DBRS Morningstar Confirms Ratings on All Classes of COMM 2019-521F Mortgage Trust

DBRS Limited (DBRS Morningstar) confirmed its ratings on all classes of COMM 2019-521F Mortgage Trust, Commercial Mortgage Pass-Through Certificates, issued by COMM 2019-521F Trust as follows:

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

All trends are Stable.

Although the collateral for the underlying loan has seen a contraction in occupancy and cash flow, which may be further exacerbated by challenging office market fundamentals and continued uncertainty related to end-user demand, the subject property is a high-quality office building, positioned in a prime location on the corner of Fifth Avenue and East 43rd Street, in New York City. Further, the transaction benefits from strong institutional sponsorship provided by Savanna Capital Partners who acquired the property in May 2019 for $381.0 million, using a $242.0 million first-lien mortgage loan and equity capital of $139.0 million. DBRS Morningstar also notes that there has been recent positive leasing momentum at the property, with several transactions closed throughout 2022.

The transaction is secured by the borrower’s fee-simple interest in 521 Fifth Avenue, a 495,636-square foot (sf), 39-story Class A office property built in 1929. The sponsor spent approximately $4.0 million to upgrade the façade of the building which includes three underground levels and multilevel retail space, which represents 10.1% of the subject’s total net rentable area (NRA). The property is well located, close to Grand Central Terminal, Bryant Park, and the New York City Public Library. The building offers efficient and flexible floorplates ranging from 3,000 sf to 22,500 sf with outdoor terraces that appeal to both large and boutique tenants. Tenants can enter the office space using the main office lobby along 43rd Street, which provides additional access to the two side street retail tenants within the property. The property also has eight setback outdoor terraces on multiple floors. Urban Outfitters occupies the prime Fifth Avenue retail space on the ground floor, with Equinox and Cazzolina Restaurant occupying the side street retail suites.

The loan is floating rate and had an initial term of two years with a maturity date in June 2021, in addition to three one-year extension options that are not subject to any performance hurdles. The borrower has exercised two out of the three extension options, pushing the current maturity date to June 2023. At issuance, the borrower entered into, and assigned to the lender, an interest rate cap agreement that was valid through June 2022. In connection with the exercise of each 12-month extension option, the borrower is required to extend the rate cap agreement until the extended maturity date occurs. DBRS Morningstar received confirmation that the borrower has entered into a revised interest rate cap agreement expiring in June 2023 with SMBC Capital Markets, Inc. at a LIBOR strike price equal to 4.5%, mirroring the terms of the original agreement. DBRS Morningstar believes it is likely that the borrower will exercise the fourth extension option; however, to date, DBRS Morningstar has not received confirmation from the servicer.

Occupancy at the property has trended downward in recent years, slipping from 93.0% at issuance to 80.8% at YE2021 and 74.3% at YE2022. Occupancy declines began after Modis (formerly 4.4% of the NRA) and BMO Capital Markets (formerly 4.5% of the NRA) vacated the subject upon their November 2021 and May 2022 lease expirations, respectively. A September 2022 “Real Estate Weekly” article noted upward of five leases that were signed in 2022, including two tenants, Tethys Technology (5,979 sf) and Averon Energy (8,600 sf) that are not reflected in the December 2022 rent roll, suggesting the physical occupancy rate could increase to approximately 77.3% in the near term. In addition, average rental rates at the property have increased to $70.94 per square foot (psf) from $64.83 psf at issuance with rental rates for new leases signed in 2022 ranging from $72.00 psf to $84.00 psf. According to Reis, comparable Class A office properties within a one-mile radius from the subject reported average vacancy rates of 13.9% with effective rental rates of $70.62.

The largest tenant, Urban Outfitters (5.2% of the NRA) has a lease that expires in February 2026 with two five-year extension options. The second-largest tenant is Equinox (5.2% of the NRA through January 2035), which occupies 25,735 sf of primarily below-ground-level retail space. The remainder of the rent roll is relatively granular with no other tenant representing more than 5.0% of the NRA. The three largest office tenants at the property include Major, Lindsey & Africa (4.4% of the NRA through January 2024), Laidlaw & Company (4.2% of NRA through February 2029), and CTBC Bank Co. (4.2% of the NRA through January 2029). Lease rollover within the next 12 months is moderately concentrated with tenant leases representing approximately 11.5% of NRA set to roll, including the largest office tenant.

According to the YE2022 financial reporting, the property generated net cash flow (NCF) of $11.2 million, with a debt service coverage ratio (DSCR) of 2.7 times (x), compared with the YE2021 figures of $16.1 million and 4.5x., respectively. The YE2021 and YE2022 NCF figures are 5.9% and 34.4% lower than the DBRS Morningstar NCF figure of $17.1 million, which was derived in 2020 when ratings were assigned. The cash flow declines since that time are largely attributable to declining rental revenue and expense reimbursements. The DSCR has fallen in turn, with coverage also stressed given the increase in the debt service obligation, which increased approximately 17.0% between YE2021 and YE2022.

DBRS Morningstar’s analysis for this review considered a NCF of $15.8 million, which was derived by applying a 2.0% haircut to the YE2021 NCF. A 6.5% cap rate was applied to that value, resulting in a DBRS Morningstar value of $242.2 million. The updated DBRS Morningstar value is a -7.5% variance from the value derived when the ratings were assigned in March 2020 and a -38.6% variance from the appraised as-is value at issuance of $395 million. The DBRS Morningstar value implies a loan-to-value ratio (LTV) of 99.8% compared with a LTV of 61.3% on the as-is appraised value at issuance. Although property performance has faced headwinds in recent years, DBRS Morningstar notes that the collateral appears relatively well positioned for a near-to-moderate term recovery given its prime location, recent leasing momentum, flexible floor plates and strong institutional sponsorship. The sponsor maintains a significant amount of equity within the transaction, and has experience owning and operating numerous office properties in Manhattan.

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 (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 (March 16, 2023; https://www.dbrsmorningstar.com/research/410912).

Other methodologies referenced in this transaction are listed at the end of this press release.

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 rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process for this rating action.

DBRS Morningstar had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This is a solicited credit rating.

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

The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

North American CMBS Single-Asset/Single-Borrower Ratings Methodology (February 23, 2023)
https://www.dbrsmorningstar.com/research/410191/north-american-single-assetsingle-borrower-ratings-methodology

Legal Criteria for U.S. Structured Finance (December 7, 2022)
https://www.dbrsmorningstar.com/research/407008/legal-criteria-for-us-structured-finance

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 12, 2022)
https://www.dbrsmorningstar.com/research/402646/dbrs-morningstar-north-american-commercial-real-estate-property-analysis-criteria

North American Commercial Mortgage Servicer Rankings (September 8, 2022)
https://www.dbrsmorningstar.com/research/402499/north-american-commercial-mortgage-servicer-rankings

Interest Rate Stresses for U.S. Structured Finance Transactions (August 30, 2022)
https://www.dbrsmorningstar.com/research/402153/interest-rate-stresses-for-us-structured-finance-transactions