DBRS Morningstar Assigns Ratings to DBGS 2018-BIOD Mortgage Trust

DBRS, Inc. (DBRS Morningstar) assigned ratings to the Commercial Mortgage Pass-Through Certificates, Series 2018-BIOD issued by DBGS 2018-BIOD Mortgage Trust (the Issuer):

-- Class A at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (high) (sf)
-- Class D at BBB (high) (sf)
-- Class E at BBB (low) (sf)
-- Class F at BB (low) (sf)
-- Class G at B (high) (sf)
-- Class HRR at B (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upon withdrawal of MCR’s outstanding ratings, the DBRS Morningstar ratings will become the successor ratings to the withdrawn MCR ratings.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 Issuer used a $725.0 million senior note combined with $140 million of senior mezzanine debt and $95.0 million of junior mezzanine debt at issuance to refinance $714.6 million of existing debt, return approximately $216.9 million of equity to the sponsor, fund upfront reserves of approximately $15.4 million, and cover closing costs of approximately $13.0 million. The loan is sponsored by an affiliate of The Blackstone Group Inc. Most of the properties secured in this transaction comprise a subset of a portfolio that an affiliate of the sponsor acquired from BioMed Realty Trust, Inc. in January 2016. The loan had a two-year initial term with five one-year extension options. The initial maturity date was scheduled to occur in May 2020, but the borrower exercised the first extension option. The transaction at issuance was secured by 18 office/lab buildings, three office buildings, and one parking garage. The loan is structured with a partial pro rata/sequential-pay structure, as the loan allows for pro rata paydowns for the first 25.0% of the unpaid principal balance. The underlying release provisions convey the prepayment premium for the release of individual assets at 105.0% for the first 25.0% of the senior loan balance and 110.0% thereafter.

Since issuance, two office/lab properties located in Colorado—Walnut Street and Trade Centre Avenue—have been released, collectively representing 5.4% of the issuance allocated loan amount (ALA) and 6.1% of the issuance aggregate individual properties’ appraised value. The current senior note balance of $672.9 million reflects the released properties. At issuance, the appraiser assumed a premium on the individual asset values to account for the $1.27 billion value of the portfolio. The portfolio value resulted in an LTV of 57.0%. With the paydowns in the portfolio, the concluded LTV is 57.8% on the first mortgage, which includes no premium for the portfolio value. The LTV at issuance, not accounting for any portfolio premium, was 58.7%.

The loan is currently secured by 16 office/lab buildings, three office buildings, and one parking garage located across California, Washington, Massachusetts, New York, Pennsylvania, and New Jersey. The loan benefits from its collateral concentration within the top-tier life science clusters: Boston-Cambridge and the San Francisco Bay Area, together representing 49.7% of the current ALA. A CB Richard Ellis 2019 U.S. Life Science Cluster report noted that San Diego and New Jersey are second-tier primary life science markets in the United States relative to the two top-tier markets and Seattle is an emerging life science hub. The loan is currently secured by collateral with ALA equating to a 28.6% concentration in Seattle, a 14.4% concentration in San Diego, and a 1.9% concentration in New Jersey.

The DBRS Morningstar net cash flow (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 $52.8 million and a cap rate of 7.28% was applied, resulting in a DBRS Morningstar Value of $726.0 million, a variance of -37.6% from the remaining collateral’s issuance appraised value of $1.16 billion. The DBRS Morningstar Value implies an LTV of 92.7% on the current senior mortgage balance compared with the LTV of 57.8% on the remaining collateral issuance appraised values. On the total current debt stack inclusive of the mezzanine debt, the DBRS Morningstar Value represents an LTV of 123.3% compared with the remaining collateral issuance appraised values LTV of 76.9%. The NCF figure applied as part of the analysis represents a -16.8% variance from the Issuer’s issuance NCF assumptions for the remaining collateral, primarily driven by vacancy and leasing costs. As of the trailing 12-month period ending September 2019, the servicer reported a NCF figure of $62.4 million, a -15.3% variance from the DBRS Morningstar NCF figure, primarily a factor of vacancy 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 within life science markets and property quality. In addition, the 7.28% cap rate applied is well above the implied cap rate of 5.46% based on the Issuer’s issuance underwritten NCF assumptions for the remaining collateral and the remaining collateral’s issuance appraised values.

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. DBRS Morningstar also made other negative adjustments to account for certain release provisions and pro rata paydown structure.

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 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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