DBRS Morningstar Confirms Ratings of Natixis Commercial Mortgage Securities Trust 2018-TECH

DBRS Limited (DBRS Morningstar) confirmed its ratings on the Commercial Mortgage Pass-Through Certificates, Series 2018-TECH issued by Natixis Commercial Mortgage Securities Trust 2018-TECH as follows:

-- Class A at AAA (sf)
-- Class X-CP at AA (high) (sf)
-- Class X-EXT at AA (high) (sf)
-- Class B at AA (sf)
-- Class C at A (high) (sf)
-- Class D at A (low) (sf)
-- Class E at BBB (low) (sf)
-- Class F at BB (low) (sf)
-- Class X-F at BB (low) (sf)
-- Class G at B (high) (sf)

All trends are Stable.

The rating confirmations reflect the overall stable performance of the transaction, which remains in line with DBRS Morningstar’s expectations. Total loan proceeds of $195.0 million and sponsor equity of $58.5 million financed the acquisition of the collateral property at an acquisition price of $240.4 million. At origination, debt proceeds included $150.0 million in senior mortgage debt and $45.0 million in mezzanine debt, though only the senior note serves as collateral for the trust. The five-year $150.0 million floating-rate interest-only (IO) senior note has an initial maturity date in November 2022 and is subject to two one-year extension options. The loan is sponsored by Preylock Real Estate Holdings, a Los Angeles-based real estate acquisition and management firm, founded in 2016 and with over $2 billion of assets under management.

The subject loan is secured by a 626,233-square foot (sf) complex comprising seven Class B office and research and development (R&D) buildings in Santa Clara, California, just outside the Golden Triangle, an area bounded by State Highway 237 to the north, U.S. Route 101 to the west, and Interstate 880 to the east. Built between 1970 and 1999, the collateral properties are all situated adjacent to one another, within the Scott Boulevard Corridor submarket, along the San Tomas Expressway. While a portion of the net rentable area (NRA) has been reconfigured since issuance from office to lab space, recent servicer commentary as of October 2020 indicates that of the 626,233 total sf, roughly 420,000 sf (67.0% of the property NRA) is configured as office space, while the remaining 206,000 sf (33% of the property NRA) is configured as lab space. As of the December 2020 rent roll, the property was 100% leased, with an average annual base rental rate of $29.11 per square foot (psf). According to Reis, the properties are all located in the Santa Clara/Sunnyvale submarket for office space and the Santa Clara submarket for Flex/R&D space, both within the larger San Jose market. According to the Q4 2020 Reis data, the average vacancy rate for the office submarket of Class B/C properties was 25.7% and the average asking rental rate was $34.22 psf, while the submarket for Flex/R&D space had a vacancy rate of 12.1% and average asking rental rate of $16.68 psf.

The December 2020 rent roll showed that the property was 100% leased to two tenants: NVIDIA Corporation (NVIDIA), the largest tenant, which occupies 60.7% of the property NRA and contributes 57.7% of the total base rent, and Futurewei Technologies, Inc. (Futurewei), which occupies 39.3% of the property NRA and contributes 42.3% of the total base rent. The property provides conventional office space and R&D labs for both NVIDIA and Futurewei, which have used these specialized labs for research, design, and implementation purposes across several sectors of both companies’ product lines.

NVIDIA is a Santa Clara-based multinational technology company primarily recognized for its work designing and manufacturing graphics cards for computer gaming and professional markets. In 2017, NVIDIA completed construction of phase one of its new headquarters campus directly across the San Tomas Expressway from the subject collateral and construction is nearly complete on another 750,000 sf of office space for the company at the same site. Preliminary approvals have been provided for up to 1.95 million sf of space to be constructed on the site as part of plans that have been in place since 2008. At issuance, it was noted that most of the space that NVIDIA occupies at the subject properties is used for R&D and includes specialized lab space, while more corporate and administrative functions were expected to be transitioned into the new headquarters across the street.

