DBRS Morningstar Assigns Ratings to MTRO Commercial Mortgage Trust 2019-TECH

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

-- Class A at AAA (sf)
-- Class B at AAA (sf)
-- Class X-NCP at AAA (sf)
-- Class C at AA (high) (sf)
-- Class D at BBB (sf)
-- Class E at BB (sf)
-- Class F at BB (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 August 5, 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upon withdrawal of MCR’s outstanding ratings, the DBRS Morningstar ratings will become the successor ratings to the withdrawn MCR ratings.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 mortgage loan is backed by the borrower’s leasehold interest in the office properties. The leasehold properties are subject to two ground leases, one that runs through 2087 for One MetroTech Center and the other through 2092 for Eleven MetroTech Center. The borrower pays ground rent and site acquisition costs to New York. The ground rent and site acquisition cost (SAC) payments are fixed through year eight (2026) with respect to One MetroTech, and through year 12 (2030) with respect to Eleven MetroTech. After the 12th year, the payments begin to increase.

The collateral is 98.2% occupied by 26 tenants across 50 leased spaces as of December 1, 2018. Prominent tenants are JPMorgan Chase, National Grid, New York University, and several municipal agencies including the Department of Information Technology & Telecommunications (DoITT) and the Emergency 911 (E911) facility. Much of the space is subject to long-term leases with an average remaining term of 8.2 years, which is about 3.2 years beyond the five-year loan term.

Lease rollover risk is low, with only 9.2% of the leases rolling during the extended five-year loan term. However, the lease to JPMorgan Chase, with 24.1% of the net rentable area (NRA) expires one year after the loan matures, and National Grid’s lease, with 23.1% of the NRA, expires two years after loan maturity. Although neither tenant has any remaining renewal options available, JPMorgan Chase has been at the property since it was built in 1991 and National Grid signed its initial lease in 1988. Both tenants carry an investment-grade credit rating.

The multiblock campus contains street-level retail as well as a 3.5-acre, centrally located greenspace and is well located with easy access to public transportation. In addition to its proximity to Manhattan and ample transportation options, the area offers a lower-cost business district that continues to attract a variety of firms seeking comparatively lower rental rates.

The loan is secured by the borrowers’ leasehold interest in two office properties. Leasehold interests are subject to certain risks not associated with mortgages secured by a lien on a borrower’s fee estate in commercial real estate. If the borrower’s leasehold interest were to be terminated or impaired, the lender could lose its security in the leasehold interest. The terms of the ground lease for One MetroTech Center provide for ground rent to be reset in 2026. The combined ground rent for both buildings, including SAC payments, will increase to $10.3 million in 2026 from $4.8 million today.

The fifth-largest tenant by DBRS Morningstar’s rent and seventh-largest by square footage has an early termination date with 180 days’ notice. The Human Resources Administration has leased 27,000 square feet (sf) since 2013 but recently expanded into an additional 17,357 sf of space. The tenant is New York’s department in charge of most the city’s social service programs. Given the city’s vast commitment throughout the MetroTech Campus and the tenant’s recent expansion, no adjustment was made for the early termination date.

Many of the larger tenants have been in occupancy since the MetroTech Center was completed. Both long-term tenants, DoITT and E911 emergency dispatcher facility, occupy 100% of the space with lease terms through 2030 in Eleven MetroTech Center. Also, JPMorgan Chase and National Grid have been at One MetroTech Center since it was completed. Many have high investment-grade ratings.

The DBRS Morningstar net cash flow (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 of $17.9 million was accepted and a cap rate of 8.23% was applied, resulting in a DBRS Morningstar Value of $217.8 million, a variance of -28.3% from the appraised value at issuance of $304 million. The DBRS Morningstar Value implies an LTV of 105.6%, as compared with the LTV on the issuance appraised value of 75.7%. The NCF figure applied as part of the analysis represents a -18.8-% variance from the Issuer’s NCF, primarily driven by vacancy loss, tenant improvements, and leasing commissions.

The cap rate applied is at the middle end of the range of DBRS Morningstar Cap Rate Ranges for office properties, reflective of the leasehold interests these loans represent, the strong market, and strong tenancy. In addition, the 8.23% cap rate applied is above the implied cap rate of 7.27% 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 4.50% 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-NCP 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.

DBRS Morningstar notes that the risk sensitivity analysis associated with the above press release was amended on September 3, 2020, to reflect an update. The results of the update were generally in line with those previously disclosed and the amendments do not have any impact on the credit ratings or analytical considerations.

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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