DBRS Morningstar Confirms Ratings on All Classes of DBGS 2019-1735 Mortgage Trust

DBRS Limited (DBRS Morningstar) confirmed its ratings on all classes of the Commercial Mortgage Pass-Through Certificates issued by DBGS 2019-1735 Mortgage Trust as follows:

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

All trends are Stable.

The rating confirmations reflect the overall stable performance of the transaction, which has remained in line with DBRS Morningstar’s expectations since its last rating action. The $311.4 million first-lien mortgage loan is secured by the fee-simple interest in a 53-story Class A office building totaling 1.3 million square feet (sf) in the Philadelphia central business district (CBD). The 10-year interest-only (IO) loan matures in April 2029. The sponsor, Silverstein Properties, Inc., used loan proceeds along with $164.2 million of cash equity to acquire the asset for $451.6 million in 2019.

According to the September 2022 rent roll, the property was 86.0% occupied with an average gross rent of $41.16 per sf (psf). Occupancy has seen minor increases from YE2020 and YE2021 figures of 84% and 83%, respectively. The office tenant mix primarily consists of law firms and financial companies with some exposure to investment-grade tenants. The largest tenant at the property is Ballard Spahr LLP (13.1% of the net rentable area (NRA), lease expiry in January 2031), a national law firm that maintains its headquarters at the subject. A portion of Ballard Spahr LLP’s lease (1.7% of NRA) was expected to expire in January 2023. The second-largest tenant, Willis Towers Watson (7.6% of NRA, lease expiry in February 2031), is considered an investment-grade tenant. The third- and fourth-largest tenants (Montgomery McCracken Walker & Rhoads LLP and Brandywine Global Investment Management, LLC, respectively) also have their headquarters at the collateral property.

There is moderate rollover risk as leases representing 11.7% of NRA are scheduled to roll in the next 12 months; approximately 14.2% of NRA is listed as available for leasing on LoopNet as of this report. According to Reis, office space in the submarket reported an average vacancy of 12.0% and asking rental rate of $32.95 psf as of Q4 2022. The collateral achieves higher rental rates as it is considered one of the top multitenant office buildings in the Philadelphia CBD. The loan reported an annualized debt service coverage ratio (DSCR) of 2.01 times (x) for the trailing nine months ended September 30, 2022, compared with the YE2021 DSCR of 2.15x and the DBRS Morningstar’s DSCR of 1.69x. Net cash flow (NCF) for the same annualized period was reported to be $26.7 million, exceeding the DBRS Morningstar NCF of $22.5 million.

The sponsor had launched a $20 million capital improvement program in 2021 that aimed to redesign the building’s lobby, front entrance, amenity spaces, and common areas as well as the concourse. The servicer’s January 2022 site inspection reported $1.52 million of capital expenditures were recently completed, comprising elevator upgrades and repairs made to the lower-level parking garage and mechanical systems following damage from Hurricane Ida. The lobby is currently undergoing a $1.0 million lobby renovation.

Given the sponsor’s continued commitment to the property as illustrated by repair work and capital improvements, the property quality and location, as well as steady gains in rental revenue, DBRS Morningstar expects an ongoing stable performance.

Environmental, Social, and 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 (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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