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

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

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

All trends are Stable.

Class X is an interest-only (IO) class whose balance is notional.

The COMM 2020-SBX single-asset/single-borrower transaction is collateralized by the borrower’s fee-simple interest in the Starbucks Center, a 1,434,337-square-foot (sf) Class A LEED Gold office building with retail, storage, and parking components, and the Home Depot parcel, a 108,000-sf single-tenant anchored retail property, in the SODO submarket of Seattle, Washington. The Starbucks Center serves as the global headquarters for Starbucks Corporation (Starbucks). The Starbucks Center benefits from long-term, institutional-grade tenancy with a Starbucks lease that expires in September 2038 with three 7.5-year lease extensions options remaining. Starbucks represents 93.8% of the DBRS Morningstar Base Rent and qualified for long-term credit tenant treatment in DBRS Morningstar’s concluded net cash flow (NCF). Starbucks moved its corporate headquarters to the property in 1993 and has since expanded more than 60 times, growing to over 1.3 million sf as of the November 1, 2020, rent roll from 60,000 sf. Starbucks has spent approximately $128.0 million of its own capital for build-outs, lobby renovations, amenities, and other projects in its space since 2015. Starbucks’ November 1, 2020, rental rate of $8.52 per sf (psf) and the stepped-up rental rate of $28.17 psf in November 2025 are both well below the appraiser’s estimated market rent of $40.00 psf for the space. A key variable of Starbucks’ early expansion plan in 1995 with the sponsor was that Starbucks would the lease warehouse space at a low rental rate with the requirement that it would fund any building system and tenant and amenity improvements.

DBRS Morningstar’s Debt Service Coverage Ratio of 3.95 times the collateral’s weighted-average remaining lease term of 16.4 years, and the loan’s low interest rate suggest a low term default risk profile. Starbucks’ lease expires in September 2038, which is 12.6 years and 9.6 years after the anticipated repayment date (ARD) and the stated maturity date, respectively.

The ARD structure of the loan, which requires that all NCF after debt service be applied to principal during a three-year tail, coupled with Starbucks’ lease term relative to the ARD and stated maturity, reduces maturity default risk. Additionally, the ARD structure provides the sponsor with the option to sell, refinance, or keep the subject loan in place after Starbucks’ rent step in November 2025, which will more than triple Starbucks’ current base rent of $8.52 psf as of the November 1, 2020, rent roll. DBRS Morningstar estimates that, only using income that Starbucks generates, the loan could be paid down substantially to $343.1 million ($222.44 psf) from $425.0 million ($275.56 psf) during the 36 months from ARD to stated maturity.

The borrower sponsor for the transaction, SODO Center, Inc. (SODO Center), is using loan proceeds to repatriate approximately $170.2 million of equity. The borrower is indirectly wholly owned by SODO Center, which is controlled by Peter P. Nitze (President and Chairman of Nitze-Stagen & Company, Inc.) and Kevin Daniels (President of Daniels Real Estate, LLC). DBRS Morningstar views cash-out refinancing transactions as less favorable than acquisition financings as sponsors typically have less incentive to support a property through times of economic stress if less of their own cash equity is at risk. The sponsor will have no cash equity remaining in the collateral as a result of this transaction.

The ongoing Coronavirus Disease (COVID-19) pandemic continues to pose challenges and risks to virtually all major commercial real estate property types. Per the site inspection, Starbucks employees are currently scheduled to return to the office in October 2021. There were over 4,500 employees at the collateral pre-coronavirus, but this number has reduced to 400 since the lockdown restrictions. According to the site representative on the site inspection, Starbucks is in talks with Gensler to redesign its interior space to expand space per employee for the post-coronavirus working environment. While the Amazon Fresh and U.S. Bank retails tenants have reportedly experienced a significant decline in customer traffic since lockdown restrictions began, the Home Depot was fairly busy at the time of the site inspection. The Home Depot reported sales of $605.00 psf in 2019, which outperformed the chain average of $455.00 psf in 2019.

The collateral is located in Seattle’s SODO district, which is a densely built-out historically industrial area that has benefited from Starbucks’ growth since the firm took occupancy at the collateral in 1993. Because of local zoning restrictions, there are no existing or planned competitive Class A offices properties in the SODO district. The Starbucks Center and the Home Depot are located in an area with a DBRS Morningstar Market Rank of 6. The collateral benefits from its close proximity to the Seattle CBD, Seattle’s three major arterial thoroughfares (I-5, I-90, and Hwy. 9), and the Sound Transit – SODO Station.

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 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.

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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