DBRS Morningstar Confirms Seven Classes of CSAIL 2017-C8 Commercial Mortgage Trust, Removes UR-Dev. Status

DBRS, Inc. (DBRS Morningstar) confirmed the ratings on the following classes of the Commercial Mortgage Pass-Through Certificates, Series 2017-C8 issued by CSAIL 2017-C8 Commercial Mortgage Trust:

-- Class 85BD-A at AA (low) (sf)
-- Class V1-85A at AA (low) (sf)
-- Class 85BD-B at A (low) (sf)
-- Class V1-85B at A (low) (sf)
-- Class 85BD-C at BBB (low) (sf)
-- Class V1-85C at BBB (low) (sf)
-- Class V2-85 at BBB (low) (sf)

Classes 85BD-A and V1-85A have Stable trends. Classes 85BD-B, V1-85B, 85BD-C, V1-85C, and Class V2-85 have Negative trends because DBRS Morningstar is concerned about this transaction’s exposure to WeWork, which accounts for 26.2% of the asset’s net rentable area (NRA) and 30.8% of base rent. Although there is a long-term lease in place, the company has shuttered many of its facilities since the outbreak of the Coronavirus Disease (COVID-19) pandemic, and an infusion of liquidity from its largest investor, Softbank, failed to materialize. This places the company at increased risk with significantly reduced revenue.

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.

This loan is secured by the borrower’s fee interest in 85 Broad Street, a 1.1 million-square foot (sf) Class A office property in downtown Manhattan, New York. The previous owner renovated the office tower in 2016 at a cost of $112.0 million ($100.00 per sf (psf)). The renovation encompassed several building system upgrades, refurbishments to the lobby and elevators, and upgrades to the tenant amenity spaces. The $358.6 million whole loan comprised three pari passu senior notes totaling $169.0 million as well as two subordinate notes with a total balance of $189.6 million. The loan will be serviced pursuant to the pooling and servicing agreement for this transaction. Whole-loan proceeds of $358.6 million along with $308.8 million of sponsor equity facilitated the sponsor’s $652.0 million acquisition of the property, funded reserves totaling $8.7 million, and covered closing costs of $6.6 million. The vast majority of reserves, or nearly $8.2 million, were allocated toward outstanding landlord obligations and free rent. The loan is interest only throughout its 10-year term.

Built in 1983 and recently renovated between 2015 and 2017, the 30-story, LEED Platinum-certified office tower served as the world headquarters for The Goldman Sachs Group, Inc. (Goldman Sachs; rated A (high) with a Stable trend by DBRS Morningstar) until 2009. Since Goldman Sachs left, occupancy has been weak, averaging 60.3% since 2012; however, as of December 2019, the property was 94.3% occupied to a diverse roster of tenants in the financial services including legal and tech, advertising, media and information (TAMI); and education industries. Moreover, the seller has enticed tenants with significant tenant improvement (TI) packages and the renovation, coupled with downtown Manhattan’s evolution to a diverse commercial district from a financial services hub, has allowed the property to achieve roughly 585,000 sf of leasing, steadily increasing occupancy to 94.3% as of YE2019 from 25.0% since the seller’s acquisition in 2014.

The property is located at the northeastern corner of Broad Street and Pearl Street in the Financial District of Lower Manhattan. Easily accessible, the office building is serviced by the PATH transit system, 30 bus routes, 20 ferry paths, and 15 subway lines in the area, which include transportation provided by the Fulton Street Transit Center and the World Trade Center Transportation Hub. The property is also easily connected to Long Island and New Jersey through the Brooklyn-Battery and Holland Tunnels. The Financial District, which is home to Wall Street, the Federal Reserve of New York and the New York Stock Exchange, serves as the world’s financial capital; however, in recent years, media, technology, and biotechnology companies have been leasing space downtown, making the area much less dependent on the financial sector. The influx of TAMI tenants can be attributed to the growing population of Brooklyn, as residents are priced out of Manhattan, and the strengthening technology and biotechnology sectors. Brooklyn is located just across the river from the Financial District, and many companies are seeking space near their employees’ residences, making the Financial District a prime location. Leasing incentives, such as the Commercial Revitalization Program, have also attracted tenancy to the area.

The property exhibits significant tenant concentration, with the three largest tenants—WeWork (26.2% of NRA, expiring August 2033), Oppenheimer Holdings Inc. (Oppenheimer; 24.7% of NRA, expiring February 2028), and Nielsen Media Research Inc. (Nielsen; 10.5 % of NRA, expiring March 2025)—comprise approximately 61.4% of the NRA. The property has significant exposure to WeWork, whose future remains unclear as it attempts to shed spaces and restructure after its failed initial public offering. Moreover, WeWork will face ongoing challenges resulting from its shutdown during the coronavirus pandemic and the failure of Softbank, its managing member and controlling equity partner, to fund additional liquidity as was agreed before the pandemic. The collateral houses WeWork’s first full-service location has a 14,000-sf wellness center, bike room, and restaurant, all of which are offered as amenities to the entire building. The tenant has been at the property since March 2015 and has since expanded several times to include space on various floors with a right of first refusal on floors 15 through 19. WeWork occupies the building subject to an 18-year lease that expires roughly six years after the loan term.

The second-largest tenant is the national investment bank and brokerage firm, Oppenheimer, which has occupied the property since July 2011. Also expanding multiple times over the years, the tenant occupies space on various floors with a right of first refusal on floors four through 11, 21, and 27. Its lease expires one year after loan maturity. It also has an early termination option in 2024 with 18 months’ notice and a termination fee equal to unamortized transaction costs at an interest rate of 8.0%. DBRS Morningstar notes that Oppenheimer contributed $15.0 million ($55.00 psf) of its own funds to the build-out of its space. Additionally, the loan is structured with a full cash flow sweep upon, or 12 months prior to, the contraction, termination, or expiration of the Oppenheimer or WeWork tenant leases. If both tenants provide 12 months’ notice, the cash flow sweep would be capped at $80.00 psf in both instances, which is well above both WeWork’s and Oppenheimer’s current rent and the appraiser’s concluded market TIs of $75.00 psf for new leases. Overall, rollover throughout the loan term is minimal with the most concentrated turnover occurring in 2025 when the third-largest tenant, Nielsen, representing 10.5% of the NRA, is scheduled to expire.

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 was $20.6 million and a cap rate of 6.75% was applied, resulting in a DBRS Morningstar Value of $304.6 million, a variance of -53.3% from the appraised value at issuance of $652.0 million. The DBRS Morningstar Value implies an LTV of 55.5% on the senior debt and 117.7% on the whole loan, as compared with the LTV on the issuance appraised value of 25.9% and 55.0%, respectively. The NCF figure applied as part of the analysis represents a -14.4% variance from the Issuer’s NCF, primarily driven by leasing costs.

The cap rate applied is at the lower end of the range of DBRS Morningstar Cap Rate Ranges for office properties, reflective of the location, quality, and market position. In addition, the 6.75% cap rate applied is significantly above the implied cap rate of 3.7% 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 1.5% to account for cash flow volatility, property quality, and market fundamentals.

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.

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.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.

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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