DBRS Morningstar Confirms All Ratings on MFTII 2019-B3B4 Mortgage Trust, Removes Under Review with Developing Implications Status

DBRS, Inc. (DBRS Morningstar) confirmed the ratings on the following classes of Commercial Mortgage Pass-Through Certificates Series 2019-B3B4 issued by MFTII 2019-B3B4 Mortgage Trust (the Issuer):

-- Class A at AA (low) (sf)
-- Class B at A (sf)

All trends are Stable. The ratings have been removed from Under Review with Developing Implications, where they were placed on November 14, 2019.

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.

Prior to the finalization of the NA SASB Methodology, the DBRS Morningstar ratings for the subject transaction and all other DBRS Morningstar-rated transactions subject to the methodology in question were previously placed Under Review with Developing Implications, as the proposed methodology changes were material.

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 loan is secured by the borrower’s fee simple interest in Moffett Towers II – Building 3 and Building 4, two Class A office buildings totaling 701,266 square feet (sf). While not part of the collateral, the tenant also has access to and pays rent on 23,860 sf of allocated amenity space. Buildings 3 is located at 1190 Discovery Way (350,633 sf) and Building 4 is located at 900 5th Avenue (350,633 sf). The subject buildings are newly constructed LEED Platinum-certified Class A facilities with strong curb appeal. Loan proceeds of $590.0 million refinanced $408.9 million of existing construction debt, returned approximately $114.3 million of sponsor cash equity, funded $39.8 million of upfront tenant improvements/leasing commissions and free rent reserves, and covered closing costs of $27.0 million. The $590.0 million debt package is composed of a $350.0 million A note, a $155.0 million B note, and $85.0 million of mezzanine debt. This transaction closed in July 2019 and contains the full $155.0 million B note piece and only $5.0 million of the A note proceeds in the trust. The fixed-rate financing has a 10-year term and is fully interest only (IO). The loan was structured with an anticipated repayment date (ARD) after 10 years and a final maturity date approximately five years beyond the ARD.

Facebook, Inc. (Facebook) leases 100.0% of the total net rentable area and the tenant’s leases expire in April and May 2034 for Building 4 and Building 3, respectively. The tenant’s two leases at the collateral extend approximately five years beyond loan maturity. DBRS Morningstar considers Facebook to be a long-term credit tenant. At the official opening of Facebook’s Sunnyvale campus in September 2019, Christopher Hom—the company’s director of real estate in the San Francisco Bay Area—relayed that he expected Facebook to physically move into Building 3 in 2020 and Building 4 by late 2020 or in early 2021. Facebook’s Sunnyvale campus officially opened after it occupied the office property at 1180 Discovery Way, which is not part of the collateral for the subject transaction. DBRS Morningstar performed an internal assessment (IA) on Facebook and considers the company to have characteristics consistent with a high investment-grade credit rating.

The loan is full-term IO, providing no reduction to the loan basis over the initial loan term; however, Facebook’s two leases extend almost five years beyond the initial loan maturity date, providing stable cash flow beyond loan maturity from an investment-grade tenant. In addition, the loan’s five-year ARD period following the initial 10-year loan term amortizes the loan balance down by 31.5% to a maturity balance of $346.1 million, establishing a low DBRS Morningstar Balloon LTV of only 51.9% at lease expiry. DBRS Morningstar notes that its net cash flow (NCF) analysis depends on the investment-grade treatment of Facebook; any future IA at a non-investment-grade level may affect DBRS Morningstar’s analysis and ratings on this transaction. The appraiser estimates replacement cost of the assets, including land value, at $520 million, which is slightly above the rated debt proceeds of $505.0 million. The recent construction vintage, high property quality, and strong location of the assets would make them highly re-leasable.

The sponsor for this loan is Jay Paul Company, a leading real estate development and investment management firm. Jay Paul Company’s extensive experience in institutional real estate development and ownership will benefit the subject collateral. The sponsor has developed the entire Moffett office park and has substantial experience with other office buildings in the Moffett area, demonstrating the company’s relevant expertise constructing Class A office product in this submarket.

The collateral is well located in the Sunnyvale, California, submarket of the greater San Jose-Sunnyvale-Santa Clara metropolitan statistical area. The subject is in a highly desirable area as many of Silicon Valley’s largest technology firms have moved into the submarket. Per Reis, Inc. (Reis), the Santa Clara/Sunnyvale office submarket features nearly 29.1 million sf of Class A office space with an average vacancy rate of 15.0% and average asking rents of $52.62 per square foot. For Q4 2019, Reis identified approximately 960,000 sf of new office construction that is expected to be delivered to the submarket by the end of 2021, which is evidence of Bay Area technology firms’ push into the Sunnyvale area. Per Reis, office properties constructed after 2009 throughout Sunnyvale accounted for 49.0% of submarket inventory as of Q4 2019. Moffett buildings have been 100.0% leased since construction began, which is evidence of the market’s strength. Although vacancy rates in the submarket are high, this is primarily because of an abundance of new supply coming online recently; however, the majority of new Class A office buildings in Sunnyvale are build-to-suit developments that are pre-leased to other leading technology firms. The collateral offers best-in-class amenities and spectacular Class A office space that should position the properties at the forefront of Sunnyvale office product in the coming years.

In the analysis for these rating actions, the DBRS Morningstar NCF figure of $43.3 million and a cap rate of 6.5% was applied, resulting in a DBRS Morningstar Value of $666.8 million, a variance from the appraised value of $123.2 million. The DBRS Morningstar Value implies an LTV of 88.5%, including mezzanine debt of $85.0 million, compared with the LTV of 74.7% on the appraised value at issuance. The DBRS Morningstar Value, excluding the mezzanine debt, implies an LTV of 75.3% compared with the LTV of 63.9% on the appraised value at issuance.

The NCF figure applied as part of the analysis represents a -6.2% variance from the Issuer’s NCF, primarily driven by rent step credit.

DBRS Morningstar applied a cap rate at the lower end of the DBRS Morningstar Cap Rate Ranges for office properties, reflecting the property’s location, high quality, and position in the market. In addition, the 6.50% cap rate DBRS Morningstar applied is above the implied cap rate of 5.85% based on the Issuer’s underwritten NCF and appraised value.

DBRS Morningstar made positive qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis totaling 7.5% to account for cash flow volatility, property quality, and market fundamentals. DBRS Morningstar also made other positive adjustments to account for the loan’s five-year ARD tail, allowing for substantial principal repayment.

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.

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

The principal methodologies are the North American Single-Asset/Single-Borrower Ratingcs Methodology and North American CMBS Surveillance Methodology, which can be found on dbrsmorningstar.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 dbrsmorningstar.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.

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.

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.

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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