DBRS Morningstar Assigns Ratings to Citigroup Commercial Mortgage Trust 2020-555

DBRS, Inc. (DBRS Morningstar) assigned ratings to the following classes of Commercial Mortgage Pass-Through Certificates, Series 2020-555 issued by Citigroup Commercial Mortgage Trust 2020-555:

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

All classes will be privately placed. The Class X balance is notional. All trends are Stable.

Our affiliate rating agency, Morningstar Credit Ratings, LLC (MCR), assigned preliminary ratings on these certificates on February 18, 2020. In connection with the ongoing consolidation of DBRS Morningstar and MCR, MCR previously announced that it had placed its outstanding ratings of these certificates Under Review–Analytical Integration Review. Upon issuance of DBRS Morningstar’s final ratings on these certificates, MCR has today withdrawn its outstanding preliminary ratings. In accordance with MCR’s engagement letter covering this transaction, upon withdrawal of MCR’s outstanding preliminary ratings, the DBRS Morningstar final ratings will become the successor ratings to the withdrawn preliminary MCR ratings. Information about the preliminary MCR ratings can be found at www.morningstar.com/learn/dbrs.

The subject is a recently built, 52-story 598-unit luxury apartment building with a charter school and a small amount of ground-floor retail space situated at the corner of 10th Avenue from 40th Street to 41st Street on the west side of Midtown Manhattan. The collateral is the leasehold interest in the building. The total unit count includes 447 market-rate apartments, 150 affordable apartments, and one manager unit. Opened in 2016 and completed in 2017, the property is one of several new residential towers in the area just northeast of Hudson Yards, an important area of Manhattan that has had substantial redevelopment over the past decade. The property has an amenity package in line with the local market, including two swimming pools, two gyms, a large social room with catering kitchen, a children’s room, a game room with arcade machines and a bowling alley, a pet grooming service, and magnificent views especially from the higher floors. The developer and owner is Extell Development Company (Extell), which is owned by Gary Barnett. Extell has developed more than 20 million square feet of mostly residential real estate since its founding in 1989.

The property’s first tenants were signed in November 2016. Leasing the market unit was slow for the first three months, then picked up significantly with at least 15 leases signed each month for nine consecutive months from February through October 2017. After a lull in activity through the winter, 73 market-rate leases were signed from May through August 2018, bringing occupancy to 83% in fewer than two years. Over the next 13 months, new lease signings brought market-rate occupancy up to 96.4% and overall occupancy to 97.2% by September 2019. An updated February 2020 rent roll showed that overall occupancy had dropped to 93.8% and market-rate occupancy to 92.2%.

The appraisal identified specifics with respect to the Section 421-A regulations which govern affordable housing requirements. Of the property’s 150 affordable units, at least 60 must be for up to 40% of Area Median Income (AMI), 60 for up to 60% of AMI, and 30 for up to 120% of AMI. AMI is defined as the median household income for the region which, for New York City in 2019, was $96,100.

When the property began to lease up in the fourth quarter of 2016, New York City rent laws required all buildings subject to the regulations of Section 421-A to adhere to rent stabilization. Under rent stabilization, rent increases are limited to a percentage determined each year by the Rent Guidelines Board (the Board). The Board considers also considers landlord expenses for individual apartment improvements or major capital improvements (MCIs) to determine how much rents will be allowed to increase.

New laws governing rent increases went into effect on June 14, 2019. Under the new guidelines established by The Housing Stability and Tenant Protection Act of 2019, allowed rent increases for MCIs reduced to 2% from 6%. Previously, a landlord could deregulate a vacated apartment for which the rent exceeded $2,700 per month or increase the rent for a vacated regulated apartment by 20% between tenants; the new laws no longer permit either practice. At renewal, tenants must also be offered preferential rent (or stabilized rent) as opposed to maximum legal rent. The maximum legal stabilized rent can be charged only to a new tenant.

DBRS Morningstar’s ratings reflect, in part, its positive view of urban high-rise multifamily properties generally and the quality and amenities of 555 10th Avenue specifically, as well as the property’s location in one of the nation’s best apartment markets, which is also the nation’s financial center and one of its top employment and cultural centers. The leasehold cap rate of 5.85% DBRS Morningstar used to determine the property’s sustainable value and the positive qualitative adjustments DBRS Morningstar applied in its LTV Benchmark Tool for this transaction reflect DBRS Morningstar’s view of some of the property’s key strengths.

In DBRS Morningstar’s analysis of the property’s submarket, it considered the extent of ongoing new apartment construction units and the potential effects on the property’s performance and ability to generate sustainable cash flow. The Midtown West submarket has been adding new apartment buildings at a moderate pace, but has not seen a dramatic difference in vacancy, which has ranged from 4.5% to 6.0% over the past three years. The Reis, Inc. forecast anticipates the delivery of slightly more than 3,000 units through 2023, or about 9% of current inventory, while vacancy heads lower to 2.5%. DBRS Morningstar accounted for the potential effects of new supply in DBRS Morningstar’s concluded vacancy loss and concessions, which total 10.3% of DBRS Morningstar’s concluded gross potential rent from apartments.

The property’s amenities and desirable location in a top-tier market that continues to attract high-skilled labor and major employers, as well as the experienced sponsor, mitigate the risks of new construction in the submarket.

The loan metrics for the mortgage loan of $400.0 million are adequate and suggest fairly low risk of a term default. DBRS Morningstar’s net cash flow coverage on an interest-only (IO) basis is 1.76 times (x) on the senior debt and 1.15x on the combined senior and mezzanine notes. The mortgage loan is 92.8% of DBRS Morningstar’s sustainable value of $430.8 million, which is 51.3% lower than the as-is appraised value.

Class X-A is an 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.

For supporting data and more information on this transaction, please log into www.viewpoint.dbrsmorningstar.com. DBRS Morningstar provides analysis and in-depth commentary in the DBRS Viewpoint platform.

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

With regard to due diligence services, DBRS Morningstar was provided with the Form ABS Due Diligence-15E (Form-15E), which contains a description of the information that a third party reviewed in conducting the due diligence services and a summary of the findings and conclusions. While due diligence services outlined in Form-15E do not constitute part of DBRS Morningstar’s methodology, DBRS Morningstar used the data file outlined in the independent accountant’s report in its analysis to determine the ratings referenced herein.

The principal methodology is North American Single-Asset/Single-Borrower Ratings 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 Morningstar 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 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.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at info@dbrs.com.

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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