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

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

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

DBRS Morningstar has maintained the Negative trends on Classes D, E, and F as a reflection of the continued concern surrounding the collateral’s increased vacancy, primarily driven by WeWork’s decision to relinquish their space. DBRS Morningstar considered a hypothetical stressed value scenario to determine the bonds exposed to the increased risks, as further described below. The rating confirmations and Stable trends for all other classes reflect DBRS Morningstar’s view that the overall credit profile of the transaction remains healthy given the sponsor’s significant equity contribution at close, the significant reserves in place, and the property’s below-market occupancy rate.

The transaction is secured by the fee-simple and leasehold interests in Wilshire Courtyard, which comprises two six-story, LEED Gold-certified office buildings with an aggregate of 1.1 million square feet (sf) in Los Angeles. The ground-leased parcel is 3.5% of the property’s total site area with a ground rent of $215,066 through 2066 that increases every 10 years based on cumulative CPI increases. The trust’s assets consist of a $408.2 million fully funded floating-rate mortgage loan with an initial maturity date in July 2022 and two 12-month extension options, exercisable under a debt service and coverage ratio (DSCR) of 1.10 times (x), with a fully extended maturity in July 2024. In addition to the trust debt, there is mezzanine financing in the amount of $69.4 million at issuance.

The loan has been on the servicer’s watchlist since February 2021 for low debt service coverage ratio (DSCR) and has remained in cash management. As of May 2022, the servicer confirmed that the loan’s first extension option had been executed, extending the maturity date to July 2023. Based on DBRS Morningstar’s analysis of the current in-place cash flow and the concentration of upcoming lease expirations, DBRS Morningstar does not expect that the borrower will meet the DSCR threshold for its second extension option unless a master lease is signed.

According to the April 2022 rent roll, the property’s physical occupancy rate fell to 56.3% from 73.0% as of February 2021, attributable to the departure of WeWork (previously 31.5% of the net rentable area (NRA)). Twentieth Television, Inc. (previously 7.1% of the NRA) has also recently vacated the property, bringing down occupancy to an implied rate of 49.2%. Leases representing an additional 4.2% of the NRA are scheduled to roll by the end of 2022, and an additional 19.3% is scheduled to roll by the end of 2024. The remaining tenancy is quite granular, with the largest tenant representing 8.4% of the NRA on a lease ending in October 2023. According to the YE2021 financials, net cash flow (NCF) was reported at $23.5 million (with a DSCR of 1.19 times (x)), in comparison with the YE2020 figure of $24.2 million and the DBRS Morningstar NCF of $26.5 million (with a DSCR of 1.21x). The slight year-over-year decline is predominately due to a 20.5% drop in other income and a 23.6% increase in real estate taxes.

The sponsor contributed $208.2 million in equity to close the subject transaction and more recently, has been reportedly planning an extensive redevelopment of the property, slated to begin in 2025. The property is well located in an affluent area with high barriers to entry; however, market vacancy rates are high. According to Reis, Class A office space within a one-mile radius from the subject property reported an average asking rent and vacancy rate of $43.59 per square (psf) and 20.0%, respectively, as of Q1 2022. In comparison, the subject property achieved an average rental rate of $53.30 psf as of the April 2022 rent roll. Reis projects that the Mid-Wilshire/Miracle Mile/Park Mile submarket will experience an annualized average rent growth of 1.4% during 2023 and 2024, with vacancy declining to 18.4% by 2025.

In the analysis conducted to assign ratings to the transaction in April 2020, DBRS Morningstar derived a value of $355.2 million ($334 per square foot (psf)), a variance of -46.8% from the appraised value of $668.0 million ($629 psf) at issuance. Given the increased vacancy at the subject, DBRS Morningstar anticipates that the as-is value has likely declined significantly since that time and could remain depressed if there is not an improvement in the occupancy rate within the near to moderate term. To evaluate the impact of the possibility that the sponsor could be purposely keeping space open and/or not renewing leases over the remainder of the loan term as part of a redevelopment plan, DBRS Morningstar analyzed two value stress scenarios, resulting in a hypothetical as-is value and a hypothetical dark value, which suggested values of approximately $200 million ($188 psf) and $281 million ($265 psf), respectively. In evaluating the impact of these scenarios, DBRS Morningstar gave credit to the $55.8 million ($53 psf) held between leasing reserves, termination fees, and the letter of credit, all of which may be used to re-lease the property or in the event of default, be held as additional collateral for the subject loan. This analysis supported the Negative trends maintained for Classes D, E and F, which would be most exposed to the possibility of interest shortfalls and/or losses should those hypothetical scenarios bear out during the loan term or at maturity. DBRS Morningstar notes the loan remains current, with no indication the sponsor’s commitment to the asset or loan has changed since issuance.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental, Social, or Governance factor(s) 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.

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 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.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.

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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