The tenant has been at the property since 1997, expanding its footprint twice to become the largest tenant, and at issuance invested $15.0 million to convert one of its office spaces to specialized lab space, indicating commitment to the property. In addition, the servicer recently confirmed NVIDIA signed a five-year renewal option for one portion of the leased space, representing 12.8% of the property NRA, with the lease for that space now expiring in September 2026. DBRS Morningstar noted on the site inspection at issuance that the 2770-2800 Scott Boulevard building was unique in that it housed a large server room on the first floor, which serves much of the NVIDIA facilities in the area. NVIDIA’s three leases have various expiration dates with two (representing 44.7% of property NRA) occurring during the fully extended loan term.

The second-largest tenant, Futurewei (which leases 39.3% of the property NRA), is a U.S. subsidiary of the Chinese multinational tech company, Huawei Technologies Co. Ltd. (Huawei), the world’s largest telecommunications equipment manufacturer. According to documentation provided at issuance, Futurewei operates as Huawei’s U.S.-based R&D unit and utilizes its space at the subject properties as Futurewei’s headquarters. DBRS Morningstar has previously noted concerns with the Futurewei tenant following the U.S. Commerce Department’s May 2019 decision to put the firm on its list of organizations that pose security risks, effectively excluding the company from the rollout of 5G telecommunications network equipment across the U.S. and encouraging its allies abroad to do the same. In addition, according to a U.S. Department of Justice (DOJ) press release, dated February 13, 2020, the DOJ announced indictments against both Futurewei and Huawei, with charges including racketeering conspiracy and conspiracy to steal trade secrets, among others. Additional information with respect to the statuses of these indictments and the related cases has not been provided by the DOJ to date.

While the Futurewei leases were renewed for 10-year terms through 2027 shortly before issuance, the company reportedly cut 600 jobs at the subject properties in June 2019. The servicer has confirmed that at least one space consisting of 46,300 sf (7.4% of the property NRA) was dark and available for sublease, with Futurewei continuing to pay its contractual rent obligations. Additionally, recent LoopNet and CBRE postings indicate that an additional 62,500 sf (10.0% of the property NRA) was also available for sublease. The Futurewei leases include a one-time right to terminate option on July 31, 2024, which is four months before the fully extended maturity date of the loan. If Futurewei exercises its early-termination option, then it must pay an early-termination fee of the unamortized amount of leasing costs plus a termination penalty. In addition, Futurewei delivered the borrower letters of credit (LOCs) issued by Standard Chartered Bank to serve as protection for Futurewei’s full and faithful performance of all its obligations under the leases. DBRS Morningstar did not incorporate value from Futurewei’s termination penalty, any cash flow sweep, or LOCs in the DBRS Morningstar net cash flow (NCF) surveillance analysis or the hypothetical discounted cash flow analysis during its last review, and those considerations remain consistent with the information available at this time.

As of the YE2020 financials, the servicer reported a NCF of $17.4 million, with a debt service coverage ratio (DSCR) of 3.35 times (x), representing an 18.8% increase from YE2019 when the NCF was reported at $14.7 million with a DSCR of 2.13x. While the NCF has increased noticeably year over year, much of the increase in the loan’s DSCR can be attributed to a 24.5% decrease in the annual debt service, as the loan has a floating interest rate and has benefitted from historically low rates since the onset of the Coronavirus Disease (COVID-19) global pandemic. Additionally, revenues were up, with effective gross income increasing 14.9% year over year. The servicer’s April 2021 CREFC Investor Reporting Package reported $9.0 million in total reserves, including $4.9 million in an LOC and $3.7 million in a tenant reserve.

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.

Classes X-CP, X-EXT, and X-F are IO certificates 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.

The DBRS Viewpoint platform provides additional information on this transaction and underlying loans including DBRS Morningstar metrics, commentary, servicer-reported cash flows, and other performance-related data.

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 methodology is the North American CMBS Surveillance Methodology (March 26, 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 related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info@dbrsmorningstar.com.

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.

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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