DBRS Morningstar Finalizes Ratings on Citigroup Commercial Mortgage Trust 2020-420K

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following classes of Commercial Mortgage Pass-Through Certificates issued by Citigroup Commercial Mortgage Trust 2020-420K (CGCMT 2020-420K):

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

All trends are Stable.

The Class X balance is notional.

The Citigroup Commercial Mortgage Trust 2020-420K (CGCMT 2020-420K) single-asset/single-borrower transaction is collateralized by the borrower’s fee-simple interest in two Class A residential towers on the waterfront in the Williamsburg section of Brooklyn, New York. Despite the uncertainty around short- and medium-term demand for multifamily rental product in New York, DBRS Morningstar takes a positive view on the credit characteristics of the collateral, which has continued to exhibit strong leasing velocity with minimal concessions. The Kings County submarket where the collateral is located has exhibited especially favorable growth trends in recent years, with double-digit inventory growth rates matched by stable absorption reported over the five-year period ended December 31, 2019, driven by Brooklyn's convenient transit access, comparatively affordable rents, and continued development and gentrification.

Both the 416 Kent and 420 Kent portions of the development benefit from significant 421-a tax exemptions during the loan term, and in return, the developer has designated between 20% and 25% of the units at each address as affordable (65 units at 416 Kent and 121 units at 420 Kent). The market rate units at 416 Kent generally are not subject to any restrictions on rental rates, while the market rate component at 420 Kent is subject to limitations on rental rate increases set by the NYC Rent Guidelines Board during the exemption period.

The property is situated in an irreplaceable waterfront location along the East River in the Williamsburg section of Brooklyn. As a result, many units feature sweeping views of Lower Manhattan, and the property also benefits from convenient access to the South Williamsburg Ferry which provides service to Wall Street/Pier 11. The surrounding neighborhood has undergone vast gentrification in the past few years, and Williamsburg has become one of the most desirable areas in Brooklyn, with many popular restaurants and high-end retail offerings.

The market rate component of 420 Kent, where the majority of the residential vacancy is concentrated, has continued to lease up at a significant pace despite the ongoing Coronavirus Disease (COVID-19) pandemic. Additionally, per the arranger, the sponsor has not had to offer any additional concessions to maintain leasing velocity throughout the spring and summer months. Furthermore, residential collections at the property have averaged 94.1% between the months of March and September 2020, a period during which other high-end multifamily properties struggled with collections.

The DBRS Morningstar loan-to-value ratio (LTV) on the first mortgage debt is 85.49%, which is relatively favorable compared with other recently analyzed single-asset transactions collateralized by Class A multifamily properties whose DBRS Morningstar LTV ratios range from to 87.3% to 102.8%.

The borrower is primarily using whole loan proceeds to refinance existing debt on the property held by KKR and is not returning a meaningful amount of equity to themselves as a part of the transaction. DBRS Morningstar views cash-neutral financings more favorably than when the sponsor is withdrawing significant equity, which can result in reduced skin in the game.

Both the 416 Kent and 420 Kent portions of the development are currently operating under temporary certificates of occupancy (TCOs) pending certain building code approvals. The borrower is required to maintain the TCOs until a permanent certificate of occupancy (PCO) is obtained. If the borrower fails to maintain a TCO or obtain a PCO, the property may not be legally occupied. However, it is not uncommon for mortgages on new developments in New York to close with a TCO, the borrower has represented that costs to obtain a PCO are de minimis, and has represented that PCOs are expected by December 31, 2020, for 416 Kent and March 31, 2021, for 420 Kent.

The properties were completed and began leasing up between January and September 2019, and therefore have limited income and expense operating history. However, DBRS Morningstar believes there is upside in the property's concluded net cash flow as the sponsor leases the remaining units, and DBRS Morningstar's concluded in-place vacancy figure is approximately 20%.

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 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 Morningstar 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.

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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