DBRS Morningstar Assigns Provisional Ratings to BBCMS 2021-AGW Mortgage Trust, Series 2021-AGW

DBRS, Inc. (DBRS Morningstar) assigned provisional ratings to the following classes of BBCMS 2021-AGW Mortgage Trust, Series 2021-AGW, as follows:

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

All trends are Stable. Class HRR is not rated by DBRS Morningstar.

Class X-CP and X-NCP are interest-only (IO) classes whose balance is notional.

The BBCMS 2021-AGW Mortgage Trust single-asset/single-borrower transaction is collateralized by the leasehold interest in 16 cross-collateralized, suburban office assets totaling approximately two million sf located on the North Shore of Long Island, NY. Angelo Gordon purchased a 95.5% leasehold interest in the portfolio in November 2019 from the WE’RE Group (WE'RE), which retained the remaining 4.5% leasehold interest and 100% of the leased fee interest. The acquisition coincided with a bifurcation of the fee and leasehold interests and the creation of new 99-year Section 467 leases for each asset. The Section 467 leases were used for tax planning purposes on behalf of WE’RE, who developed each of the assets in the portfolio from 1970 to 2007.

As of June 2021, the portfolio is 86.8% occupied by a diverse roster of tenants in the medical, finance, and law industries with no single tenant comprising more than 24.1% of base rent or 18.3% of NRA. Approximately 50.6% of base rent is derived from investment-grade tenants and/or tenants with investment-grade parent entities and the top three tenants include ProHealth Corp. (24.1% of base rent), Northwell Health (10.5% of base rent), and Newsday (5.8% of base rent). Outside of the top three tenants, no single tenant represents more than 3.3% of base rent or 3.7% of NRA. The weighted average (WA) remaining lease term and WA tenure of the portfolio are 6.1 years and 14.8 years, respectively. Medical tenants comprise 53.8% of base rent and have a WA tenure of 16.3 years. Since acquisition, the sponsor has executed more than 440,000 sf of new and renewal leasing (approximately 21.7% of NRA), improving net operating income by approximately $12 million.

Only 50.9% of base rent and 40.3% of leased sf expire during the fully extended loan term. Tenants representing no more than 12.0% of NRA or 16.2% of base rent roll in any single year during fully extended loan term. The WA remaining lease term of the 10 largest tenants, which comprise 59.5% of base rent, is 6.6 years, and the WA remaining lease term for the portfolio is 6.1 years.

The sponsorship is a joint venture between Angelo Gordon and WE'RE. Angelo Gordon has been investing in commercial real estate since 1993 and has acquired more than $35 billion of properties globally. Angelo Gordon's investment strategies span a broad spectrum of value creation, ranging from light value add to heavy value add, with the goal of increasing cash flow and stabilizing underperforming properties. The WE’RE Group, owned by the Rechler and Wexler families, has designed, built, owned, and managed more than 10 million sf of commercial real estate in Long Island, NY, over the past 50 years. WE’RE exhibits tenant retention rates of 90% across its entire portfolio and has decades of experience in owning and operating Long Island office properties.

The portfolio is well located along the North Shore of Long Island, which contains some of Long Island’s strongest submarkets and all assets are located within close proximity of major arterials including the Northern Parkway and the Long Island Expressway. The western Nassau County assets, which represent 61.8% of portfolio NOI, are proximate to Long Island Jewish Hospital and North Shore University Hospital, which merged in 2016 to form Northwell Health. These renowned hospitals are major demand drivers for medical office space on the North Shore.

The proximity of the properties to the major hospitals on Long Island’s North Shore makes the portfolio a highly desirable location for medical tenants, which comprise approximately 53.8% of base rent with a WA tenure of 16.3 years vs 14.8 years at the property overall. Medical tenants tend to receive above market allocations for tenant improvements, but will often spend additional capital on the build out of their space. This larger upfront investment substantially increases potential relocation costs upon lease expiration and increases probability of renewal.

New supply has been limited because of the infill nature of the portfolio's submarkets and the high surrounding population density. Per the appraisals, two of the submarkets, Western and Eastern Nassau (collectively 63.9% of NRA) have had no new supply within the past 12 months and no new construction is under way. Western Suffolk (36.1% of NRA) has only had 15,000 sf of new supply within the past 12 months and only 65,700 sf of new supply (0.3% of total submarket inventory) is currently under construction.

The DBRS Morningstar LTV is high at 99.7% based on the $350 million in total mortgage debt. In order to account for the high leverage, DBRS Morningstar programmatically reduced its LTV benchmark targets for the transaction by 1.5% across the capital structure.

The sponsor is partially using proceeds from the mortgage loan to repatriate approximately $98.1 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-is valuation of $458.7 million, the sponsor will have approximately $108.7 million of unencumbered market equity remaining in the transaction.

The nonrecourse carveout guarantors are five Angelo Gordon fund entities on a several (and not joint basis) that are required to maintain an aggregate minimum net worth of at least $200 million, exclusive of the properties with no liquidity requirement. This effectively limits the recourse to the sponsor for bad act carveouts. “Bad boy” guarantees and consequent access to the guarantor help mitigate the risk and increased loss severity of bankruptcy, additional encumbrances, unapproved transfers, fraud, misappropriation of rents, and other potential bad acts of the borrower or its sponsor.

The loan allows for pro rata paydowns associated with property releases for the first 20% of the unpaid principal balance. The loan has been structured with a partial pro rata/sequential-pay structure. DBRS Morningstar considers this structure credit negative, particularly at the top of the capital stack. Under a partial pro rata structure, deleveraging of the senior notes through the release of individual properties occurs at a slower pace compared with a sequential-pay structure. DBRS Morningstar applied a penalty to the transaction's capital structure to account for the pro rata nature of certain voluntary prepayments.

Individual properties are permitted to be released with customary requirements. However, the prepayment premium for the release of individual assets is 105% of the allocated loan amount for the applicable property up to 10% of the original principal balance, 110% of the ALA for the applicable property up to 20% and 115% thereafter. With regard to the individual assets located within the Lake Success Quadrangle, the release price shall equal 115% at any given time for: 1 Dakota Drive; 3000 Marcus Avenue; 2800 Marcus Avenue; 3 Delaware Drive; 3003 New Hyde Park; 5 Delaware Drive; and 6 Ohio Drive and 120% at any given time for: 3 Dakota Drive; 5 Dakota Drive; 2 Ohio Drive; and 4 Ohio Drive. DBRS Morningstar elected not to apply a penalty to the transactions capital structure as 63.5% of the portfolio by ALA is subject to a release price of 115% or greater, which DBRS Morningstar considers to be credit neutral.

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 X-CP and Class X-NCP are interest-only (IO) certificates that reference 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 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/375376.

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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