DBRS Morningstar Assigns Ratings to COMM 2019-WCM Mortgage Trust

DBRS, Inc. (DBRS Morningstar) assigned the ratings to the Commercial Mortgage Pass-Through Certificates, Series 2019-WCM issued by COMM 2019-WCM as follows:

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

All trends are Stable.

These certificates are currently also rated by DBRS Morningstar’s affiliated rating agency, Morningstar Credit Ratings, LLC (MCR). 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 and that MCR intended to withdraw its outstanding ratings. As such, in conjunction with these rating actions by DBRS Morningstar for the subject transaction, the MCR ratings will be withdrawn. In accordance with MCR’s engagement letter covering these certificates, upon withdrawal of MCR’s outstanding ratings, the DBRS Morningstar ratings will become the successor ratings to the withdrawn MCR ratings. Information about the MCR ratings, including the history of the MCR ratings, can be found at www.morningstarcreditratings.com.

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.

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 collateral for the COMM 2019-WCM Mortgage Trust is a $415 million first-lien mortgage loan collateralized by the fee simple interests in 10 properties totaling 2,297 units across seven markets in three states, including Washington, California, and Arizona.

The $415.0 million loan will be used to refinance the existing debt of $305.0 million, pay closing costs of $7.2 million, and return equity of $102.8 million. The sponsor for this transaction is Blackstone, a large global alternative asset manager. The properties are owned by affiliates of Blackstone Real Estate Partners Fund VIII and were acquired between December 2015 and November 2016 for almost $428.9 million. The mortgages are cross-collateralized and cross-defaulted. Each borrower is a special-purpose entity sponsored by BREP VIII.

The underlying loan for the subject transaction is interest only (IO) throughout with a two-year initial term and three one-year extension options. The loan pays a floating-rate interest of Libor plus 159 points.

Blackstone continues to demonstrate its broad experience and ability to identify opportunistic assets and invest the resources necessary to improve performance. Its acquisition of the 10 West Coast Multifamily portfolio assets in 2015 and 2016 is another example of this strategy. Although renovations to this portfolio have been completed for about 43.1% of the total 2,297 units since acquisition, overall performance has improved considerably.

Following the acquisition of the portfolio for nearly $428.9 million, Blackstone invested an additional $30.4 million, or $13,235 per unit, into property improvements. While $12.3 million was for deferred maintenance and asset preservation requirements and another $3.6 million was for replacement of capital items, most of the additional investment, or $14.6 million, was for renovations to the units. The unit renovations typically included installing stainless steel appliances, new countertops and vanities, and new flooring, among other items.

The properties are located in markets with strong multifamily fundamentals with an average vacancy rate of 4.9% based on appraisal data. Submarket vacancy rates are below each of the properties except for Kent, Washington, which was higher at 9.4% compared with the property’s vacancy of 6.8%. Market rents were stronger, averaging $1,552 per unit based on appraisal data and $1,726 per unit based on the appraiser’s average market rent. Based on these market fundamentals, there is enough incentive for continued investment and improvement within the portfolio.

In the analysis for these rating actions, DBRS Morningstar utilized a net cash flow (NCF) figure of $26.1 million and a cap rate of 6.71% was applied, resulting in a DBRS Morningstar Value of $390.4 million, a variance of -31.9% from the appraised value at issuance of $573.7 million. The NCF utilized was the same used by MCR in its original analysis at securitization using the CMBS Property Cash Flow Underwriting and Valuation Guidelines. Such NCF was re-analyzed for the subject rating action to confirm its consistency with the "DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria." The DBRS Morningstar Value implies an LTV of 106.3%, as compared with the LTV on the issuance appraised value of 72.3% The cap rate applied is in the middle of the range of DBRS Morningstar Cap Rate Ranges for multifamily properties and is reflective of the portfolio’s locations in strong core markets and recent capital improvements. In addition, the 6.71% cap rate applied is substantially above the implied cap rate of 4.73% based on the Issuer UW NCF and Appraised Value.

The DBRS Morningstar NCF figure applied as part of the analysis represents a -4.06% variance to the Issuer’s NCF, primarily driven lower expense reimbursements and higher real estate taxes. DBRS Morningstar calculated expense reimbursements based on a three-year weighted average and damages and other income based on the TTM. There is one property, 15Fifty5 Apartments, with 12,219 square feet of retail space that is currently 27.4% vacant. DBRS Morningstar gave credit for only the revenue generated from the four existing tenants, totaling $313,364 per year. We calculated real estate taxes with a 3% inflationary increase over the previous year, except for the four California properties, which we underwrote to reflect real estate taxes that are closer to the market level. The sustainable real estate taxes for these properties were $128,234 higher than the issuers assumption.

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.

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 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.

DBRS Morningstar notes that the above press release was amended on April 13, 2020, to clarify the previous MCR criteria. The amendment was minor and would not impact the understanding of the reader.

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

The principal methodology is the 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.

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

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

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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