DBRS Morningstar Confirms All Ratings on Natixis Commercial Mortgage Securities Trust 2018-TECH, 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 2018-TECH issued by Natixis Commercial Mortgage Securities Trust 2018-TECH (the Issuer):

-- Class A at AAA (sf)
-- Class X-CP at AA (high) (sf)
-- Class X-EXT at AA (high) (sf)
-- Class B at AA (sf)
-- Class C at A (high) (sf)
-- Class D at A (low) (sf)
-- Class E at BBB (low) (sf)
-- Class F at BB (low) (sf)
-- Class X-F at BB (low) (sf)
-- Class G 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.

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 subject loan is secured by a 626,233-square foot (sf) complex comprising seven Class B office and research and development (R&D) buildings in Santa Clara, California, just outside the Golden Triangle area. Loan proceeds of $195.0 million ($311 per square foot (psf)) and sponsor equity of $58.5 million financed the asset’s acquisition price of $240.4 million, funded $14.3 million of upfront reserves, and covered closing costs totaling $12.9 million. Loan proceeds comprise a $150.0 million senior mortgage note and $45.0 million of mezzanine debt. The loan sponsor is Preylock Real Estate Holdings, LLC, a Los Angeles-based real estate investment and development firm that has acquired 1.0 million sf of commercial space since its inception, primarily in major West Coast markets. The guarantors are well capitalized and have no credit history of foreclosures, defaults, or bankruptcies.

The property is currently 100.0% leased to two tenants: NVIDIA Corporation (NVIDIA), the largest tenant which occupies 60.7% of the total net rentable area (NRA) and contributes 57.9% of the total DBRS Morningstar Base Rent, and Huawei Technologies Co., Ltd. (Huawei), which occupies 39.3% of the total NRA and contributes 42.1% of the total DBRS Morningstar Base Rent. The collateral houses conventional office space and R&D facilities for both NVIDIA and Huawei, which have used these specialized labs for research, design, and implementation purposes across several sectors of both companies’ product lines.

NVIDIA has had a presence at the property—specifically, the 2880 Scott Boulevard building—since 1997. NVIDIA extended its lease at the 2770-2800 Scott Boulevard property, representing 15.9% of total portfolio NRA, through December 2025 as its lease expiry at issuance occurred in December 2020. DBRS Morningstar noted on the site inspection at issuance that the 2770-2800 Scott Boulevard building was unique in that it housed a large server room on the first floor, which serves much of the NVIDIA facilities in the area.

Huawei subsidiary, Futurewei Technologies, Inc. (Futurewei), has occupied the property since 2009 and historically used the space for R&D. Futurewei executed a 10-year lease renewal beginning in August 2017 that includes a one-time right to terminate the lease on July 31, 2024, which is four months before the fully extended maturity date. If Futurewei exercises its early-termination option, then the tenant must pay an early-termination fee of approximately $4.9 million based on the unamortized amount of leasing costs plus a termination penalty of $2.2 million, resulting in a total payment of $7.1 million, equal to $28.80 psf for Futurewei’s space. The Issuer will also sweep 12 months of cash flow before the July 31, 2024, date. Futurewei delivered the borrower letters of credit (LOCs) issued by Standard Chartered Bank to serve as protection for Futurewei’s full and faithful performance of all its obligations under the 2882 & 2890 Scott Lease and Central Expressway leases, respectively. While the LOCs at issuance totaled $1.7 million, the LOCs reduce to $1.2 million on August 1, 2022. DBRS Morningstar did not incorporate value from Futurewei’s termination penalty, cash flow sweep, or LOCs in the DBRS Morningstar net cash flow (NCF) surveillance analysis or the hypothetical discounted cash flow (DCF) analysis.

According to a December 2019 article in “The Mercury News,” a newspaper published in San Jose, California, Huawei cut up to 600 jobs at Futurewei’s space at the property in June 2019 following the U.S. Commerce Department’s May 2019 decision to put the firm on its list of organizations that pose security risks. Additionally, Futurewei held an equipment auction at the 2330 Central Expressway property in March 2020 according to Heritage Global Partners Asset Advisory and Auction Services’ website. According to the servicer, Futurewei’s space at the property was not dark and no formal notice of subleases had been submitted as of April 2020. To account for the risks associated with Huawei’s occupancy at the property when reanalyzing the DBRS Morningstar NCF, DBRS Morningstar increased its vacancy rate assumption to 20.0%, twice the vacancy rate assumption at issuance, and its renewal probability assumption to 50.0%, a decrease from its 65.0% renewal probability assumption at issuance, to Huawei’s space.

DBRS Morningstar performed a hypothetical DCF analysis to access the hypothetical discounted value of the property, assuming Huawei completely vacates its space and the sponsor had to re-lease the property to a market-oriented level. DBRS Morningstar determined that the property’s hypothetical discounted value was above the cumulative proceeds through Class G at $240 psf.

Per Reis, Inc. (Reis), the collateral is in the Santa Clara submarket, which is part of the greater San Jose flex/R&D market. Reis reported a submarket vacancy rate of 8.1% for Q1 2020, but forecast the submarket vacancy rate to increase to 10.5% in 2022, the year of the initial maturity date, and to 9.5% in 2024, the year of the fully extended maturity date. The property benefits from its favorable location in Santa Clara, which is part of Silicon Valley—the premier market for high-technology companies. The subject has favorable access and visibility as it is located at the junction of Central Expressway and San Tomas Expressway, two highly trafficked thoroughfares that facilitate access to several demand generators in the local area. If NVIDIA or Huawei vacates or reduces the size of its respective space, the sponsor could potentially find other similar tenants to occupy the buildings without necessarily converting every suite back to conventional office space.

The DBRS Morningstar NCF derived at issuance was reanalyzed 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 $12.3 million and a cap rate of 7.5% was applied, resulting in a DBRS Morningstar Value of $164.4 million, a variance of -37.0% from the appraised value at issuance of $261.2 million. The NCF figure applied as part of the analysis represents a -21.6% variance from the Issuer’s NCF, primarily driven by vacancy, leasing costs, and rent step credit. As of YE2019, the servicer reported a NCF figure of $14.7 million, a -16.0% variance from the DBRS Morningstar NCF figure, primarily a factor of vacancy and leasing costs. The DBRS Morningstar Value implies an LTV of 91.2% compared with the LTV of 57.4% on the appraised value at issuance. The DBRS Morningstar Value implies an LTV of 118.6%, including mezzanine debt of $45.0 million, compared with the LTV of 74.7% on the appraised value at issuance. The DBRS Morningstar Value implies an LTV of 91.2% on the first mortgage compared with the LTV of 57.4% on the appraised value at issuance.

The cap rate DBRS Morningstar applied is at the middle end of the DBRS Morningstar Cap Rate Ranges for office properties, reflecting the property’s location, market position, and quality. In addition, the 7.50% cap rate DBRS Morningstar applied is above the implied cap rate of 6.02% 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 1.75% 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.

Classes X-CP, X-EXT, and X-F 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.

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 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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