DBRS Morningstar Confirms Ratings on All Classes of SFO Commercial Mortgage Trust 2021-555

DBRS Limited (DBRS Morningstar) confirmed the ratings on all classes of Commercial Mortgage Pass-Through Certificates, Series 2021-555 issued by SFO Commercial Mortgage Trust 2021-555 as follows:

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

All trends are Stable.

The rating confirmations reflect the overall stable performance of the transaction, which remains in line with DBRS Morningstar’s expectations since issuance. The transaction is collateralized by 555 California Street Campus, a 1.8 million-square foot Class A office complex in the North Financial District of San Francisco. The Campus comprises three LEED Gold-certified and Energy Star-rated office buildings—555 California Street, 345 Montgomery Street, and 315 Montgomery Street. The $1.2 billion two-year floating-rate loan is interest only for the full term with an initial scheduled maturity in May 2023 and five one-year extension options available for a fully extended maturity date of May 2028. At issuance, a rate cap agreement was in place with an initial Libor strike rate of 4.00%. The loan is sponsored by a 70/30 joint venture between Vornado Realty L.P. and Donald J. Trump.

The loan was added to the servicer’s watchlist in February 2023 because of its upcoming initial maturity date in May 2023. Per the servicer, the extension request has been received from the borrower and is currently under review. According to the loan terms, during an extension term the strike price on the rate cap will be the greater of 4.00% and the annual rate, which, when added to the sum of the spread and, if applicable, the alternate rate spread adjustment, would result in a debt service coverage ratio (DSCR) equal to or greater than 1.10 times (x). As of the most recent reporting, the financials for the trailing 12 months ended September 30, 2022, reported a debt service coverage ratio (DSCR) of 2.12 times (x), compared with the YE2021 DSCR of 2.60x and the DBRS Morningstar DSCR of 3.37x at issuance. The variance from the DBRS Morningstar DSCR is the result of straight-line rent credit treatment given to the tenant Bank of America (BofA) over the loan term as BofA is an investment-grade tenant (rated AA by DBRS Morningstar). In addition, the loan is structured with a floating interest rate, which contributed a 38.9% increase in the debt service obligation, raising it to $34.4 million in 2022 from $24.7 million in 2021.

As of the October 2022 rent roll, the property was 93.7% occupied with a rental rate of $79.78 per square foot (psf), relatively in line with the 92.7% occupancy and average rental rate of $91.85 psf at issuance. The largest collateral tenants include BofA (18.1% of the net rentable area (NRA), expiry in September 2025), Kirkland & Ellis (8.4% of the NRA, expiry in October 2026), and Morgan Stanley (7.3% of the NRA, expiry in October 2028). Near-term rollover risk is minimal at 5.9% of the NRA through 2023 and 2024, with moderate risk in 2025 when leases representing 16.2% of the NRA are scheduled to roll. The 345 Montgomery building remains vacant but is being actively marketed for lease following a $60.8 million renovation to turn the space into creative office use, completed in 2021.

Per the Q4 2022 Reis report, the North Financial District submarket reported an average asking rental rate of $68.32 psf and vacancy rate of 12.5% for all Class A office properties, compared with the Q4 2021 asking rental rate of $68.52 psf and vacancy rate of 9.7%. Despite the general uncertainty surrounding office demand and increasing debt service commitment, mitigating factors include the subject’s excellent location, good asset quality, significant reserves, sponsorship commitment, and steady performance since issuance.

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).

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.

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