DBRS Morningstar Assigns Ratings to SG Commercial Mortgage Securities Trust 2019-787E

DBRS, Inc. (DBRS Morningstar) assigned ratings to the Commercial Mortgage Pass-Through Certificates, Series 2019-787E issued by SG Commercial Mortgage Securities Trust 2019-787E as follows:

-- Class A at AAA (sf)
-- Class B at AAA (sf)
-- Class X at AAA (sf)
-- Class C at AA (sf)
-- Class D at A (sf)
-- Class E at BBB (low) (sf)
-- Class F at BB (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; such withdrawal will occur on or about July 16, 2020. 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upon withdrawal of MCR’s outstanding ratings, the DBRS Morningstar ratings will become the successor ratings to the withdrawn MCR ratings.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 loan is secured by the borrower’s fee-simple interest in 787 Eleventh Avenue, a 513,397-square foot (sf) Class A mixed-use property located in New York. The subject was 88.4% leased to a combination of car dealerships and office tenants as of the November 2018 rent roll. Loan proceeds of $410.0 million will be used to refinance the $349.5 million construction loan, fund the $48.1 million in holdback reserves, fund the $6.2 million in returned equity, and cover the approximate $6.2 million in closing costs. The total financing is divided into $175.0 senior companion loans, a $117.5 subordinate A note, and a $117.5 million junior B note. The subject securitization contains the $70.0 million A-1A note and the subordinate $117.5 A-2 note. Noncontrolling A notes with a combined $105.0 million trust balance are included in the CSAIL 2019-C16, BBCMS 2019-C3, and CSAIL 2019-C15 securitizations. The B note was held by the lender at issuance and DBRS Morningstar expected the B note to be sold to a third-party investor. The 10-year loan is interest only (IO) for the entire period.

The collateral is well situated in the heart of Automotive Row along with 20 other automotive dealerships. The corridor and its concentration of dealerships is the result of a favorable rezoning by New York so that property owners can operate showrooms and service centers at the same location. The largest tenant is a dealership for JaguarLand Rover Limited PLC (JLR). In 2018, the JLR dealership reported sales of $150.7 million. The JLR dealership at the property is the only one in Manhattan and is reportedly the second-ranked Jaguar dealership in the country by sales volume. Nissan North America (Nissan), the second-largest tenant at the subject and an investment-grade tenant, subleases the space to a Nissan car dealership at the property through a franchisee. As of March 31, 2018, the tenant reported a total net revenue of $108.0 billion and a net income of $6.8 billion. The property benefits from a lease guaranteed by Nissan, which is unusual for car dealerships but provides additional credit characteristics to the loan. The loan documents provide for a condominium conversion of the property and a one-time release option of the retail/showroom portion of the building subsequent to such a conversion. Upon a release of the retail condominium, the loan is structured with a release premium of 105.0% of the appraised value of the retail condominium unit subject to a minimum debt yield test of 6.2% and a minimum LTV test of 63.1%.

The three office tenants include Spaces, an IWG plc subsidiary; Pershing Square Capital Management, L.P.; and Dwight Capital LLC, which have a combined average remaining lease term of more than 12 years, indicating there is no scheduled rollover risk during the loan term. Spaces is a coworking tenant with an international community that includes 2.5 million members and 3,000 business centers spanning 1,000 cities in 110 countries. DBRS Morningstar performed a hypothetical net cash flow (NCF) scenario assuming Spaces vacates the property because of concerns around coworking tenants. The resulting hypothetical DBRS Morningstar NCF represents a debt service coverage ratio (DSCR) of 1.12 times (x) on the capital stack through the subordinate A-2 note within the trust, but a DSCR of 0.99x on the entire capital stack inclusive of the B note. The DBRS Morningstar hypothetical NCF implies there is an elevated risk of term default if Spaces stops paying rent at the property.

The Georgetown Company, LLC (Georgetown) and Table Holdings sponsor the loan. Georgetown is a private real estate investment company based in New York with offices across the country. Georgetown has a portfolio of 22.0 million sf of diverse commercial property assets that have been developed, owned, and overseen by the company. Table Holdings is an investment office owned by the Ackman family. The company has invested over $300.0 million in equity in a portfolio consisting of 2,700 multifamily units as well as other property interests. Since acquiring the property in 2015 for $255.5 million, the sponsors have commenced a $275.2 million renovation of the building, including conversion of three floors in the existing building from showroom to office space and adding two office floors. Although this financing will result in a $36.3 million return of equity to the sponsors, they will have significant equity remaining in the property based on a cost basis.

The DBRS Morningstar NCF derived at issuance 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 resulting NCF figure was $21.5 million and a cap rate of 6.5% was applied, resulting in a DBRS Morningstar Value of $331.1 million, a variance of -49.1% from the appraised value at issuance of $650.0 million. The DBRS Morningstar Value implies an LTV of 123.8%, as compared with the LTV on the issuance appraised value of 63.1%. The NCF figure applied as part of the analysis represents a -11.0% variance from the Issuer’s NCF, primarily driven by expenses and leasing costs.

The cap rate applied is at the lower end of the range of DBRS Morningstar Cap Rate Ranges for office properties, reflective of the location and quality. In addition, the 6.5% cap rate applied is substantially above the implied cap rate of 3.7% 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 3.5% to account for cash flow volatility, property quality, and market fundamentals.

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.

Class X is an 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.

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 www.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 www.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 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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