DBRS Morningstar Finalizes Provisional Ratings on BMO 2022-C1 Mortgage Trust 360 Rosemary Loan-Specific Certificates

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following classes of 360 Rosemary Loan-Specific Certificates issued by BMO 2022-C1 Mortgage Trust:

-- Class 360A at AA (low) (sf)
-- Class 360X at AA (sf)
-- Class 360B at A (low) (sf)
-- Class 360C at BBB (low) (sf)
-- Class 360D at BB (low) (sf)
-- Class 360E at B (low) (sf)

The Issuer elected to make certain changes to the Class 360X certificate after DBRS Morningstar assigned a provisional rating of A (sf). The resulting finalized provisional rating DBRS Morningstar assigned to the Class 360X certificate in light of the changes was AA (sf).

All trends are Stable.

The 360 Rosemary Loan-Specific Certificates are secured by the fee-simple interest in 360 Rosemary, a newly constructed, 313,002-square-foot (sf), Class A office building in the heart of West Palm Beach, Florida. The building is composed of 291,298 sf of office space and 21,704 sf of retail space along with a seven-story garage with 606 parking spaces. Situated on the southeast corner of South Rosemary Avenue and Fern Street, the subject is in an ideal location in West Palm Beach. The property is located near I-95 and Route 1, providing easy access to the coastal cities of Florida. Four miles southwest is Palm Beach International Airport (PBI), the primary airport for West Palm Beach, Boca Raton, Palm Beach, and the surrounding area. It is also one of three major airports serving the South Florida metro area.

The sponsor, Related Companies, built 360 Rosemary in 2021, and it is currently 95.9% leased to primarily finance, real estate, insurance, and legal tenants such as New Day USA, Goldman Sachs, Comvest Partners, Elliott Management, Benefit Street Partners, Point 72, and Maverick Capital. The three largest tenants (New Day USA, Goldman Sachs, and Comvest Partners) represent a combined 43.1% of the total net rentable area (NRA) and each tenant has more than 10 years remaining under their respective leases. The retail space is fully leased by four tenants: Harry’s/Adrienne’s, Mount Sinai, Regions Bank, and Felice Cafe. Tenants representing approximately 21.0% of the total NRA have leases that commenced in 2021, and 70.7% have leases that commence in 2022.

New Day USA, a mortgage lender, moved its second headquarters to the property occupying three suites leased with a weighted-average (WA) lease term of 10.9 years. New Day USA's lease expires in December 2032 and contains two consecutive renewal options of 60 months. Goldman Sachs, a multinational investment bank and financial services company, occupies two suites with a lease term of 10.5 years expiring in December 2032 with two consecutive renewal options of 60 months each. Comvest Partners, a private equity firm, occupies three suites with a lease term of 10.5 years expiring in December 2033 with two consecutive renewal options of 60 months.

360 Rosemary was delivered in 2021 and offers superior amenities, along with a LEED GOLD anticipated energy rating and Platinum WiredScore. The property offers panoramic views of Palm Beach Island, a rooftop deck, multiple green spaces, an Equinox-designed fitness center, and bicycle racks and is near the neighborhood’s shopping and entertainment offerings.

The property is currently 95.9% leased to a mix of finance, real estate, insurance, and legal tenants such as New Day USA, Goldman Sachs, Comvest Partners, Elliott Management, Benefit Street Partners, Point 72, and Maverick Capital. Goldman Sachs is investment grade rated by DBRS Morningstar (A (high)) and investment grade by Moody's, S&P, and Fitch.

The property is in one of the most desirable areas in West Palm Beach, which has the metro’s highest Class A asking rents in the greater Palm Beach metro. The property is in downtown West Palm Beach and benefits from its proximity to entertainment attractions and outdoor recreation areas, including The Square and public parks. 360 Rosemary is accessible from all major commuter transportation hubs with nearby train stations including the West Palm Beach Brightline Station and the West Palm Beach Amtrak Train Station, both of which are less than a half mile from the property.

None of the property’s tenants roll through 2025, and during the initial nine-year term of the loan, the property’s rollover profile is exposed to 9.9% of the NRA and 10.5% of base rent. The WA remaining lease term at the property is 10.4 years, which results in a stable, long-term cash flow stream.

The property has a blended in-place rent of $47.10 per square foot (psf) net for office rents, which is approximately 16.8%–27.4% below market, based on the appraisal’s average comparable Class A office rent of $55 psf–$60 psf net. The limited lease rollover provides for minimal opportunity to capture the upside during the loan term, but the property will likely benefit in the long run from increased rental revenue as leases expire and roll to market.

The property is owned and controlled by The Related Companies, L.P., a global real estate firm with approximately $60 billion in assets under management as of December 31, 2021. Related has a significant interest in West Palm Beach, owning more than 1.4 million sf of office, 550,000 sf of retail, and 400 hotel keys. The company’s pipeline in West Palm Beach includes more than $500 million in planned projects.

The ongoing Coronavirus Disease (COVID-19) pandemic continues to pose challenges and risks to virtually all major commercial real estate (CRE) property types and has created uncertainty about future demand for office space, even in gateway markets that have historically been highly liquid. Despite the disruptions and uncertainty, the collateral has been largely unaffected and the property leased up to 95.9% in a matter of months. As of December 1, 2021, the property is open and operating, and all tenants made their November 2021 and December 2021 rental payments.

The sponsor for the transaction is partially using proceeds from the whole loan to repatriate approximately $129.3 million of equity. DBRS Morningstar views cash-out refinancing transactions as less favorable than acquisition financings as 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 $895.5 million, the sponsor will have approximately $370.5 million of cash and unencumbered market equity remaining in the transaction.

One Flagler, a 25-story, 275,000-sf Class A office tower approximately a half mile from 360 Rosemary, is under construction and will be directly competitive with the subject property once it completes in 2023. One Flagler recently signed its first leases shortly after breaking ground. The property, which is also owned by the sponsor (Related), will be similar to 360 Rosemary in quality and type of amenities and will also extend the Flagler waterfront greenbelt.

The DBRS Morningstar Loan-to-Value Ratio (LTV) is high at 114.3% based on the $210 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 2.0% across the capital structure. The debt yield and debt service coverage ratio (DSCR) triggers for the cash flow sweep event are low at less than a 5.0% debt yield on the initial term. The low threshold increase the term and balloon default risks. The nonrecourse carveout guarantor is The Related Companies, L.P., which is required to maintain a net worth of only at least $210 million, effectively limiting the recourse back 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, physical waste, and other potential bad acts of the borrower or its sponsor.

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 360X is a interest-only (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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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.

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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