DBRS Morningstar Upgrades Ratings on Two Classes of Irvine Core Office Trust 2013-IRV

DBRS Limited (DBRS Morningstar) upgraded its ratings on the Commercial Mortgage Pass-Through Certificates, Series 2013-IRV (the Certificates) issued by Irvine Core Office Trust 2013-IRV as follows:

-- Class E to A (sf) from A (low) (sf)
-- Class F to A (sf) from A (low) (sf)

DBRS Morningstar also confirmed the ratings on the following classes:

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class B at AAA (sf)
-- Class C at AAA (sf)
-- Class X-A at AAA (sf)
-- Class D at AA (sf)

All trends are Stable. The rating upgrades reflect the increased credit support of the bonds as a result of scheduled loan amortization and the stable-to-improved performance of the underlying collateral.

The Certificates are supported by the payment streams from 10 uncrossed, amortizing, fixed-rate mortgage loans secured by the fee interest in 10 Class A commercial office properties (17 buildings combined) in Southern California with an aggregate square footage of roughly 4.85 million. The loans are nonrecourse and each is evidenced by a single promissory note that is secured by the respective fee interest in the related property. As of the May 2022 remittance, the transaction reported an aggregate balance of $697.2 million, representing a collateral reduction of 20.3% since issuance as a result of scheduled loan amortization. The loans are scheduled to mature in May 2023.

DBRS Morningstar identified two loans with occupancy concerns and potential for near-term cash flow decline. The largest loan in the portfolio is Fox Plaza (Prospectus ID#1, 22.2% of the pool balance). It is secured by a 725,399-square-foot (sf) office property in Los Angeles between Beverley Hills and Century City. The property reported a December 2021 occupancy rate of 62.8%, a significant decline from the December 2020 occupancy rate of 98.9%. The decline is attributable to the downsizing of the largest tenant, Disney, which gave back approximately 248,000 sf of space in 2021. As a result, the tenant currently represents 33.6% of the property’s net rentable area (NRA) (5.2% of the portfolio NRA) on a lease through June 2026.

For the trailing 12 month period (T-12) ended June 30, 2021, the loan reported a debt service coverage ratio (DSCR) of 2.95 times (x). When accounting for Disney’s reduced footprint, the implied DSCR is estimated to be 1.60x, which is above the DSCR trigger of 1.40x that would initiate a cash flow sweep. The property is well located in an affluent area with strong submarket fundamentals and high barriers to entry. Although these factors lend to the expectation that some of the vacated space is likely to be back-filled in the near term, DBRS Morningstar’s analysis is reflective of the loss in income from declined occupancy and does not give any credit to prospective leasing.

The second-largest loan is Irvine Towers (Prospectus ID#2, 16.8% of the pool balance), which is secured by six office buildings located immediately east of John Wayne Airport in Irvine, California, and is on the servicer’s watchlist for occupancy decline. The property reported a December 2021 occupancy rate of 71.3%, compared with the June 2020 occupancy rate of 86.1%. There is additional concern with upcoming tenant rollover as leases representing approximately 30.0% of the NRA have expired or will be expiring within the next 12 months. According to Reis, office properties in the Airport submarket reported a Q1 2022 vacancy rate of 17.4%, compared with the Q1 2021 vacancy rate of 19.9%. The DSCR was 2.41x for the T-12 period ended June 30, 2021. The loan is structured with a cash flow sweep in the event the DSCR falls below 1.30x. Similar to the Fox Plaza property, DBRS Morningstar holds a favorable view of the property quality, location, and excess cash flow relative to the outstanding debt.

The portfolio reported a DSCR of 2.80x for the T-12 period ended June 30, 2021, up slightly from 2.75x and 2.67x for the same periods in 2020 and 2019, respectively. The transaction benefits from a very low loan-to-value ratio (LTV) of 39.3%, based on the current outstanding loan balance as of May 2022 remittance and the issuance value. Despite the drop in occupancy tied to the largest two loans in the deal, both of these loans and the general pool have continued to report healthy DSCRs amid the Coronavirus Disease (COVID-19) pandemic. There has also been a considerable amount of deleveraging since DBRS Morningstar assigned ratings in August 2020. In addition to stressing the Fox Plaza loan based on the implied cash flow following the downsizing of Disney, DBRS Morningstar used additional stresses on the remaining loans to test the cash flow durability and further support the upgrades.

There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/396929.

Class X-A is an 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.

The DBRS Morningstar 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 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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