lease expires in November 2021. The fourth-largest tenant, Point72 Asset Management, L.P. (7.2% of the NRA), announced plans to consolidate its offices into the new 55 Hudson Yards development and will likely vacate the subject at its lease expiry in August 2021.

According to Q1 2020 Reis, Inc. data, the Grand Central submarket reported a vacancy rate of 7.7% and average gross rent of $80.51 psf across all office properties. The five-year average vacancy rate was 8.6% and asking rents should grow by 3.0% in the next five years. The loan was structured with a leasing reserve funded monthly with a balance of $1.4 million reported for May 2020.

The YE2019 debt service coverage ratio (DSCR) is 2.37 times (x) compared with the YE2018 DSCR of 2.30x and the Issuer-derived DSCR of 2.56x at issuance. A 3.2% increase in total effective gross income, largely a result of decreased vacancy/collection loss, drove the net cash flow increase in 2019. According to the December 31, 2019, rent roll, rent abatements have generally burned off since issuance. There was an upfront reserve of $3.4 million collected at issuance to fund these free-rent periods and the June 2019 reporting confirms that those funds have been fully disbursed. As of December 2019, three tenants (14.5% of the NRA) were receiving concessions or were in a free-rent period for an unspecified time frame.

The resulting NCF figure used was $39.9 million and a cap rate of 6.75% was applied, resulting in a DBRS Morningstar Value of $591.2 million, a variance of 37.8% from the appraised value at issuance of $950.0 million. The DBRS Morningstar Value implies an LTV of 84.6% compared with the LTV on the appraised value of 52.6% at issuance.

The cap rate DBRS Morningstar applied is at the low end of the DBRS Morningstar Cap Rate Ranges for office properties, reflecting the property’s condition, strong historical occupancy, and desirable Grand Central submarket location. In addition, the 6.75% cap rate DBRS Morningstar applied is substantially above the implied cap rate of 4.7% 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 4.5% to account for property quality and market fundamentals.

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.

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.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

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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