DBRS Morningstar Assigns Provisional Ratings to Morgan Stanley Capital I Trust 2021-PLZA, Commercial Mortgage Pass-Through Certificates, Series 2021-PLZA

DBRS, Inc. (DBRS Morningstar) assigned provisional ratings to the classes of Morgan Stanley Capital I Trust 2021-PLZA, Commercial Mortgage Pass-Through Certificates, Series 2021-PLZAas follows:

-- Class A at AAA (sf)
-- Class X at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (sf)

All trends are Stable.

The Morgan Stanley Capital I Trust 2021-PLZA (MSC 2021-PLZA) transaction is secured by the fee-simple interest in Park Avenue Plaza, a 45-story, 1.16 million-sf LEED Platinum office tower. The building is located along Park Avenue between 52nd Street and 53rd Street in Midtown Manhattan’s Plaza submarket. Developed in 1981 by the sponsor, Fisher Brothers, the property has received in excess of $38 million in capex since January 2020 including tenant work letters, demolition of the former McKinsey & Company (McKinsey) space on floors 15 to 21, a build-out of the marketing center, and lobby renovations. The property is currently 99% leased to a mix of major financial and consulting firms with a WA remaining lease term of approximately 14.7 years, inclusive of future starting leases.

Two major tenants, BlackRock (375,022 sf) and Aon Services Corporation (Aon) (209,493 sf), which collectively account for approximately 584,515 sf (50.4% of NRA) and represent approximately 53.0% of base rent, have given notice that they will be vacating their respective leased premises upon expiry of their leases in April 2023. Of the 11 floors BlackRock will be vacating, the sponsor has already executed a 17-year lease with Jennison Associates to take four of the floors (24 to 27) upon the BlackRock expiration. This lease was signed in February 2021 for 118,998 sf at approximately $93 psf in base rent, a 22% premium to BlackRock’s in-place rent of $76 psf. All of Aon’s space is currently being subleased to General Atlantic and Evercore, which will be converted to direct leases with the existing subtenants with expirations ranging from 2035 to 2039. After giving credit to these forward starting leases, the building will be approximately 77% occupied in 2023. In addition, as of October 20, 2021, the sponsor has executed an LOI with a confidential existing tenant of the building to lease 194,466 sf being vacated by BlackRock that was not leased by Jennison Associates. The expected lease term is 15 years at a WA rent which is a 6.4% premium to BlackRock’s in-place rent. DBRS Morningstar did not give explicit credit to this LOI in its concluded stabilized NCF but did consider it when determining its qualitative adjustments and assessing execution risk.

At loan closing, approximately $43.5 million of cash equity will be placed into the Re-Tenanting Reserve, to be used for contractual obligations to tenants under the forward starting executed leases. In addition, the loan is structured with an ongoing full cash sweep through December 2024, which flows through the hard lockbox to be deposited into the Re-Tenanting Reserve each month to finance contractual free rent obligations to tenants, the majority of which are the forward starting leases that commence in 2023. The Re-Tenanting Reserve is sized to provide excess funds of approximately $21.4 million ($80 psf) at the end of the free rent period in February 2025 to re-tenant any remaining space that remains vacant following BlackRock’s natural lease expiration in April 2023. Other than BlackRock and Aon, only one tenant, Intercontinental Exchange (ICE), which represents 9.7% of base rent, has a lease maturity during the loan term in 2028 and currently uses its space as its headquarters.

Given the forward starting leases that account for 56.2% of the upcoming known vacancy, along with the substantial loan structure including upfront reserves and a five-year full cash flow sweep with funds available for future accretive leasing, DBRS Morningstar concluded to a stabilized economic occupancy of 92.5% for the property. The sponsor has a history of proactively handling any tenant lease expirations and focusing on occupancy and tenant credit. When McKinsey opted not to renew its lease in 2017 and vacated 206,600 sf across floors 15 to 21, the sponsor quickly re-tenanted the entire space, signing leases with Duff & Phelps (91,019 sf), BBR Partners (30,345 sf), and Evercore (91,008 sf). Across the seven former McKinsey floors, the new leases achieved a 26.3% premium to the prior rent and have an average term of 16.1 years. This assumption is further bolstered by the property’s historical average occupancy of 99% since 2005, never dropping below 95%, a 16-year period which includes both the financial crisis and the Coronavirus Disease (COVID-19) pandemic.

The transaction sponsorship is a joint venture of Fisher Brothers and Seven Valleys. Fisher Brothers is a family-owned and multigenerational real estate investment company with an expertise in owning and managing Class A office space, as well as developing both residential and commercial space, with a geographic focus on urban markets along the East Coast. Founded in 1915, the firm has developed, owned, and managed over 10 million sf of Class A office space including 1345 Avenue of the Americas (2 million sf), 605 Third Avenue (1.0 million sf), and 299 Park Avenue (1.2 million sf) in New York as well as Station Place in Washington, D.C. (2 million sf). Seven Valleys is the New York-based single-family office of Zhang Xin and Pan Shiyi, who are the co-founders of SOHO China, China’s largest prime
office developer. Founded in 1995, SOHO China focuses on developing and holding high-profile branded commercial properties in Beijing and Shanghai. SOHO China has developed 54 million sf of commercial property and is listed on the Stock Exchange of Hong Kong (Stock Code: 410).

Morgan Stanley Mortgage Capital Holdings LLC originated the 10-year loan that pays fixed-rate interest of 2.8375% on an IO basis through the entire term. The $460 million whole loan is composed of nine promissory notes: eight senior A notes totaling $338 million and one junior B note of $122 million. The MSC 2021-PLZA mortgage trust will total $260 million and consist of two senior A notes with an aggregate principal balance of $138 million and the $122 million junior B note. The remaining senior A notes will be held by the originator and may be included in a future securitization. The senior notes are pari passu in right of payment with respect to each other. The senior notes are generally senior in right of payment to the junior notes. The $115 mezzanine loan was funded by Morgan Stanley Mortgage Capital Holdings LLC and has a 10-year term.

Class X is an interest-only (IO) certificates that references a single rated tranche. The IO rating mirrors the lowest-rated applicable reference obligation tranche adjusted upward by one notch if senior in the waterfall

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.

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.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

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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