DBRS Morningstar Assigns Ratings to DBUBS 2017-BRBK Mortgage Trust

DBRS, Inc. (DBRS Morningstar) assigned ratings to the Commercial Mortgage Pass-Through Certificates, Series 2017-BRBK issued by DBUBS 2017-BRBK Mortgage Trust (the Issuer) as follows:

-- Class A at AAA (sf)
-- Class XA at AAA (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)
-- 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 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upon withdrawal of MCR’s outstanding ratings, the DBRS Morningstar ratings will become the successor ratings to the withdrawn MCR ratings.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 collateral for the transaction is a $530.0 million portion of a $660.0 million first-lien mortgage loan on a portfolio of four Class A office properties totaling 2.1 million square feet (sf). Through one or more affiliates, The Blackstone Group Inc. acquired an 80.0% interest in each property in the portfolio from certain separate joint ventures comprising Worthe Real Estate Group Inc. (Worthe) affiliates and certain third parties In connection with the acquisition. Through one of more affiliates, Worthe acquired or retained the remaining 20.0% interest in each property in the portfolio. Worthe operates media and technology campuses in Los Angeles with an existing portfolio comprising 35 assets totaling approximately 5.4 million sf. Worthe is the largest owner and manager of real estate by square footage in Burbank, California, and manages all four assets in the portfolio.

The four properties comprising the portfolio include three office towers in Burbank’s Media District known as The Pointe, 3800 Alameda, and Central Park as well as a five-building creative office campus, the Media Studios, four miles north of the Media District adjacent to the Hollywood Burbank Airport. Historically, the properties have had high occupancy levels, although the newest building, The Pointe, was delivered vacant in 2009 and the ownership entity decided to strategically delay lease-up until more favorable market terms prevailed. The other three office properties averaged 96.0% occupancy levels over the most recent 10 years and current occupancy for all properties, including The Pointe, is 92.4% since issuance. The tenant roster provides some granularity to the transaction, but nearly all are in the media and entertainment industry.

Burbank is in the entertainment industry’s Thirty Mile Zone, which favors production and related activities with established union wage scales and workplace rules implemented by the media and entertainment industry unions more than 100 years ago, making production more expensive and difficult outside the designated area. Originally known as the Studio Zone, original union restrictions applied only to a six-mile radius but extended in 1970 to a 30-mile radius from the intersection of West Beverly Boulevard and North La Cienega Boulevard in Los Angeles. Burbank’s location along the boundary of the original six-mile Studio Zone resulted in the largest concentration of television and motion picture studio space in Los Angeles. Three of the industry’s “Big Six” studios—The Walt Disney Company (Disney)/The American Broadcasting Company, Warner Bros. Entertainment Inc., and Comcast Corporation/NBCUniversal Media, LLC—are in Burbank’s Media District and cover more than 640 acres with 72 soundstages totaling more than 1.0 million sf.

When analyzing the risk of the property’s cash flow single-industry dependency, DBRS Morningstar considered that investment-grade tenants leased 61.4% of the building area at issuance, including Disney, Time Warner’s Turner Broadcasting System, Inc. and Warner Bros., and Kaiser Foundation Health Plan, Inc. As of Q3 2019, the in-place occupancy was 93.4% compared with 92.4% at issuance, indicating positive momentum.

DBRS Morningstar also considered portfolio rollover risk of 74.4% of net rentable area at issuance, which will expire during the seven-year loan term. Recognizing that rollover exposure is high, closer consideration of the functional groups and proximity to studio headquarters for the three-largest tenants with leases expiring during the term should mitigate this risk. Disney occupies the single-tenant building at 3800 Alameda and originally developed the property in 1984, adjacent to its studio headquarters. Worthe is Disney’s largest landlord, which bought the property from Disney in 2007 in a sale-leaseback transaction. The building is considered a mission-critical location for Disney, which has invested over $40 million in the building’s infrastructure ($98 per sf). The building serves as Radio Disney’s headquarters, the broadcasting home to the Disney Channel and others, and as the backup location for Disney’s East Coast operations, including ESPN Inc. Because Disney’s operations are critical to the building, it has a triple-backup power supply and a number of other features considered essential to operations at the property.

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 $48.3 million and a cap rate of 7.25% was applied, resulting in a DBRS Morningstar Value of $666.6 million, a variance of -35.8% from the appraised value at issuance of $1.04 billion. The DBRS Morningstar Value implies an LTV of 99.0% compared with the LTV of 63.6% on the appraised value at issuance. The NCF figure applied as part of the analysis represents a -23.5% variance from the Issuer’s NCF, primarily driven by vacancy, step rent, and concessions. As of the trailing 12 months ending September 2019, the servicer reported an annualized NCF figure of $59.1, a 18.2% variance from the DBRS Morningstar NCF figure, primarily a factor of differences in vacancy, step rent assumptions, and concessions

DBRS Morningstar applied a cap rate at the middle end of the DBRS Morningstar Cap Rate Ranges for office properties, reflecting the strong entertainment market, the investment-grade tenancy, and strong tenant investment. In addition, the 7.25% cap rate DBRS Morningstar applied is above the implied cap rate of 6.1% 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 3.25% 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 XA is an interest-only (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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