DBRS Morningstar Confirms Ratings on All Classes of NYC Commercial Mortgage Trust 2021-909

DBRS Limited (DBRS Morningstar) confirmed the ratings on all classes of Commercial Mortgage Pass Through Certificates, Series 2021-909 issued by NYC Commercial Mortgage Trust 2021-909 as follows:

-- Class A at AAA (sf)
-- Class X at AA (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)

All trends are Stable.

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

The loan is secured by the leasehold interest in 909 Third Avenue, a 32-story, 1.35 million-square foot (sf) Class A, LEED Gold-certified office tower in Midtown, Manhattan. The property is prominently situated between 54th Street and 55th Street, occupying the entire eastern block of Third Avenue. The office portion of the collateral sits atop 492,375 sf of flex industrial space, which is occupied by the United States Postal Service’s (USPS) main New York City mail-handling facility. The property is subject to a ground lease that is scheduled to expire in May 2041 with one remaining option to extend to November 2063. Whole loan proceeds of $350.0 million along with $2.9 million of sponsor equity refinanced existing debt, covered closing costs, and funded upfront reserves. The whole loan consists of $485.6 million of senior debt and $114.4 million of junior debt, of which $135.6 million of senior debt and the entirety of the junior debt is held in the trust.

The fixed-rate loan, which is sponsored by Vornado, is interest only (IO) for the full 10-year term, maturing in April 2031. Vornado is one of New York City’s leading landlords with a portfolio of office buildings concentrated in Midtown, Manhattan, with ownership and/or management interest in nearly 20 million square feet of office space. Since acquisition, Vornado has invested more than $184 million of capital into the property, including more than $46.9 million of base building upgrades.

The USPS has been a tenant at the property since 1968 and currently occupies 36.5% of net rentable area (NRA) on a lease expiring in October 2023. The tenant has three five-year extensions remaining, bringing the fully extended lease expiration date to October 2038. According to the servicer, the borrower has until July 2023 to exercise the option; however, given the unique nature of the space, its mission-critical location in the heart of Manhattan, the tenant’s renewal history, and its well-below-market rents of $14.20 per sf (psf), DBRS Morningstar expects that the USPS will continue to renew and believes there is substantial long-term upside embedded in this space.

Other major tenants include IPG DXTRA (17.1% of NRA, lease expiring in February 2028), Allergan Sales (12.5% of NRA, lease expiring in January 2027) and Geller & Company (9.3% of NRA, lease expiring in April 2025). Allergan subleases 105,295 sf of its space (7.8% of total NRA) to IPG DXTRA, and the remaining space to AlixPartners LLP. IPG DXTRA has a one-time termination option in November 2023 that requires 18 months’ notice, but according to the servicer, the tenant did not provide notice to exercise this option. The tenant also has a one-time contraction option to downsize its space by 20,000 sf (1.5% of total NRA) in March 2024 with 12-months’ notice and according to the servicer, discussions to exercise the contraction option are ongoing. According to the sponsor’s website, only 60,502 sf was listed as available for lease, which does not include any portion of IPG DXTRA’s space. USPS’s space was not advertised, suggesting the tenant is likely to extend its lease.

Per the September 2022 rent roll, the property was 95.6% leased to 14 tenants with an average rental rate of $38.97 psf. Although USPS has an expiration in October 2023, the tenant represents only 11.2% of gross rents at the property. According to Reis, as of February 2023, Class A office buildings within a one-half-mile radius of the subject reported average rental and vacancy rates of $98.1 psf and 15.0%, respectively. The overall Plaza submarket reported a YE2022 vacancy rate and effective rental rate of 11.8% and $81.89 psf, respectively, compared with the YE2021 vacancy rate and effective rental rate of 11.1% and $80.39 psf, respectively.

According to the trailing nine month (T-9) ended September 30, 2022, financials, the loan reported an annualized net cash flow (NCF) of $24.4 million and a debt service coverage ratio (DSCR) of 2.12 times (x), down 16.0% from the YE2021 NCF of $29.0 million and DSCR of 2.67x. This was primarily driven by an increase in real estate taxes, utilities, and janitorial expenses. Given the triple net nature of the leases, the year-end statements should indicate a stabilized expense ratio.

At issuance, the DBRS Morningstar NCF was $26.5 million, which is a -15.3% variance from the Issuer’s NCF. DBRS Morningstar’s NCF analysis gives credit to the effective gross income by straight-lining USPS’ rent over the term of the loan, given its consideration as a long-term credit tenant. Despite the upcoming lease expiration in USPS, DBRS Morningstar is optimistic regarding the renewal prospects given the subject’s prime location and below-market contractual rental rate.

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/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 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.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577