DBRS Morningstar Confirms All Ratings on Morgan Stanley Capital I Trust 2019-AGLN, Removes Under Review with Developing Implications Status

DBRS, Inc. (DBRS Morningstar) confirmed the ratings on the following classes of Commercial Mortgage Pass-Through Securities Certificates, Series 2019-AGLN issued by Morgan Stanley Capital I Trust 2019-AGLN (the Issuer):

-- Class A at AAA (sf)
-- Class X-NCP at AAA (sf)
-- Class B at AA (high) (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 G at B (low) (sf)

All trends are Stable. The ratings have been removed from Under Review with Developing Implications, where they were placed on November 14, 2019. DBRS Morningstar also discontinued and withdrew its rating on Class X-CP.

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.

Although the portfolio has properties across eight states and 10 markets and is generally well diversified, DBRS Morningstar notes certain market concentrations. Texas accounts for 37.9% of the NRA and 43.8% of the base rent, of which Houston has 12 properties, accounting for 26.3% of the net rentable area (NRA) and 28.1% of the in-place base rent. Chicago has the next-highest concentration with 13.9% of the NRA and 22.7% of the base rent. The largest property in the portfolio is located in Sarasota, Florida, and accounts for 15.8% of the NRA and 12.4% of the base rent. However, certain stabilizing factors in these markets mitigate some concentration risks. The portfolio properties generally outperform their submarket averages in terms of occupancy and there is limited new supply in the properties’ submarkets.

There is relatively high rollover risk as 84.2% of the rent roll expires during the loan term and the rollover is more than 15.0% in each of 2020, 2021 and 2022; however, the portfolio has a roster of 235 different tenants and no tenant occupies more than 8.1% of the NRA or contributes more than 6.8% of the portfolio rent. DBRS Morningstar accounted for the concentration risks by limiting the diversity credit in the LTV sizing hurdles to only 3.5%.

The median age of the portfolio properties is 33 years and none of the buildings were built within the last 10 years. As such, DBRS Morningstar is concerned about potential functional obsolescence. In addition, only six properties in the portfolio have clear heights greater than 25 feet; however, these buildings are among the top 10 by size, including Sarasota Distribution Hub—the largest property in the portfolio with a combined 2.2 million square feet—account for 38.0% of the portfolio NRA.

The portfolio has exhibited consistently high occupancy. Since 2015, the portfolio has had weighted-average occupancy of nearly 96.0%, even as properties have been added and the portfolio has grown to the current 42 assets from 28 assets. As well, on a same-store basis, occupancy has remained steady at 95.0% since 2015. During the same time, the portfolio net cash flow (NCF) has increased to $35.6 million from $25.9 million, an increase of 37.0%.

Based on the sponsor’s acquisition cost of the collateral properties, excluding noncollateral minority interests in other properties, there is $202.0 million of cash equity and mezzanine debt behind the mortgage loan and $119.6 million of equity behind the total financing package.

The loan is structured with a cash flow sweep during a Trigger Period, defined as an event of default, or if the debt yield falls below 10.0% for two consecutive quarters. The current debt yield based on the Issuer’s net operating income (NOI) is 10.6%, and 9.7% based on the Issuer’s NCF. The Issuer’s NOI would have to decline by $1.9 million to fall below 10.0%.

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 $29.0 million and a cap rate of 8.50% was applied, resulting in a DBRS Morningstar Value of $341.0 million, a variance of -27.8% from the appraised value at issuance of $472.5 million. The DBRS Morningstar Value implies an LTV of 118.3% compared with the LTV of 85.4% on the appraised value at issuance. The NCF figure applied as part of the analysis represents a -7.1% variance from the Issuer’s NCF, primarily driven by capital expenditures, tenant improvements, and mark-to-market adjustments.

The cap rate DBRS Morningstar applied is at the middle end of the DBRS Morningstar Cap Rate Ranges for office properties, reflecting the geographically diverse pool, high occupancies, and older vintages of the properties. In addition, the 8.50% cap rate DBRS Morningstar applied is above the implied cap rate of 6.6% 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 1.25% 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.

Classes X-CP and X-NCP 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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