DBRS Morningstar Confirms All Ratings on Independence Plaza Trust 2018-INDP, Removes UR-Dev. Status

DBRS, Inc. (DBRS Morningstar) confirmed the ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2018-INDP issued by Independence Plaza Trust 2018-INDP:

-- Class A at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class X-CP at BBB (sf)
-- Class X-NCP at BBB (sf)
-- Class D at BBB (low) (sf)
-- Class E at BB (low) (sf)
-- Class X-ECP at B (high) (sf)
-- Class X-ENP at B (high) (sf)
-- Class HRR at B (sf)

All trends are Stable. The ratings have been removed from Under Review with Developing Implications, where they were placed on November 14, 2019.

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.

The collateral for the transaction consists of the fee and leasehold interests in a 1.5 million-square foot (sf) mixed-use residential and commercial complex located in the Tribeca neighborhood of Manhattan in New York. The properties consist of three 39-story apartment towers and connecting townhomes in addition to commercial space. The towers are at 310 Greenwich Street, 40 Harrison Street, and 80 North Moore Street. The fee interest covers the entire property, while the leasehold interests relate to three parcels—the South Podium, North Podium, and Tower Development—which contain a mix of parking, retail, and apartment units. Collateral for the loan consists of both the fee and leasehold interests that cover these three parcels, with the fee owner signing the mortgage loan documents. Loan proceeds of $675 million are being used to retire outstanding debt of $551.6 million (comprising a $444.0 million commercial mortgage-backed security mortgage loan securitized in BAMLL 2014-IP and a $110.0 million mezzanine loan), return $112.8 million of equity to the sponsor, and cover closing costs of $10.6 million. According to September 2019 financials, the debt service coverage ratio (DSCR) was 1.63 times (x) compared with the DBRS Morningstar Term DSCR derived at issuance of 1.49x. The September 2019 DSCR represents a 13.9% increase over the YE2018 DSRC of 1.43x.

The property was originally built in 1975 under the Mitchell-Lama Housing Program of New York State, an affordable-housing initiative for lower- and middle-income families. The property exited the program in June 2004, at which time the borrower offered the Landlord Assistance Program (LAP) to any tenants not qualifying for the Section 8: Enhanced Vouchers program. Management has been able to increase value by renovating rent-regulated apartments that are vacated and re-leasing them at market rents following a significant renovation. The borrower intends to continue this strategy as units turn over.

As of the December 2018 rent roll, the residential portion of the property was 96.6% occupied at an average rental rate of $4,590 per unit. As of September 2019, the residential occupancy was 95.9%. According to the Q1 2020 Reis market report, the average asking rent for the West Village/Downtown New York Metro submarket is $4,844 per unit with an average vacancy rate of 3.9%, in line with the subject property. Retail occupancy dropped slightly to 88.9% in September 2019 compared with the March 2018 rent roll, and the commercial portion of the property was 95.6% occupied at an average rental rate of $22.73 per square foot (psf). Patriot Parking Inc., the largest commercial tenant, representing 75.6% of the commercial net rentable area (NRA), leases the entire 550-space parking garage through August 2024 at a rental rate of $18.83 psf. According to online searches conducted by DBRS Morningstar, it appears Best Market (7.3% of the commercial NRA) vacated upon its September 2018 lease expiration and Public School 150 (6.2% of the commercial NRA) vacated upon its July 2019 lease expiration. The borrower plans to spend $5.6 million to renovate these two retail units, which the borrower expects to allow for an increase in current rents to approximately $200 psf from $22.70 psf. While a renovation and reprogramming of the retail footprint may indeed bring tenants who better complement the upscale fair market tenant base, the loan has been structured in a way that eliminates the upside potential from a credit perspective. The three leasehold parcels, which contain all of the retail and parking, can be released subject to the repayment of a portion of the loan based on a release price formula anchored essentially to the greater of in-place cash flow attributable to the released parcel or the cash flow of such parcel at the time of release. As such, the borrower would be incentivized to release the parcels prior to restabilization and leverage them separately. DBRS Morningstar made sizing adjustment and gave no net cash flow (NCF) credit to the upside potential associated with the retail and parking components.

The DBRS Morningstar 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 $43.5 million and a cap rate of 6.0% was applied, resulting in a DBRS Morningstar Value of $725.2 million, a variance of -43.5% from the appraised value at issuance of $1.285 billion. The DBRS Morningstar Value implies an LTV of 93.1%, as compared with the LTV on the issuance appraised value of 52.5%. The NCF figure applied as part of the analysis represents a 1.8% variance from the Issuer’s NCF, primarily driven by operating expenses and LAP rent differences. As of March 2020, the servicer reported a net operating income (NOI) figure of $44.8 million, a positive 1.6% variance from the DBRS Morningstar NOI figure.

The cap rate applied is at the lower end of the range of DBRS Morningstar Cap Rate Ranges for office properties, reflective of the subject’s cash flow volatility, property quality, and market fundamentals. In addition, the 6.0% cap rate applied is substantially above the implied cap rate of 3.4% 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 5.0% to account for cash flow volatility, property quality, and market fundamentals. DBRS Morningstar also made other negative adjustments to account for certain risks associated with the release price for the retail parcels.

ESG CONSIDERATIONS
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, X-NCP, X-ECP, and X-ENP 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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