DBRS Confirms All Classes of COMM 2016-667M Mortgage Trust

DBRS Limited (DBRS) confirmed all classes of Commercial Mortgage Pass-Through Certificates, Series 2016-667M issued by COMM 2016-667M Mortgage Trust, as listed below:

-- 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 transaction consists of a $214.0 million trust loan, part of a $254.0 million whole loan that also consists of an additional senior $40.0 million A-2 pari passu note contributed to the CD 2016-CD2 CMBS transaction. The loan is sponsored by Hartz Financial, a subsidiary of Hartz Group, Inc., one of the country’s largest privately held, full-service real estate companies. The rating confirmations reflect DBRS’s outlook for the performance of the collateral property, a trophy Class A office building located in Midtown Manhattan, 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 DSCR remains healthy and there are significant reserves in place ($2.0 million as of the August 2019 remittance) for leasing costs. In addition, DBRS notes that the Plaza submarket Class A vacancy rate of 8.5% as reported by Reis as of Q2 2019 (down from 10.6% at Q2 2018) 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. However, DBRS does note there are unknowns surrounding a recently signed agreement with the coworking firm Servcorp (11.5% of NRA). Based on the limited information provided to date by the servicer, Servcorp was in place as of July 2019 at the property under a five-year management agreement, instead of a traditional lease. The terms of the management agreement are unknown, but DBRS believes the agreement provides for the sponsor to collect a percentage of revenues and profits generated from Servcorp’s coworking tenants. 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 who terminated their lease and downsized shortly after provisional ratings were issued for this transaction, as noted by DBRS in its final Rating Report at issuance.

At issuance, the property had a ten-year average occupancy rate of 96.3%; however, occupancy dropped when Berenson downsized its space in November 2016, to 1.2% 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. Additionally, Crestview Advisors, L.L.C. (7.4% of NRA) vacated at the end of its lease in December 2018 and the servicer reports the space has since been filled by two existing tenants that have expanded. The March 2019 rent roll provided by the servicer showed an occupancy rate of 76.1%, suggesting occupancy will improve to 87.6% when accounting for the space occupied by Servcorp.

At YE2018, the loan reported a DSCR of 2.19 times (x), compared with the YE2017 DSCR of 2.23x, and the DBRS Term DSCR at issuance of 2.93x. For the purposes of this review, DBRS calculated an updated DBRS NCF figure of $20.1 million, based on in-place leases as of the March 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 newly derived DBRS net cash flow figure resulted in a DBRS Term DSCR of 2.47x and a DBRS loan to value of 88.6%. Although these metrics suggest risk is slightly elevated from issuance, DBRS notes mitigating factors in the property’s ownership by an affiliate of Hartz Group, Inc., a highly experienced commercial real estate owner and manager, as well as the property’s trophy status in a submarket displaying strong leasing dynamics and the $2.0 million in available leasing reserves for re-tenanting the existing vacancy.

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.

DBRS 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.dbrs.com. The platform includes loan-level data for most outstanding CMBS transactions (including non-DBRS rated), as well as loan-level and transaction-level commentary for most DBRS-rated and -monitored transactions.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is North American CMBS Surveillance Methodology, which can be found on www.dbrs.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 Global Structured Finance Related Methodologies document, which can be found on www.dbrs.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.

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@dbrs.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS 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 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.dbrs.com or contact us at info@dbrs.com.

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