DBRS Morningstar Confirms Ratings on All Classes of BGME Trust 2021-VR

DBRS Limited (DBRS Morningstar) confirmed the following ratings of the Commercial Mortgage Pass-Through Certificates, Series 2021-VR issued by BGME Trust 2021-VR:

-- Class A at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (sf)
-- Class HRR at BBB (low) (sf)

All trends are Stable.

The rating confirmations reflect the overall performance of the collateral, which remains in line with DBRS Morningstar’s issuance expectations.

The transaction is secured by the borrower’s fee-simple interest in Burlingame Point, a campus of four newly built, Class A office and research and development buildings totaling 805,118 square feet (sf) in Burlingame, California. All four buildings are fully leased to Meta (previously known as Facebook, Inc.), an investment-grade tenant, under a 12.5-year triple net lease. The collateral is nestled between Silicon Valley and downtown San Francisco, near the parent company’s headquarters in Menlo Park. The property serves as the headquarters for the company’s Meta Quest division (formerly, Oculus), an industry leader in immersive virtual reality hardware and software products.

The whole loan amount of $620.0 million includes $380.0 million of senior debt and $240.0 million of junior debt. In addition to the $620.0 million loan, the capital stack includes $130.0 million of mezzanine debt. The whole loan features an anticipated repayment date (ARD) in July 2030, with a final maturity date in January 2033, which is co-terminous with Meta’s initial lease expiry. The loan is interest only until the ARD, at which point, the loan will amortize on a 30-year schedule and hyper-amortize if excess cash flow is available.

The loan sponsor is Kylli Inc. (Kylli), a subsidiary of Genzon Investment Group, a full-service real estate investment management company that focuses on acquiring, developing, and managing institutional-quality assets in the Western United States. Since acquiring the property for $45.7 million in 2015, Kylli has spent approximately $757.0 million to transform the asset.

Meta invested significant capital to build out the space and took occupancy in June 2021. Meta’s lease expires on January 31, 2033, and has two unilateral eight-year extension options exercisable by the borrower at 95.0% of market rent as long as the tenant is not in default under the lease. Additionally, there are no contraction or termination options available during the initial lease term. The tenant’s rent commencement dates ranged between 2021 and 2022, but it was expected to pay its full rent by November 2022. The annual base rent escalates by 3.0% per year, starting at $56.40 per square foot (psf) during rent commencement. The most recent rent roll provided was dated September 2022, which reported an average rental rate of $58.09 psf. According to Reis, as of March 2023, average rental and vacancy rates for Class A office properties within a five-mile radius of the subject are $62.26 psf and 12.0%, respectively. The greater Central San Mateo submarket reported a YE2022 average rental rate of $44.50 psf and a vacancy rate of 17.2%, compared with the YE2021 average rental rate of $43.74 psf and vacancy rate of 15.4%.

According to the trailing nine months ended September 30, 2022, financials, the annualized net cash flow (NCF) improved significantly to $26.9 million from -$1.5 million at YE2021 but remain below the DBRS Morningstar NCF of $51.2 million at issuance. At issuance, low NCFs were anticipated until rent payments for all buildings commenced. In addition, DBRS Morningstar’s NCF analysis gives credit to the effective gross income by straight-lining Meta’s rent over the term of the loan, given it’s a long-term credit tenant. At issuance, there were upfront reserves of $122.7 million for various items including free rent, gap rent, unpaid tenant allowances, and leasing commissions.

Given the subject’s optimal location in the Bay Area, investment-grade tenancy, and substantial capital investments, DBRS Morningstar’s view remains consistent with issuance expectations.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no environmental, social, and 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).

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 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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