DBRS Morningstar Finalizes Provisional Ratings of VASA Trust 2021-VASA

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2021-VASA (the Certificates) to be issued by VASA Trust 2021-VASA (Vasa 2021-VASA or the Trust):

-- 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 (low) (sf)
-- Class F at B (low) (sf)
-- Class A-Y at AAA (sf)
-- Class A-Z at AAA (sf)
-- Class A-IO at AAA (sf)

All trends are Stable.

The Class A, Class A-Y, Class A-Z, and Class A-IO Certificates (the CAST Certificates) can be exchanged for other CAST Certificates and vice versa. Proportions are constant proportions of the original Certificate Balance or Notional Amount of the CAST Certificates being exchanged. Following the Closing Date, the Class A certificates will be exchangeable for the CAST Certificates in the Exchanged Proportions indicated in the applicable combinations indicated above (each a Combination) and vice versa (each such completed exchange, an Exchange). The CAST Certificates required under the applicable Combination to result in the issuance of the other CAST Certificates in amounts at least equal to the applicable minimum denomination for such other Class(es) are referred to as the Required Exchangeable Proportion, and the proportion so exchanged, the Exchanged Proportion.

The collateral for VASA 2021-VASA includes certain components of a $505.6 million first-lien mortgage loan secured by the borrower’s fee and leasehold interest in a 576,921-square-foot (sf) mixed-use office and retail development in the heart of Mountain View, California, which is part of Silicon Valley. The loan is structured with a two-year initial term and three 12-month extension options that are exercisable subject to certain criteria set forth in the initial loan agreement. The floating-rate loan is interest only (IO) through the fully extended loan term. However, commencing after the fully-extended anticipated repayment date in April 2026, the loan is scheduled to hyper-amortize until the balance is repaid in full, subject to a final maturity date of July 31, 2029. During the hyper-amortization period the interest rate is scheduled to step up 250 basis points over the initial interest rate (defined as Libor plus 2.03%), though the portion of the interest accrued in excess of the Initial Interest Rate during the hyper-amortization will be deferred and added to the outstanding principal balance of the mortgage loan.

The collateral was originally delivered to market in 2017 and comprises 456,760 (79.2% of total net rentable area (NRA)) of Class A office space, 120,161 sf (20.8% of total NRA) of ground- and second-floor retail space, and a nine-story parking garage that is not included in the cumulative NRA. The property is a component of a larger mixed-use development, which outside of the collateral includes a 90,000-sf grocery-anchored retail center (commonly referred to as The Village Shops), a 167-key hotel operated as a Hyatt Centric, and a 330-unit luxury multifamily property (commonly referred to as The Village Residences). As of loan closing, the collateral was 89.8% physically leased to four tenants. The collateral’s office component was originally 100% leased by LinkedIn but, following Microsoft’s acquisition of LinkedIn in 2016, Microsoft assigned the LinkedIn lease to WeWork and provided a guaranty on the assigned lease that extends through July 2029. Microsoft is rated investment grade. WeWork has, in turn, enterprise leased 100.0% of the office space to Facebook, which took occupancy in the space prior to the ongoing Coronavirus Disease (COVID-19) pandemic. The collateral’s retail component was 51.1% physically leased as of loan closing, anchored by a Showplace Icon Theatre that went dark because of business closures and stay-at-home mandates associated with the ongoing coronavirus pandemic. Showplace Icon Theatre reported strong sales at the property prior to the pandemic and has evidenced its commitment to the space through significant capital investment as well as the recent execution of a lease amendment that extended the tenant’s lease through October 2040.

The borrower sponsor for this transaction is Brookfield Strategic Real Estate Partners III GP L.P., which is a $15.0 billion global private real estate find managed by Brookfield Asset Management Inc. (Brookfield; rated A (low) with a Stable trend by DBRS Morningstar). Brookfield is an alternative asset manager and one of the largest owners and managers of office properties with a portfolio of 301 properties totaling approximately 160.0 million sf reported as of Q4 2020. Brookfield also owns The Village Residences, which is within the broader Villages at San Antonio Center development but does not serve as collateral for this transaction.

DBRS Morningstar’s outlook on the stability of Class A office space in and around San Francisco and further into Silicon Valley has historically been positive, given that the region is home to many of the world’s largest and fastest-growing technology companies including Apple, Alphabet (Google), Tesla, Facebook, and Microsoft. However, the ongoing coronavirus pandemic continues to pose challenges and risks to virtually all major commercial real estate property types and technology companies have been at the forefront of establishing long-term remote-working policies in response to business closures and ongoing stay-at-home orders. The Stanford Institute of Economic Policy Research estimated that as of June 2020 approximately 42% the U.S. labor force had transitioned to working from home full time while only 26% of the labor force was reported to be working on business premises. While many workers will ultimately return to the office, many sources suggest that the share of working days spent at home may rise structurally compared with pre-pandemic levels. The uncertainty surrounding such changes poses a potential threat to office demand in the technology-dominated San Francisco and Silicon Valley areas, which could otherwise be balanced by continued growth to the area’s technology sector and historically low vacancy rates. Additionally, the appraiser noted that tenants are returning to the market and that continued focus on the distribution of the coronavirus vaccine should provide increasing confidence for individuals looking to return to the office, further spurring a return to stabilized demand levels throughout the collateral’s Mountain View submarket. Facebook intends to allow employees to work remotely through June 2021, though during the ongoing pandemic the firm announced that as many as 50.0% of its employees could be working remotely within the next five to 10 years.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Class A-IO 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.

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DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for this transaction.

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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 North American Single-Asset/Single-Borrower Ratings Methodology (March 2, 2021), 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.

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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