DBRS Morningstar Confirms All Classes of DBGS 2019-1735 Mortgage Trust

DBRS, Inc. (DBRS Morningstar) confirmed its ratings on all classes of the Commercial Mortgage Pass-Through Certificates issued by DBGS 2019-1735 Mortgage Trust (the Issuer) as follows:

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

All trends are Stable.

The rating confirmations reflect the overall stable performance of the transaction, which remains in line with DBRS Morningstar’s expectations. The $311.4 million first-lien mortgage loan is secured by the fee-simple interest in a 53-story Class A office building totaling 1.3 million square feet (sf) in the Philadelphia central business district (CBD). The 10-year interest-only (IO) loan matures in April 2029. The sponsor, Silverstein Properties, Inc., used loan proceeds along with $164.2 million of cash equity to acquire the asset for $451.6 million in 2019.

Built in 1990, 1735 Market Street is on 18th Street between Market Street and JFK Boulevard with direct concourse access to SEPTA’s Suburban Station and a 176-space parking garage. The subject property is in the Center City submarket, which is the largest office submarket in Philadelphia with approximately 38 million sf of office space. According to Reis, the submarket reported a vacancy of 9.1% and average rental rate of $32.77 per sf (psf) gross as of Q4 2021. The collateral achieves higher rental rates as it is considered one of the top two multitenant office buildings in the Philadelphia CBD, along with One Liberty Place. Submarket demand is expected to remain stable in the near to medium term with minimal new inventory under construction.

According to the September 2021 rent roll, the property was 83.5% occupied with an average gross rent of $41.00 psf. The office tenant mix primarily consists of law firms and financial companies with some exposure to investment-grade tenants. The largest tenant at the property is Ballard Spahr LLP, a national law firm that leases 14.7% of the net rentable area (NRA) through January 2031 and maintains its headquarters at the subject. The second-largest tenant, Willis Towers Watson (Willis) (7.6% of NRA), is considered an investment-grade tenant and leases its space through February 2031. The third- and fourth-largest tenants (Montgomery McCracken Walker and Brandywine Global Investment, respectively) also have their headquarters at the collateral property.

Occupancy has dipped to 83.5% from 92.2% at issuance, partially due to Willis giving back space in 2020. The loan reported a trailing nine-month (T-9) ended September 30, 2021, debt service coverage ratio (DSCR) of 2.00 times (x), compared with the year end 2020 DSCR of 2.42x and Issuer’s underwritten DSCR of 2.01x. The 2020 NCF captured a one-time termination fee paid by Willis. New leases that were signed in 2020 with commencement dates in 2021 are also not fully reflected in the T-9 2021 reporting. The annualized T-9 ended September 30, 2021, NCF of $26.6 million exceeds the DBRS Morningstar NCF of $22.5 million. Rollover risk is limited in the near term, as leases representing only 10.2% of the NRA are scheduled to roll in the next two years.

The sponsor recently launched a $20 million capital improvement program that will redesign the building’s lobby, front entrance, amenity spaces, and common areas as well as the concourse. The servicer’s January 2022 site inspection reported $1.5 million of capital expenditures were recently completed, comprising elevator upgrades and repairs made to the lower-level parking garage and mechanical systems following damage from Hurricane Ida. The lobby is currently undergoing a $1.0 million renovation that will include new monument signs at the front and back of the building. The borrower is budgeting $5.2 million of total building improvements planned for 2022. DBRS Morningstar will monitor the loan for any potential impacts to performance resulting from ongoing projects at the property, but ultimately views the infusion of capital into property upgrades as a positive development.

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.

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

The DBRS Viewpoint platform provides additional information on this transaction and underlying loans including DBRS Morningstar metrics, commentary, servicer-reported cash flows, and other performance-related data.

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com. The platform includes issuer and servicer 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.

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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