DBRS Morningstar Confirms Ratings of COMM 2016-787S Mortgage Trust

DBRS Limited (DBRS Morningstar) confirmed the ratings of the following Commercial Mortgage Pass-Through Certificates, Series 2016-787S issued by COMM 2016-787S Mortgage Trust:

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.

The rating confirmations reflect the overall stable performance of the transaction, which remains in line with DBRS Morningstar’s expectations. The 10-year interest-only (IO) loan provided whole-loan proceeds of $780.0 million to facilitate the $1.95 billion acquisition of 787 Seventh Avenue, a 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 (CALPERS) and Commonwealth Partners, LLC.

The collateral property is located in the Midtown West submarket of New York, and includes 53,000 sf of ground-floor retail, and 68,000 sf of storage and auditorium space on the concourse level. The property continues to benefit from historically high occupancy rates with high-quality tenants, as investment-grade entities lease 47.0% of the net rentable area (NRA) of the property. As of the December 2020 rent roll, the property was 100% occupied, with an average rental rate of $68.37 per square foot (psf) and an average rental rate for the office tenants of $69.90 psf. According to the Reis Q4 2020 Midtown West submarket report, the average vacancy rate for the submarket was 8.7% and the average rental rate was $59.78 psf.

The largest tenant at the property is BNP Paribas SA (29.4% of NRA; rated AA (low) with a Stable trend by DBRS Morningstar). The property serves as BNP Paribas SA’s U.S. headquarters with signage on the building entries. While it was previously reported that this tenant would be reducing their footprint at lease expiration in December 2022, with a July 2020 article by Commercial Observer reporting the tenant was planning to vacate approximately 132,000 sf or 7.7% of the NRA, as of the December 2020 rent roll provided by the servicer, the tenant’s footprint had actually increased to 517,200 sf, with a lease expiration date for all spaces listed at December 2041. DBRS Morningstar has requested confirmation of the terms of the renewal lease, including lease expiration dates for all spaces occupied by the tenant as of the December 2020 rent roll, and as of the date of this press release, the servicer’s response is pending. However, based on previous servicer commentary, it is likely that a significant portion of that space, as much as 189,000 sf or 10.8% of NRA, is on a temporary lease that will expire at the original expiration date in December 2022. With the contraction of this space, net cash flow (NCF) is expected to decline following the lease expiration. Also noteworthy, the tenant was scheduled for a free rent period from July 2021 to May 2022 as part of the previous lease terms, which was accounted for with tenant reserves established at issuance, with the April 2021 loan-level reserve reporting total reserves of $65.3 million.

The third-largest tenant, Willkie Farr & Gallagher LLP (17.2% of NRA), whose lease expires in August 2027, negotiated a lease amendment allowing the tenant to surrender one floor (52,942 sf) by December 2019 in exchange for a $10 million termination fee to be held by the servicer in a leasing reserve. According to the December 2020 rent roll, the relinquished space was taken by BNP Paribas SA, who began paying rent on the space in December 2020. Other large tenants include Sidley Austin LLP (20.1% of NRA, through May 2037), Stifel, Nicolaus & Company, Inc. (12.2% of NRA, through November 2026), and UBS AG New York Branch (8.7% of NRA, through December 2025). These top five tenants represent 87.6% of the property’s total NRA.

As of December 2020 (the property’s fiscal year ends in June), the servicer reported that the property had an annualized NCF of $53.7 million, with a debt service coverage ratio (DSCR) of 1.76 times (x) and an occupancy rate of 100%. This compares with $77.8 million, 2.56x, and 98.3%, respectively, at issuance. While the extensions are below the average rental rate for the submarket and are anticipated to adversely impact the NCF and DSCR in the future, overall the property remains well occupied, still enjoys an overall average rental rate above that of the submarket, and benefits from very strong sponsorship in CALPERS.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262

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 issuance metrics and all historical surveillance commentary on the DBRS Viewpoint platform.

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 methodology is the North American CMBS Surveillance Methodology (March 26, 2021), 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.

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

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577