DBRS Morningstar Confirms Ratings on All Classes of BBCMS 2021-AGW Mortgage Trust, Series 2021-AGW

DBRS Limited (DBRS Morningstar) confirmed its ratings on the following classes of Commercial Pass-Through Certificates issued by BBCMS 2021-AGW Mortgage Trust, Series 2021-AGW:

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

All trends are Stable.

The rating confirmations reflect the overall stable performance of the transaction since issuance. The loan is secured by the leasehold interest in 16 cross-collateralized suburban office buildings totalling approximately 2.0 million square feet (sf) on the North Shore of Long Island, New York. Sponsorship is provided through a joint venture between Angelo Gordon and the WE’RE Group. Angelo Gordon purchased a 95.5% leasehold interest in the portfolio from the WE’RE Group, which retained the remaining 4.5% leasehold interest and 100% of the leased fee interest.

Loan proceeds of $350.0 million were primarily used to refinance $234.6 million of existing debt, return $98.1 million of borrower equity, cover closing costs, and fund approximately $5.3 million in upfront reserves to be used for certain outstanding free rent, unfunded tenant improvement allowances, landlord work, and/or leasing commissions, as well as required repairs as identified in the mortgage loan agreement. Based on the appraiser’s as-is valuation of $458.7 million, the sponsor will have approximately $108.7 million of unencumbered market equity remaining in the transaction. The interest-only (IO) loan has an initial two-year term, with three one-year extension options available and a fully extended loan maturity in June 2026.

The proximity of the properties to the major hospitals on Long Island’s North Shore makes the portfolio a highly desirable location for medical tenants, which comprise approximately 53.8% of base rent. Medical tenants tend to receive above-market allocations for tenant improvements, but will often spend additional capital on the build-out of their space. This larger upfront investment substantially increases potential relocation costs upon lease expiration and increases probability of renewal. Rollover is also limited through the fully extended term, with tenants representing no more than 12.0% of net rentable area (NRA) expected to roll in any single year.

Individual properties are permitted to be released at 105% of the allocated loan amount (ALA) for the applicable property up to 10% of the original principal balance, 110% of the ALA for the applicable property up to 20%, and 115% thereafter. With regard to the individual assets located within the Lake Success Quadrangle, the release price shall equal 115% at any given time for seven properties, representing approximately 35.5% of the current pool balance, and 120% at any given time for four properties, representing approximately 19.1% of the current pool balance. DBRS Morningstar elected not to apply a penalty to the transaction’s capital structure as 63.5% of the portfolio by ALA is subject to a release price of 115% or greater, which DBRS Morningstar considers to be credit neutral. The loan allows for pro rata paydowns associated with property releases for the first 20% of the unpaid principal balance, and DBRS Morningstar applied a penalty to the capital stack as the deleveraging of the senior notes through the release of individual properties occurs at a slower pace compared with a sequential-pay structure.

As of the year-to-date ended September 30, 2021, the portfolio was 88.1% occupied compared with the issuance level of 86.8%. At issuance, the portfolio featured a diverse and granular roster of tenants in the medical, finance, and law industries. According to the October 2021 rent roll, the largest tenants are ProHealth Corp. (18.2% of the NRA; with 114,129 sf expiring in December 2022 and 126,454 sf in August 2030), Newsday (6.4% of the NRA; lease expiring in June 2035), and GEICO (3.7% of the NRA; lease expiring in October 2027). As of December 2021, office tenants representing 6.6% of the portfolio NRA have leases scheduled to expire in the next 12 months, including ProHealth Corp. with 114,129 sf (5.7% of the NRA). Only 50.9% of base rent and 40.3% of leased sf expire during the fully extended loan term. The annualized net cash flow as of September 2021 was reported at $26.8 million, a decline from the issuance level of $32.5 million as a result of a 8.6% decrease in estimated gross income. However, the debt service coverage ratio remains well above breakeven at 2.55 times.

The portfolio is well located along the North Shore of Long Island, which contains some of Long Island’s strongest submarkets, and all assets are located within close proximity of major arterials, including the Northern Parkway and the Long Island Expressway. According to the CBRE Q1 2022 Long Island Office Figures report, the Western and Eastern Nassau submarkets, which represent 63.9% of the ALA, have reported no new supply added within the last 12 months. The remaining submarket, Western Suffolk, representing 36.3% of the ALA, has had only 15,000 sf of new supply added within the past 12 months. All three submarkets have minimal construction underway.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental, Social, or 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.

Classes X-CP and X-NCP 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 the 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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