DBRS Morningstar Finalizes Provisional Ratings on COMM 2020-CX Mortgage Trust

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following classes of Commercial Mortgage Pass-Through Certificates (the Certificates) issued by COMM 2020-CX Mortgage Trust (the Issuer):

-- Class A 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 (sf)
-- Class HRR at BB (sf)
-- Class X at AA (sf)

All trends are Stable.

The Class X balance is notional.

The COMM 2020-CX Mortgage Trust single-asset/single-borrower transaction is collateralized by the borrower’s fee-simple interest in 222 Jacobs Street, a newly constructed, 426,869-sf, nine-story, Class A LEED® Gold (targeted), life-sciences office building in the Kendall Square submarket of Cambridge, Massachusetts. DBRS Morningstar takes a positive view on the credit characteristics of the collateral, which was completed in 2019 and is a component of the larger master-planned Cambridge Crossing Development (CX), which is currently being executed by the sponsor, DivcoWest. When fully built out, CX will consist of approximately 2.1 million sf of science and technology space, 2.4 million sf of residential space, and 100,000 sf of retail space. In total, approximately 1.8 million sf of office and laboratory space are under construction, with approximately 1.7 million sf leased to Philips, Sanofi, Bristol Myers Squibb, and Cerevel.

The building benefits from long-term, institutional-grade tenancy with a WA remaining lease term of over 13.2 years, which DBRS Morningstar believes should largely shield the property from any short- or medium-term dislocations in the Cambridge office and life-sciences market resulting from the ongoing Coronavirus Disease (COVID-19) pandemic. The property is currently 97.8% leased with two major tenants, Philips NV and Cerevel Theraputics, LLC, comprising 94.8% of NRA. Philips NV occupies 343,969 sf (80.6% of NRA) as its North American headquarters pursuant to a 15-year NNN lease. Philips is expected to have approximately 2,000 employees work out of 222 Jacobs, which will include electronics lab space with a clean room, as well as all of its traditional business operations, including its C-suite executives. Philips will be relocating its employees from a suburban, corporate campus in Andover, approximately 30 miles north of Boston, with the ultimate intention to fully transition all corporate operations to the property. Cerevel Theraputics occupies 60,867 sf (14.3% of NRA). Cerevel’s lab space is on the second floor and consists primarily of wet lab space including wet rooms, freezer farms, tissue culture, and cell culture space, along with common biology and chemistry labs.

DBR Investments Co. Limited is expected to originate the 10-year loan that pays fixed-rate interest of 2.69% on an interest-only basis through the initial maturity of the loan, contingent upon final pricing.

The $435 million whole loan is composed of a $295 million senior note, a $91,450,000 senior companion note, and a junior note in the trust of $140,000,000. The whole loan proceeds are being used to refinance existing financing, return equity to the sponsor, fund up-front reserves, and pay closing costs.

The property is well-located in a prime location in Kendall Square submarket of East Cambridge, one of the world’s foremost life-sciences and technology clusters and is in close proximity to MIT, Harvard, and Massachusetts General Hospital. Per Cushman & Wakefield, the East Cambridge lab market has a vacancy rate of 1.5% and also commands the highest rents of any life-sciences cluster in the United States with asking Class A rents of $100 psf NNN. Dutch healthcare technology company, Philips NV, which is investment-grade rated, Fitch: A-, S&P: BBB+, Moody’s: Baa1, represents more than three fourths (78.2%) of the building's concluded in-place base rent and qualified for long-term credit tenant (LTCT) treatment in our concluded net cash flow (NCF). Philips originally leased floors three through seven in 2018 as its North American headquarters. Shortly thereafter, the tenant leased floors eight and nine by exercising a right of first offer. After finalizing its space planning, Philips subleased the ninth floor to Thrive Earlier Detection Corp. for 10 years, giving the tenant flexibility to grow into its space in the future. Philips remains liable throughout the term of the lease. The sublease base rent is $80.00 psf NNN (approximately 10% above Philips’ in-place rent), increasing 3.0% annually. DivcoWest and Philips share the rental differential less deal costs 50/50.

In addition to a large percentage of investment-grade tenancy, there is limited lease rollover during the 10-year loan term. The WA remaining lease term at the property is 13.2 years, which results in a stable, long-term cash flow stream with contractual rent increases built into both Philips’ and Cerevel's leases. Philips’ lease expires on November 30, 2034, and has three five-year extension options. Cerevel's lease expires on February 28, 2030, and has two five-year extension options.

Executed in January 2018, Philips’ lease has a blended starting base rent of $64.00 psf, which is 20% below market office rents of $80.00 psf and 36% below market lab rents of $100.00 psf, as referenced by the appraisal. Additionally, Philips’ rent represents a 32.6% discount to the sponsor’s average asking base rent of $95.00 psf for similar product type in the greater Cambridge Crossing Development. The limited lease rollover provides for minimal opportunity to capture the upside during the 10-year loan term, but the property will likely benefit in the long run from increased rental revenue as leases expire and roll to market.

The ongoing coronavirus pandemic continues to pose challenges and risks to virtually all major CRE property types and has created an element of uncertainty around future demand for office space, even in gateway markets that have historically been highly liquid. Despite the disruptions and uncertainty, the collateral has largely been unaffected. No tenants have requested rent relief or are currently subject to any kind of rent deferral, and the Sponsor collected 100% of July rent at the property.

The borrower sponsor for the transaction, a JV partnership between DivcoWest and CalSTRS, is partially using loan proceeds to repatriate approximately $58.4 million of equity. DBRS Morningstar views cash-out refinancing transactions as less favorable than acquisition financings because sponsors typically have less incentive to support a property through times of economic stress if less of their own cash equity is at risk. Based on the appraiser’s as-completed valuation of $729 million, the sponsor will have approximately $294 million of unencumbered market equity remaining in the transaction.

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 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.

For supporting data and more information on this transaction, please log into www.viewpoint.dbrsmorningstar.com. DBRS Morningstar provides analysis and in-depth commentary in the DBRS Viewpoint platform.

Notes:
All figures are in U.S. dollars unless otherwise noted.

With regard to due diligence services, DBRS Morningstar was provided with the Form ABS Due Diligence-15E (Form-15E), which contains a description of the information that a third party reviewed in conducting the due diligence services and a summary of the findings and conclusions. While due diligence services outlined in Form-15E do not constitute part of DBRS Morningstar’s methodology, DBRS Morningstar used the data file outlined in the independent accountant’s report in its analysis to determine the ratings referenced herein.

The principal methodology is the North American Single-Asset/Single-Borrower Ratings Methodology (March 1, 2020), 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.

With regard to the Coronavirus Disease (COVID-19) pandemic, the magnitude and extent of performance stress posed to global structured finance transactions remain highly uncertain. This considers the fiscal and monetary policy measures and statutory law changes that have already been implemented or will be implemented to soften the impact of the crisis on global economies. Some regions, jurisdictions, and asset classes are, however, feeling more immediate effects. DBRS Morningstar continues to monitor the ongoing coronavirus pandemic and its impact on both the commercial real estate sector and the global fixed-income markets. Accordingly, DBRS Morningstar may apply additional short-term stresses to its rating analysis, for example by front-loading default expectations and/or assessing the liquidity position of a structured finance transaction with more stressful operational risk and/or cash flow timing considerations.

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. The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at info@dbrsmorningstar.com.

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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