DBRS Morningstar Confirms All Ratings on Natixis Commercial Mortgage Securities Trust 2019-NEMA

DBRS Limited (DBRS Morningstar) confirmed the following ratings of the Commercial Mortgage Pass-Through Certificates, Series 2019-NEMA issued by Natixis Commercial Mortgage Securities Trust 2019-NEMA:

-- Class A at AAA (sf)
-- Class B at AAA (sf)
-- Class X at AA (high) (sf)
-- Class C at AA (sf)
-- Class V-ABC at AA (sf)
-- Class D at BBB (sf)
-- Class V-D at BBB (sf)
-- Class V2 at BBB (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 since the last rating action. The transaction consists of an $199.0 million nonrecourse, first-lien mortgage loan secured by NEMA San Francisco, which consists of 754 units of Class A luxury apartments and 11,184 square feet of commercial retail space in the South of Market submarket of San Francisco.

The loan has been on the servicer’s watchlist since November 2020 for low debt service coverage ratio and declining occupancy stemming from the Coronavirus Disease (COVID-19) pandemic, which stemmed from residential exits as work-at-home options encouraged tenants to seek more affordable housing elsewhere. However, demand is expected to increase as restrictions are lifted and companies and their employees gradually return to in-office working.

According to the December 2021 rent roll, the property’s average rental rate declined to approximately $3,382 per unit from the September 2020 rate of $3,727 per unit, which is attributable to the borrower’s efforts to increase occupancy. In comparison, according to Reis, the South of Market submarket reported average asking rents of $3,554 per unit as of Q4 2021. As of YE2021, there are 20 units that are expected to take occupancy in the near term. Recent leases that commenced in Q4 2021 suggest a gradual return to pre-pandemic rental rates, a trend that is expected to continue through 2022. Reis projects asking rents in the South of Market submarket to increase up to $3,979 by 2023, which, combined with continued absorption, indicates a recovery in leasing dynamics in the near to medium term.

The servicer reported a net cash flow (NCF) of $7.8 million for the year-to-date ended September 30, 2021, or an annualized figure of $10.4 million, representing a 32.3% decline from the YE2020 NCF of $15.4 million, and below the DBRS Morningstar NCF of $20.1 million. However, according to the December 2021 rent roll, occupancy increased to 90.5% from 72.0% in YE2020, and DBRS Morningstar anticipates that rental revenue will restabilize as leases are renewed and concessions burn off. Submarket vacancy was 6.0% for Q4 2021, per Reis, and is expected to tighten to 5.5% over the next few years. According to a June 2021 article by SFist, the sponsor had been seeking approval to convert 150 to 200 units to corporate housing. As of YE2021, the largest corporate housing tenants are Synergy Corporate Housing, Blueground US Inc, and Furnished Quarters of California LLC, occupying 59 units, 20 units, and nine units, respectively. Retail occupancy remains at 45.5% as of December 2021, consistent with March 2021 levels.

The $199.0 million trust loan is part of a $384.0 million whole loan and consists of $130.0 million of senior A-1 note and $69.0 million of senior-subordinate A-B note. There is $75.0 million of additional debt that is pari passu to the A-1 note and is held outside the trust. The trust loan has a 10-year term and pays interest only (IO) for the full term ending at maturity on February 10, 2029.

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 certificates 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.

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.

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