DBRS Morningstar Assigns Ratings to Natixis Commercial Mortgage Securities Trust 2020-2PAC

DBRS, Inc. (DBRS Morningstar) assigned ratings to the Commercial Mortgage Pass-Through Certificates, Series 2020-2PAC, Amazon Phase VII Loan Specific Certificates issued by Natixis Commercial Mortgage Securities Trust 2020-2PAC as follows:

-- Class AMZ1 at BBB (low) (sf)
-- Class AMZ2 at BB (low) (sf)
-- Class AMZ3 at B (low) (sf)
-- Class V-AMZ 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 24, 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upon withdrawal of MCR’s outstanding ratings, the DBRS Morningstar ratings will become the successor ratings to the withdrawn MCR ratings.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.

Built in 2015, the Amazon Phase VII property is a 12-story Class A office building containing 318,617 square feet (sf) on a 0.68-acre site and is Leadership in Energy and Environmental Design Gold certified. The property includes 5,651 sf of ground-floor retail space, as well as a four-level subterranean parking garage containing 429 parking spaces, a public plaza, and a landscaped rooftop terrace with sweeping views of Seattle. The property received the Office Development of the Year award from NAIOP in 2015 as part of Amazon.com, Inc.’s (Amazon) expansion, which also included phases VI and VIII.

The property is 98.2% occupied by Amazon Corporate LLC, a subsidiary of Amazon, an investment-grade tenant. The property is one of more than 40 office buildings comprising Amazon’s corporate headquarters campus in Seattle’s South Lake Union submarket. The tenant’s lease, which has a 9.3% rent increase every three years, is fully guaranteed by Amazon. The lease commenced on September 1, 2015, and expires on August 31, 2031, well beyond the 64-month loan term. In addition, the lease is structured with two five-year extension options and no early termination options. Furthermore, the current contract rent is approximately 19% below market, according to the appraiser.

The Amazon Phase VII whole loan has an outstanding principal balance of $220 million and is evidenced by two promissory notes: a senior A note with an outstanding principal balance of $160 million and a subordinate B note with an outstanding principal balance of $60 million. The whole loan accrues interest at a rate of 4.0530% per year and has a stated maturity date of January 7, 2025. The Amazon Phase VII A note will be contributed to the NCMS 2020-2PAC Trust and split into four components: one senior pooled component with an outstanding principal balance of $100.1 million and three subordinate nonpooled components of $59.9 million, which will serve as collateral for the loan-specific certificates. The Amazon Phase VII B note was contributed to the NCMS 2019- AMZ7 securitization.

The loan is interest only for the entire term. The lack of principal amortization during the loan term increases refinance risk at maturity, and the DBRS Morningstar LTV is 95.4%, based on the senior loan, with the nonpooled rake certificates being subordinate to the senior pooled portion of the loan. The DBRS Morningstar LTV is 131.1%, inclusive of the subordinate note. The DBRS Morningstar opinion of the property’s stabilized value is 39.0% lower than the appraised value, and factors in a substantial decline prior to applying our LTV rating thresholds.

The sponsors cashed out $17.5 million as part of this transaction; however, this only represents 8.0% of the loan uses, and the borrower still has approximately $68.0 million of implied equity in the property. The appraised value equates to $904 per sf, which is well within the recent office property sale comparables in the Seattle market.

In the analysis for these rating actions, the DBRS Morningstar net cash flow (NCF) figure of $10.9 million derived at issuance was accepted and a cap rate of 6.50% was applied, resulting in a DBRS Morningstar Value of $167.8 million, a variance of 39.0% from the appraised value at issuance of $275.0 million. The DBRS Morningstar Value implies an LTV of 131.1%, as compared with the LTV on the issuance appraised value of 80%.

The DBRS Morningstar NCF 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 NCF figure applied as part of the analysis represents a 0.4% variance from the Issuer’s NCF.

The cap rate applied is at the lower end of the range of DBRS Morningstar Cap Rate Ranges for office properties, reflective of the strong market; strong property quality; and long-term, investment-grade tenancy. In addition, the 6.5% cap rate applied is above the implied cap rate of 4.0% 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 6.50% 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.

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.

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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