DBRS Morningstar Confirms All Ratings on Morgan Stanley Capital Barclays Bank Trust 2016-MART, Removes Under Review with Negative Implications Status

DBRS, Inc. (DBRS Morningstar) confirmed the ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2016-MART issued by Morgan Stanley Capital Barclays Bank Trust 2016-MART (the Issuer):

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

All trends are Stable. The ratings have been removed from Under Review with Negative Implications, where they were placed on April 24, 2020.

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 subject property, the Merchandise Mart (known as theMART), is a 3,648,730-square-foot (sf), 24-story, Class B mixed-use building on the bank of the Chicago River in Chicago’s River North submarket. At the time of its construction in 1930, the property was the largest building in the world. The collateral, which is Leadership in Energy and Environmental Design Gold certified, offers an extensive amenities package that consists of hundreds of premier showrooms, flexible and spacious floorplates, a food court with several fast-casual restaurants scattered on the first and second floors, 325 surface and subterranean garage parking spaces, and a hair and nail salon. Furthermore, the building has direct access to the train platform for two Chicago Transit Authority elevated train lines that stop at the property. The subject has large floorplates, which are approximately 200,000 sf on the first through 18th floors and step back to roughly 8,000 sf on the 24th floor. In addition, the property boasts ceiling heights ranging from 12 feet to 20 feet. Currently, the collateral contains roughly 1,996,195 sf of office space; 1,328,319 sf of showroom space; 214,545 sf of trade show space; 84,507 sf of retail space; 21,227 sf of storage space; and 3,937 sf of riser space. As of October 2019, the property was 94.6% physically occupied. Additionally, during Vornado Realty Trust's (Vornado) earnings announcement for Q1 2020, the firm announced that 231,000 sf of leases at theMART were signed during Q1 2020.

Vornado invested $188.0 million between 2011 and 2015 on capital improvements and tenant allowances with an additional $43.0 million in capital expenditures budgeted for 2016. These investments have transformed the lobby space, upgraded the food court, improved building systems, and attracted a number of new office tenants.

The $675.0 million whole loan is split into a $550.0 million mortgage loan to be held within the trust and a $125.0 million pari passu companion loan to be held outside the trust. The whole loan refinanced $550.0 million of debt, returned $100.0 million of equity to the sponsor, allocated $23.6 million in upfront reserves, and covered $1.3 million in closing costs. The five-year loan is interest only throughout. In total, the whole loan encompasses seven separate notes: A-1-A, A-1-B, A-1-C, A-1-D, A-1-E, A-1-F, A 1-G. The A-1-A, A-1-B, and A-1-C notes are contributed to the trust (the Trust Notes) and the remaining notes are held by the companion loan holder outside the trust (the Companion Notes). The Trust Notes and the Companion Notes are pari passu with each other.

The DBRS Morningstar net cash flow (NCF) derived at issuance was reanalyzed for the subject rating action to confirm its consistency with the “DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria.” The resulting NCF figure was $70.1 million and a cap rate of 7.75% was applied, resulting in a DBRS Morningstar Value of $904.2 million, a variance from the appraised value of $1.64 billion. The DBRS Morningstar Value implies an LTV of 74.6% compared with the LTV of 41.2% on the appraised value at issuance. The NCF figure applied as part of the analysis represents a -22.9% variance from the Issuer’s NCF. As of the year-to-date period ended September 2019, the servicer reported a NCF figure of $64.0 million, which translates to an annualized figure of $78.0 million. The growth is primarily a factor of rental growth since issuance. In the event that all rental income associated with retail, showroom, and design space was vacant, DBRS Morningstar estimates that the loan would have an implied debt service coverage ratio of 1.02 times for the lowest-ranked Class D bond. While this is a low coverage ratio, it illustrates that the property would still be able to cover its debt service in a highly stressed scenario; thus, DBRS Morningstar assigned a Stable trend to the bonds in this securitization.

The cap rate DBRS Morningstar applied is at the middle end of the DBRS Morningstar Cap Rate Ranges for office properties, reflecting the Chicago office market fundamentals, property quality, and favorable location within the market. In addition, the 7.75% cap rate DBRS Morningstar applied is above the implied cap rate of 5.5% 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 totaling 2.5% to account for cash flow volatility, property quality, and market fundamentals.

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

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.

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 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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