DBRS Morningstar Assigns Ratings to DBGS 2019-1735 Mortgage Trust

DBRS, Inc. (DBRS Morningstar) assigned ratings to the Commercial Mortgage Pass-Through Certificates issued by DBGS 2019-1735 Mortgage Trust (the Issuer) as follows:

-- Class A at AAA (sf)
-- Class X at A (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (low) (sf)
-- Class E at BB (low) (sf)
-- Class F at B (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upon withdrawal of MCR’s outstanding ratings, the DBRS Morningstar ratings will become the successor ratings to the withdrawn MCR ratings.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.

The $311.4 million ($242 per square foot (psf)) first-lien mortgage loan is secured by the fee simple interest in a 1.3 million sf (including approximately 44,000 sf of retail space) Class A office building in Center City, Philadelphia. Deutsche Bank AG, New York Branch and Goldman Sachs Mortgage Company originated the 10-year fixed-rate, interest-only (IO) loan, which has an interest rate of 4.2129%. The sponsor, Silverstein Properties, Inc. (Silverstein), used loan proceeds along with $164.2 million of cash equity to acquire the asset for a $451.6 million purchase price. Silverstein is a privately held real estate development and management firm based in New York City with a portfolio of more than 13.0 million sf of office, residential, and retail properties. Some of Silverstein’s major projects include the new World Trade Center, 30 Park Place, 120 Wall Street, and the Equitable Building, among others. The entire mortgage loan was securitized in the transaction.

Built in 1990, the building is located on 18th Street between Market Street and JFK Boulevard with direct concourse access to SEPTA’s Suburban Station and a 176-space parking garage. The subject property is in the Market Street West submarket, which is the largest office submarket in Philadelphia with approximately 39 million sf of office space. The submarket reported a vacancy of 8.2% and average rental rate of $32.38 psf gross. The collateral achieves higher rental rates as it is considered one of the top two multitenant office buildings in the Philadelphia central business district (CBD), along with One Liberty Place. The DBRS Morningstar average gross rent for the property is $37.50 psf.

Currently 92.2% leased to 75 tenants, the property benefits from institutional tenancy with nearly half of the building leased to investment-grade tenants or major law firms, including Ballard Spahr LLP (Ballard Spahr; 14.9% of net rentable area (NRA)), Hogan Lovells (2.7% of NRA), and Ogletree Deakins (1.2% of NRA). Large corporate tenants include Willis Towers Watson (7.6% of NRA); Brandywine Global Investment Management, LLC (Brandywine; 5.2% of NRA); The Bank of New York Mellon Corporation (3.7% of NRA); The Goldman Sachs Group, Inc. (1.7% of NRA); and JPMorgan Chase & Co. (0.8% of NRA; rated AA (low) with a Stable trend by DBRS Morningstar), among others. Furthermore, three of the 10-largest tenants, totaling 25.9% of the NRA, are headquartered at 1735 Market Street, including Ballard Spahr, Montgomery McCracken Walker & Rhoads LLP, and Brandywine.

The largest concentration of lease rollover is not until 2028 when 11.4% of the space is expected to roll. Over the 10-year loan term, approximately half of the space is scheduled to expire; however, the property has proven successful at attracting and retaining institutional-quality tenants. Beginning in 2015, the building suffered the loss or downsizing of three major tenants, which reduced occupancy to approximately 65.0%. This included the downsizing of The Bank of New York Mellon Corporation and Sunoco LP as well as the loss of FMC Corporation, which vacated the property for its build-to-suit headquarters at Cira Centre South/FMC Tower. Since then, the previous owner has increased the property’s occupancy to 92.0%—a testament to the overall desirability of 1735 Market Street.

The DBRS Morningstar net cash flow (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 $22.5 million and a cap rate of 6.75% was applied, resulting in a DBRS Morningstar Value of $334 million, a variance of -24.2% from the appraised value at issuance of $440.3 million. The DBRS Morningstar Value implies an LTV of 93.2% compared with the LTV of 70.7% on the appraised value at issuance. The NCF figure DBRS Morningstar applied as part of the analysis represents a -15.8% variance from the Issuer’s NCF, primarily driven by tenant improvements/leasing commissions, vacancy, and in-place base rent.

The cap rate DBRS Morningstar applied is at the lower end of the DBRS Morningstar Cap Rate Ranges for office properties, reflecting the subject property’s location within the Philadelphia CBD, strong sponsorship, and institutional-quality tenant roster. In addition, the 6.75% cap rate DBRS Morningstar applied is slightly higher than the implied cap rate of 6.10% 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 2.50% 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.

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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