DBRS Morningstar Confirms All Ratings on Prima Capital CRE Securitization 2019-RK1, Removes Under Review with Developing Implications Status

DBRS Limited (DBRS Morningstar) confirmed the ratings on the following classes of the Commercial Mortgage Pass-Through Certificates, Series 2019-RK1 issued by Prima Capital CRE Securitization 2019-RK1 (the Issuer):

DreamWorks Campus and Headquarters (Dreamworks; Group D):
-- Class A-D at BBB (low) (sf)
-- Class B-D at BB (low) (sf)
-- Class C-D at B (low) (sf)

The Gateway (Gateway; Group G):
-- Class A-G at A (low) (sf)
-- Class B-G at BBB (low) (sf)
-- Class C-G at BB (high) (sf)

TriBeCa House (TriBeCa; Group T):
-- Class A-T at BBB (low) (sf)
-- Class B-T at BB (low) (sf)
-- Class C-T at B (high) (sf)

All trends are Stable. The ratings have been removed from Under Review with Developing Implications, where they were placed on November 14, 2019. Interest is deferable on all rated Certificates other than Classes A-D, A-G, A-T, and B-G.

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 transaction has a total mortgage balance of $152.25 million and consists of three nonpooled B notes tied to previously securitized collateral. The collateral includes one office property, DreamWorks, and two multifamily properties, Gateway and TriBeCa. The notes are secured by the grantor trust certificate representing beneficial interests in a subordinate loan, which is a portion of a whole loan. The transaction comprises Group D, Group G, and Group T (each, a Loan Group) with certificates tied to each of the three subjects. Because the notes are not pooled, proceeds from the Collateral Interest relating to any Loan Group will not be available to support shortfalls in collections on the Collateral Interest relating to any other Loan Group.

For further information on these loans, please visit the DBRS Viewpoint platform, for which information has been provided below. Below, DBRS Morningstar has provided a summary of assumptions and adjustments used during the application of the NA SASB Methodology and the “North American CMBS Surveillance Methodology”. The DBRS Morningstar net cash flow (NCF) derived at issuance was reanalyzed for each Loan Groups.

DREAMWORKS CAMPUS
The resulting NCF figure was $11.3 million and a cap rate of 7.25% was applied, resulting in a DBRS Morningstar Value of $156.4 million, a variance of 47.4% from the appraised value at issuance of $297.0 million. The DBRS Morningstar Value implies an LTV of 127.9% compared with the LTV of 67.3% on the appraised value at issuance based on the whole-loan amount of $200.0 million. The NCF figure applied as part of the analysis represents a 16.1% variance from the Issuer’s NCF, primarily driven by vacancy as well as tenant improvement and leasing commissions costs.

The cap rate DBRS Morningstar applied is at the lower end of the DBRS Morningstar Cap Rate Ranges for office properties, reflecting the quality of the properties and amenity packages, the tenants’ commitment to the property, and the position of the property in a growing market, which DBRS Morningstar views as a mitigant against potential relocation risk with the single-tenant property. In addition, the 7.25% cap rate DBRS Morningstar applied is substantially above the implied cap rate of 5.0% 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 2.5% to account for cash flow volatility, property quality, and market fundamentals. DBRS Morningstar also made other negative adjustments to account for the high implied total LTV of 127.9% based on the DBRS Morningstar Value.

THE GATEWAY
The resulting NCF figure was $33.6 million and a cap rate of 6.25% was applied, resulting in a DBRS Morningstar Value of $538.3 million, a variance of 38.0% from the appraised value at issuance of $868.8 million. The DBRS Morningstar Value implies an LTV of 102.2% compared with the LTV of 63.3% on the appraised value at issuance based on the whole-loan amount of $550.0 million. Including mezzanine debt of $115.0 million, the loan has an implied LTV of 123.5%. The NCF figure applied as part of the analysis represents a 9.3% variance from the Issuer’s NCF, primarily driven by real estate taxes.

The cap rate DBRS Morningstar applied is at the lower end of the DBRS Morningstar Cap Rate Ranges for multifamily properties, reflecting the property’s desirable location in downtown San Francisco, which benefits from favourable demographics and low submarket vacancy of under 5.0%. In addition, the 6.25% cap rate DBRS Morningstar applied is well above the implied cap rate of 5.0% 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 4.0% to account for cash flow volatility and market fundamentals. DBRS Morningstar also made other negative adjustments to account for the high implied LTV of 123.5% (including mezzanine debt) based on the DBRS Morningstar Value.

TRIBECA HOUSE
The resulting NCF figure was $17.4 million and a cap rate of 6.25% was applied, resulting in a DBRS Morningstar Value of $278.9 million, a variance of 51.9% from the appraised value at issuance of $580.0 million. The DBRS Morningstar Value implies an LTV of 92.2% compared with the LTV of 44.3% on the appraised value at issuance based on the whole-loan amount of $257.0 million. Including mezzanine debt of $103.0 million, the loan has an implied LTV of 129.1%. The NCF figure applied as part of the analysis represents a 5.2% variance from the Issuer’s NCF, primarily driven by operating expenses.

The cap rate DBRS Morningstar applied is at the lower end of the DBRS Morningstar Cap Rate Ranges for multifamily properties, reflecting the property’s location, large unit sizes, and updated finishes. In addition, the 6.25% cap rate DBRS Morningstar applied is substantially above the implied cap rate of 4.5% 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 4.0% to account for cash flow volatility and market fundamentals. DBRS Morningstar also made other negative adjustments to account for the high implied LTV of 129.1% (including mezzanine debt) based on the DBRS Morningstar Value.

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 Ratings 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.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info@dbrsmorningstar.com.

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.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577