DBRS Morningstar Confirms All Ratings on DC Office Trust 2019-MTC

DBRS Limited (DBRS Morningstar) confirmed the following ratings of the Commercial Mortgage Pass-Through Certificates, Series 2019-MTC issued by DC Office Trust 2019-MTC:

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

All trends are Stable.

The rating confirmations reflect the transaction’s overall stable performance, which remains in line with DBRS Morningstar’s expectations. The collateral remained 100% occupied as of the September 2022 reporting, with more than 85.0% of base rent contributed by investment-grade tenant Fannie Mae (82.2% of the net rentable area (NRA), expiring September 2033).

The loan is secured by the Midtown Center, an 867,654-square-foot (sf), newly constructed, 14-story Class A office campus in Washington, D.C., with ground-floor retail and a three-level below-grade parking garage with 562 spaces. The sponsor, Carr Properties, an experienced owner, developer, and manager of commercial properties primarily in Washington, D.C., and Boston, acquired the site in 2014, demolished the existing buildings, and began construction of the subject in 2015.

Whole-loan proceeds of $525.0 million were primarily used to refinance existing debt of $472.3 million, fund upfront reserves of $32.3 million, and return $17.1 million of equity to the sponsor. The trust loan balance of $404.0 million has a split-loan structure composed of three senior pari passu A notes totaling $261.0 million and three subordinate B notes totaling $143.0 million. The remaining $121.0 million of the whole loan is composed of pari passu A notes (companion notes); of those companion notes, 23.0% are held in BANK 2019-BNK22 (DBRS Morningstar rated) and the remaining 12.7% are in COMM 2018-GC44 (not rated by DBRS Morningstar). The underlying loan for the subject transaction is interest only (IO) until its stated maturity in September 2033; the loan has an anticipated repayment date in October 2029.

According to the September 2022 rent roll, the property was 100% occupied. As of the year-to-date ended September 30, 2022, financials, net cash flow (NCF) was reported at $35.9 million, or an annualized figure of $47.8 million, exceeding DBRS Morningstar issuance expectations when an NCF of $42.8 million was derived. The loan’s Q3 2022 debt service coverage ratio (DSCR) was reported at 2.92 times (x), an increase from the YE2021 DSCR of 2.71x. As of September 2022, the average rental rate increased to $51.98 per sf (psf) from $49.71 psf at issuance as a result of rent steps, but, according to Reis, it remains below the East End submarket average rental rate of $61.72 psf for Class A office properties.

The two largest tenants at the property account for 95.0% of NRA. The largest tenant is Fannie Mae (82.2% of the NRA, expiring September 2033), which is rated investment grade. In addition to its contraction right that allows for 160,200 sf (22.4% of NRA) of space to be contracted annually between the loan’s sixth and ninth year, the lease also features a termination option, where upon at least 32 months’ notice is given, the tenant may terminate its lease in May 2029 or cease operations in at least 50% of its leased space at the cost of a $66.2 million termination fee.

The second-largest tenant is WeWork (12.7% of the NRA, expiring November 2036). While WeWork’s operations have been affected by the Coronavirus Disease (COVID-19) pandemic, there has been no indication that WeWork has sought any type of rent relief at the subject. WeWork’s lease does not have a termination option, but its lease does include stiff penalties if the space were to go dark, which would include an $8.5 million surety bond that WeWork posted at lease execution and one year’s rent and carry expenses estimated at $8.3 million.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
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/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022).

Class X is an 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.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is the North American CMBS Surveillance Methodology (October 3, 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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