DBRS Morningstar Confirms Ratings of Natixis Commercial Mortgage Securities Trust 2018-TECH

DBRS, Inc. (DBRS Morningstar) confirmed its ratings on the Commercial Mortgage Pass-Through Certificates, Series 2018-TECH issued by Natixis Commercial Mortgage Securities Trust 2018-TECH as follows:

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

DBRS Morningstar also discontinued and withdrew the rating on Class X-CP, as that class is no longer receiving interest distributions. All trends are Stable.

The rating confirmations reflect the overall stable performance of the transaction, which remains in line with the last review.

The collateral for the underlying loan is a first-lien mortgage on the borrower’s fee-simple interest in a portfolio of seven Class B office and light industrial (research and development (R&D)) buildings located in the Golden Triangle area within Santa Clara, California. Built between 1970 and 1999, the collateral properties are all situated adjacent to one another, within the Scott Boulevard Corridor submarket, across the San Tomas Expressway from NVIDIA Corporation’s (NIVIDIA’s) corporate headquarters. According to the servicer’s reporting, space representing roughly 67% of the total net rentable area (NRA) is configured as office space, while the remainder is configured as lab (R&D) space.

Loan proceeds of $195.0 million ($311 per square foot (psf)) and sponsor equity of $58.5 million financed the asset’s acquisition price of $240.4 million. Loan proceeds comprise a $150.0 million senior mortgage note and $45.0 million of mezzanine debt. The five-year $150 million floating-rate interest-only (IO) senior note has an initial maturity date in November 2022 and is subject to two one-year extension options. The loan requires 30–90 days’ notice of the borrower’s intent to exercise its extension option. The sponsor is Preylock Real Estate Holdings, a Los Angeles-based real estate acquisition and management firm, founded in 2016 and with over $2 billion of assets under management (including at least four other Silicon Valley properties).

As of the December 2021 rent roll, the portfolio properties were 100% leased to two tenants in NVIDIA (60.7% of NRA) and Futurewei Technologies, Inc. (Futurewei) (39.3% of NRA) with an average base rental rate of $26.36 psf. NVIDIA is a multinational technology company primarily recognized for its work designing and manufacturing graphics cards for computer gaming and professional markets. NVIDIA occupies 379,851 sf across three leases with various expiration dates. Each of the leases included one five-year extension option with 12-months’ notice. One of the leases (representing 12.8% of the total NRA) that had an expiration date in September 2021 has been renewed, as reported by the servicer, while the tenant’s next lease expiration is in February 2023 for a space representing 31.9% of the total NRA.

Futurewei is a U.S. subsidiary of the Chinese multinational technology company, Huawei Technologies Co. Ltd. (Huawei), which is the world’s largest telecommunications equipment manufacturer. In May 2019, the U.S. Commerce Department’s decision to put the firm on its list of organizations that pose security risks effectively excluded the company from the rollout of 5G telecommunications network equipment across the U.S. This was followed by the U.S. Department of Justice’s announcement of indictments against both Futurewei and Huawei, with charges including racketeering conspiracy and conspiracy to steal trade secrets, among others. There have not been any updates regarding the status of the charges.

While the Futurewei leases were renewed for 10-year terms through 2027 shortly before issuance, the company reportedly cut 600 jobs at the subject properties in June 2019. The servicer and CB Richard Ellis listings confirmed that at least one space consisting of 46,300 sf (7.4% of the property NRA) was dark and available for sublease, with Futurewei continuing to pay its contractual rent obligations. The Futurewei leases include a one-time right to terminate option on July 31, 2024, four months before the fully extended maturity date of the loan. If Futurewei exercises its early-termination option, then it must pay an early-termination fee plus a termination penalty. Concurrent with execution of the lease extension that commenced in August 2017, Huawei delivered to the landlord letters of credit (LOCs) in the total amount of $5.5 million, subject to scheduled annual reductions.

As of the YE2021 financials, the servicer reported a net cash flow (NCF) of $16.3 million, with a debt service coverage ratio (DSCR) of 3.32 times (x), representing an 11.5% increase from YE2019 when NCF was reported at $14.7 million with a DSCR of 2.13x. The improved DSCR from 2019 reflects both the cash flow growth and the lower in-place debt service obligation for the floating rate loan in 2020. The March 2022 reporting for the transaction showed $9.4 million in total reserves, including a $4.9 million LOC and $4.2 million in a tenant reserve account.

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.

Classes X-CP, X-EXT, and X-F are IO certificates that reference 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.

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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