DBRS Morningstar Assigns Ratings to SG Commercial Mortgage Securities Trust 2020-COVE

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

-- 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 (low) (sf)
-- Class F at B (low) (sf)
-- Class X at BBB (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 Upon issuance of DBRS Morningstar’s final ratings on these certificates, MCR has today withdrawn its outstanding preliminary ratings.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of MCR’s outstanding preliminary ratings, the DBRS Morningstar final ratings will become the successor ratings to the withdrawn preliminary MCR ratings.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 loan is secured by a 283-unit, Class A luxury multifamily property built in 1967 along the waterfront in Tiburon, California, across the bay from San Francisco. The property consists of 33 two- and three-story apartment buildings and a single-story clubhouse/management office building. There are 428 designated parking spaces and an additional 63 spaces of street parking is available for a total of 1.7 spaces per unit. Each unit has at least one designated parking space. The collateral spans 20.12 acres, however, a portion of the property includes some submerged land/tidal area and the appraisal estimates that the approximate usable land area is 13.61 acres, noting that portions of some buildings were constructed on piers that are in the submerged land/tidal area. Because it is in a flood zone, flood insurance is required for the entire property. The property has been extensively renovated with 272 units and the clubhouse/management building was renovated between 2014 and 2016 at a total cost of $39.31 million, or $138,895 per unit. The remaining 11 units, all three- and four-bedrooms units, were renovated in 2017 and 2018 with high-end, condominium-quality luxury finishes for $11.08 million, or $39,146 per unit, and are known as the Pointe Homes. Unit amenities include open-concept kitchen and living room areas, an upgraded kitchen package with stainless-steel Bertazzoni range and microwave, Fisher & Paykel refrigerator, GE dishwasher and in-unit washer dryer, quartz countertops, and a woodburning fireplace. Floor finishes include carpet, wood plank, and tile, depending on the room. The Pointe Homes have custom cabinetry, indoor-outdoor fireplaces, and floor-to-ceiling operable glass doors along with custom-designed closets. Many units have a view of Richardson Bay and some units, including the Pointe Homes, have San Francisco city views. The property has 20 different floorplans and all units have private patios or balconies. Some units have vaulted ceilings wine refrigerators and a separate storage unit.

The Cove at Tiberon apartments offers an attractive lifestyle option for renters in San Francisco’s robust multifamily market. Located just across the Golden Gate Bridge from San Francisco, the luxury waterfront apartments are accessible by automobile or nearby ferry to San Francisco’s downtown area and many units have beautiful city views. On-site amenities, which include a 52+-slip marina, a private beach, and both indoor and outdoor pools and spas, take advantage of the property’s location on the northern end of San Francisco Bay. Recent high-end renovations to the units and amenities, as well as services that allow for easy enjoyment of the property’s desirable location, should continue to attract tenants seeking an active lifestyle in the Bay area’s top-tier apartment market. The garden-style property offers residents 20 different floorplan configurations, ranging in size from one to four bedrooms, which allows The Cove at Tiburon to accommodate active singles as well as families who are drawn to the area’s highly sought-after school district in Marin County.

Marin County is also famous for its restrictive development regulations. As early as the late 1960s, Marin activists have sought to restrain growth for the sake of the environment. Currently, almost 85% of the county is off limits to development, resulting in limited new supply and a perennially low vacancy rate among the county’s multifamily apartments. Reis, Inc. (Reis) reports that the South Marin residential submarket is the smallest of the 11 San Francisco neighborhoods and minimal new apartment development has kept historic vacancy rates below 5% since 2004. Reis projects South Marin’s vacancy rate to be around 3.8% by 2024 after 134 new units are expected to be added in 2023, a 1.8% increase to the current inventory of 7,422 units. Class A units, like The Cove at Tiberon, number only 4,059, according to Reis.

The sponsor has invested $50.4 million ($178,042 per unit) in capital improvements since acquiring the property in 2013. In addition to extensive exterior and common-area renovations, all apartment units were reconfigured and extensively renovated with updated, high-end finishes. Post-renovation, average rents at the property increased 83.2% from a propertywide average of $2.62 per square foot (psf) in 2014 to $4.80 psf average in-place rents at all non-Pointe Place units.

Amenities at the Cove include an approximately 52- to 55-boat slip marina programmed with the assistance of a Coast Guard licensed captain, a sunset deck, three pools (two outdoor and one indoor), two hot tubs, as well as a clubhouse with a business center and fitness center. The recently completed renovations also provide for lifestyle amenities including move-in assistance, dry cleaning, towel service at pool, the ability for residents to book sailing trips through the boat slip marina, complimentary use of kayaks and paddleboards, adult fitness camp, and yoga in the clubhouse. The Cove at Tiburon is located directly on the waterfront in south Marin County and many units have unobstructed views of the San Francisco skyline. Comparable new supply is severely constrained because it is difficult to obtain approval from local authorities for development and construction, particularly in proximity to protected wetlands. To protect the borrower from any future liability stemming from the property’s location adjacent to wetlands, the lender required an environmental insurance policy.

While the property’s use is conforming, the property is legally nonconforming with respect to parking. Because of changes in the zoning ordinance subsequent to its development in 1963, existing parking at the property is deficient by 51 parking spaces. The borrower is not required to alter the current structure to comply with existing or new laws; however, the borrower may not be able to rebuild the premises as is in the event of a substantial casualty loss. As a mitigant, the borrower must obtain law and ordinance coverage for the property

The loan is structured with a recycled special-purpose entity (SPE). The borrower has given backward-looking representation, from the date of the SPE’s formation, that it does not carry any prior liabilities. Additionally, if the borrower’s SPE representations are breached, this triggers a guarantee from the sponsor.

The DBRS Morningstar loan-to-value ratio is significant at 102.8%. The high leverage point, combined with the lack of scheduled amortization, could result in potentially elevated refinance risk at loan maturity.

Class X 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.

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.

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/dbrs-morningstar-provides-update-on-rating-methodologies-in-light-of-measures-to-contain-coronavirus-disease-covid-19.

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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