DBRS Morningstar Confirms Ratings on BGME Trust 2021-VR

DBRS Limited (DBRS Morningstar) confirmed its ratings on the Commercial Mortgage Pass Through Certificates, Series 2021-VR issued by BGME Trust 2021-VR as follows:

-- Class A at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (sf)
-- Class HRR at BBB (low) (sf)

All trends are Stable.

The rating confirmations reflect the overall stable performance of the collateral, which remains in line with issuance expectations. The transaction is secured by the borrower’s fee-simple interest in Burlingame Point, which consists of four newly built, Class A office and research and development buildings totaling 805,118 square feet (sf), located in Burlingame, California. All four buildings are fully leased to Facebook Inc., (Facebook) under a 12.5-year triple net lease, which is privately rated by DBRS Morningstar and exhibits characteristics consistent with a high investment grade credit. The collateral is a mission-critical location between Silicon Valley and downtown San Francisco, near the parent company’s headquarters in Menlo Park, serving as the headquarters for its Oculus division, an industry leader in immersive virtual reality hardware and software products.

The whole loan amount of $620.0 million includes $380.0 million of A note debt and $240.0 million of B note debt. In addition to the $620 million whole loan, the capital stack includes $130.0 million of mezzanine debt. The underlying loan for the subject transaction is interest only (IO) until its final maturity in January 2033. The loan has an anticipated repayment date in July 2030, co-terminous with Facebook’s initial lease expiry.

The loan sponsor is Kylli Inc. (Kylli), a subsidiary of Genzon Investment Group, a full-service real estate investment management company that focuses on acquiring, developing, and managing institutional-quality assets in the Western United States. Since acquiring the property for $45.7 million in March 2015, Kylli has spent approximately $757.0 million to transform the asset.

Facebook was expected to invest approximately $171.0 million of its own capital to build out the space and was expected to take occupancy in June 2021. The lease term commenced on Buildings 1 and 2 on November 19, 2020, and with respect to Buildings 3 and 4 and the Amenity Space, on April 1, 2021. Facebook’s lease expires on January 31, 2033, and has two unilateral eight-year extension options exercisable by the borrower at 95.0% of market rent as long as the tenant is not in default under the lease. Additionally, Facebook has no contraction or termination options during the initial lease term. Rent commenced on July 11, 2021, for Building 1 and the amenity space, January 11, 2022, for Building 2, and for Buildings 3 and 4, rent is scheduled to commence on May 8, 2022, and November 7, 2022, respectively. Upon rent commencement, the annual base rent would is scheduled to escalate by 3.0% per year starting at $56.40 per square foot (psf). According to Reis, as of March 2022, the leases’ first year rent of $56.40 psf is above the average asking rate of the offices within the Central San Mateo submarket of $53.53 psf.

According to the year-to-date ended September 30, 2021, financials, the properties are fully occupied and the net cash flow (NCF) was reported at -$3.6 million, in comparison with the DBRS Morningstar NCF of $51.2 million. The negative NCF is because rent collections have yet to commence for Buildings 2, 3, and 4. Once rent payments for all buildings commence, NCF is expected to reach DBRS Morningstar’s NCF derived at issuance. Until then, the uncollectible rents are partially covered by the upfront reserves of $122.7 million, which as of March 2022, had approximately $28.6 million remaining in the account. Overall, considering the collateral’s optimal location in the Bay Area, investment grade tenancy, and substantial capital investments, DBRS Morningstar’s credit view remains positive.

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.

DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for this transaction.

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 North American CMBS Surveillance Methodology (March 4, 2022), 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 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.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577