DBRS Morningstar Finalizes Provisional Ratings on SLG Office Trust 2021-OVA

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

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

All trends are Stable.

The SLG Office Trust 2021-OVA single-asset/single-borrower transaction is collateralized by the borrower’s fee-simple interest in One Vanderbilt, a 1,648,713-square foot (sf) Class A office high rise located directly adjacent to Grand Central Terminal in Midtown Manhattan, New York. The collateral was developed by the transaction sponsor, SL Green Realty Corp. (SL Green). In addition to being exceptionally well located, the collateral exhibits asset quality that is relatively unmatched, even among New York’s existing supply of trophy office properties. The subject’s general composition includes more than 1.5 million sf of luxury office space, a roughly 67,000-sf observation deck called the Summit, nearly 32,000 sf of high-end retail and restaurant space (inclusive of the Summit’s reception area), and nearly 30,000 sf of tenant amenity space.

Despite having not yet finalized construction, One Vanderbilt was 89.1% leased as of loan closing with a weighted-average (WA) remaining lease term of 17.0 years, which DBRS Morningstar believes should largely shield the property from any short- or medium-term dislocations in the Midtown Manhattan office market resulting from the ongoing Coronavirus Disease (COVID-19) pandemic. The property benefits from a large proportion of long-term, institutional-grade tenancy and nearly zero lease rollover through the scheduled loan maturity. The collateral’s clearly superior asset quality and market location are projected to fuel a new ceiling for Midtown Manhattan office rents, a trend clearly supported by the collateral’s active lease-up during the height of the ongoing coronavirus pandemic. Overall, DBRS Morningstar believes that the collateral is well positioned to remain an attractive option for the market’s top office tenants, or at least those in a position to execute leases before the collateral reaches 100.0% occupancy.

As of loan closing, approximately 34.8% of the collateral’s total net rentable area (NRA) was leased to tenants with investment-grade ratings and 35.9% of the collateral’s in-place base rent was derived from investment-grade tenants that qualified for long-term credit tenant (LTCT) treatment as part of the DBRS Morningstar Net Cash Flow analysis. An additional 26.3% of the collateral’s in-place base rent reported at closing was derived from global law firms with reported 2020 gross revenues placing them in the top 40 highest grossing law firms in the world. In addition to the institutional-grade tenancy, the collateral benefits from nearly zero lease rollover during the 10-year lease term with only 5.2% of total NRA (representing 5.0% of the DBRS Morningstar gross rent) scheduled to roll prior to loan maturity. As of loan closing the collateral was 89.1% leased with a WA remaining lease term of 17.0 years, which results in a stable, long-term cash flow stream with contractual rent increases built into many of the leases.

The transaction benefits from strong, experienced, and investment grade-rated sponsorship in SL Green, which is one of Manhattan’s largest office landlords. As of March 31, 2021, SL Green reported interests in 84 buildings totaling 37.8 million sf, including ownership interests 28.3 million sf of Manhattan buildings and 8.7 million sf securing debt and preferred equity investments. The borrower (One Vanderbilt Owner LLC) is approximately 71.0% indirectly owned and controlled by the SL Green Realty Corp., with the remainder being held by National Pension Service of Korea (27.6%) and by Hines Interests Limited Partnership (1.4%). The National Pension Service of Korea is one of the largest pension funds in the world with approximately $771.0 billion in assets as of February 2021. Hines Interests Limited Partnerships (Hines) is one of the largest privately held real estate investors, managers, and developers in the world. With reported management interests in 576 properties totaling 246.0 million sf.

The DBRS Morningstar LTV ratio for the $3.0 billion of total debt is relatively substantial at 100.8%. 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 high leverage point, combined with the lack of scheduled amortization, pose potentially elevated refinance risk at loan maturity. The loan documents do not permit additional debt or future additional debt as part of this transaction with customary exceptions for trade payables and other property expenses. The Borrower Sponsor for this transaction is partially using loan proceeds to repatriate more than $1.0 billion of cash equity for distribution. 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.

As part of Carlyle Investment Management's lease agreement at One Vanderbilt, SL Green agreed to take over Carlyle's lease obligation at 520 Madison Avene. Carlyle's lease at 520 Madison Avenue extends through May 2031 with approximately $213.3 million of outstanding rent obligations outstanding as of loan closing. Carlyle's space at 520 Madison is subleased to three tenants, though not all of the subleases extend through the remainder of Carlyle's lease term, nor do the subleased rents cover the entirety of Carlyle's monthly rent obligations. To mitigate shortfalls in rent owed at 520 Madison Avenue, the loan included reserves at closing sufficient to cover the remainder of Carlyle's outstanding rent obligations, net of projected sublease income. DBRS Morningstar also applied an additional $8.0 million value penalty to account for what DBRS Morningstar perceived to be shortfalls in the reserved rent amounts. Similar to the execution of Carlyle Investment Management's lease agreement, the sponsor has taken over existing leases of incoming tenants at several alternative properties including 340 Madison Avenue, 330 Madison Avenue, the Grace Building, 1140 Avenue of the Americas, 375 Park Avenue, and 510 Madison Avenue. The total obligations across these properties (approximately $32.1 million) have been reserved for upfront as part of this transaction.

While One Vanderbilt currently stands as the pinnacle for premier office space in Midtown Manhattan (and the greater New York City), competitive developers RXR Realty and TF Cornerstone have announced plans to redevelop the Grand Hyatt located on the adjacent side of Grand Central Terminal at 175 Park Avenue. The proposed redevelopment would stand 83 stories (approximately 1,600 feet) tall, making it the tallest building in Midtown and potentially overshadowing One Vanderbilt. Early plans of Project Commodore indicate the redevelopment could add 2.1 million sf of luxury office space to the Midtown Market (within roughly a block of the collateral), in addition to approximately 10,000 sf of ground-floor and cellar retail space. Project Commodore is not anticipated to be completed until 2030 at the earliest, and its delivery will likely further solidify the collateral’s location as Manhattan’s premier office market. Additionally, Project Commodore’s overall investments to the surrounding infrastructure should provide a long-term benefit to One Vanderbilt.

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 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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