DBRS Morningstar Assigns Ratings to DC Office Trust 2019-MTC

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

-- Class A at AAA (sf)
-- Class X at AAA (sf)
-- Class B at AA (high) (sf)
-- Class C as AA (low) (sf)
-- Class D at A (low) (sf)
-- Class E at BBB (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such, in conjunction with these rating actions by DBRS Morningstar for the subject transaction, the MCR ratings will be withdrawn.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upon withdrawal of MCR’s outstanding ratings, the DBRS Morningstar ratings will become the successor ratings to the withdrawn MCR ratings.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 DC Office Trust 2019-MTC is a $525.0 million whole loan of which $404 million was issued and held inside the trust. The $525.0 million whole loan is secured by a first priority lien mortgage on the Midtown Center, an 867,654-square-foot, 14-story, Class A office building in Washington, D.C., with ground-floor retail and a three-level below-grade parking garage with 562 spaces.

The $525.0 million loan will be used to refinance the existing debt of $472.3 million, pay closing costs of $3.2 million, fund an upfront reserve $32.3 of and return equity of $17.1 million. The sponsor is Carr Properties, a real estate company headquartered in Washington, D.C.

The trust loan balance of $404 million has a split loan structure composed of three senior pari pasu A notes totaling $121 million and three subordinate B notes totaling $143 million. Collectively, they are the trust notes. The remaining $121 million of the whole loan is composed of pari passu A notes (companion notes), which will not be assets of the trust. Together, the mortgage loan and the companion loans are referred to as the whole loan. The underlying loan for the subject transaction is interest only (IO) throughout its 10 year term and will pay interest at a fixed rate of 3.085%. It has a stated maturity of 14 years with an anticipated repayment date of 10 years.

Midtown Center, which serves primarily as the headquarters for Fannie Mae, is on the northwest corner of L Street and 15th Street and in the heart of downtown Washington, D.C. The property is bordered by M Street to the north, L Street to the south, 15th Street to the east, and 16th Street to the west. Additionally, the property benefits from being situated within two blocks of the McPherson Square Metro rail station as well as three other Metro rail stations that are in walking distance of the property. Furthermore, the property is approximately three blocks north of K Street, which provides good access to various bridges and parkways that lead to northern Virginia and suburban Maryland.

The property is a newly constructed, Class A office campus composed of a 14-story, 867,654-square-foot building, including a penthouse level with outdoor space, ground-floor retail, subterranean parking, and building amenities. The campus was completed in 2018, with high-end interior fit and finishes and exterior curtain walls made of glass and concrete, giving the property a cutting edge and modern appeal superior to the office properties in the surrounding area.

The sponsor, Carr Properties, founded in 1994, is an experienced owner, developer, and manager of commercial properties primarily in Washington, D.C. and Boston. The sponsor acquired the site in 2014. In December 2015, Carr Properties demolished the existing buildings and commenced the construction of Midtown Center.

There is minimal scheduled lease rollover during the 10-year loan term. The only rollover occurs in the final year and totals 1.3% of the NRA, representing 1.2% of DBRS Morningstar’s underwritten gross potential rent. In addition, Fannie Mae (82.2% of the NRA) is an investment-grade tenant. Its average rent (excluding the penthouse space) is $49.71 per square foot, approximately 19% below the appraiser’s market rent determination of $62 per square foot for Class A space in the submarket.

The appraiser indicated the overall vacancy rates of the East End submarket at 13.3% and the CBD submarket at 13.6% for Class A space are driven by vacancies concentrated in Class B and C properties. The appraiser indicated the vacancy rate for trophy properties in the East End submarket is 14%; however, the market vacancy is only 7.8% for trophy properties in the CBD submarket, which is where the appraiser places the Midtown Center.

In the analysis for these rating actions, DBRS Morningstar utlilized a net cash flow (NCF) figure of $42.8 million and a cap rate of 6.50% was applied, resulting in a DBRS Morningstar Value of $659.1 million, a variance of -31.3% from the appraised value at issuance of $960.0 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 79.7%, as compared with the LTV on the issuance appraised value of 54.6% The cap rate applied is in the lower end of the range of DBRS Morningstar Cap Rate Ranges for office properties and is reflective of the quality and location of Midtown Center. In addition, the 6.50% cap rate applied is substantially above the implied cap rate of 4.50% based on the Issuer UW NCF and Appraised Value.

The DBRS Morningstar NCF figure applied as part of the analysis represents a -9.90% variance to the Issuer’s NCF, primarily driven by rent steps, vacancy, replacent reserves and tenant improvements/leasing commisisons. DBRS Morningstar gave credit for $3.1 million in credit tenant rent steps versus the issuer’s $4.03 million. DBRS Morningstar assumed a blended vacancy rate of 6.3% versus the issuers 2.1%. For replacement reserves, DBRS Morningstar assumed a normalized $0.25 PSF versus $0.20 for the issuer. For tenant improvements and leasing commisisons, DBRS Morningstar assumed weighted average TI/LC costs of $0.63 PSF versus the issuer’s assumption of $0.35.

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.

Classes X are interest-only (IO) certificates that reference 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 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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