DBRS Morningstar Confirms All Ratings on Natixis Commercial Mortgage Securities Trust 2019-MILE

DBRS Limited (DBRS Morningstar) confirmed its ratings on the Commercial Mortgage Pass-Through Certificates, Series 2019-MILE issued by Natixis Commercial Mortgage Securities Trust 2019-MILE as follows:

-- Class A at AAA (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)
-- Class F at B (low) (sf)

DBRS Morningstar has maintained the Negative trends on Classes D, E, and F as a reflection of the continued concerns surrounding the collateral’s increased vacancy, combined with cash flows that have continued to underperform expectations. The loan was transferred to the special servicer in May 2023 for imminent monetary default, likely as a result of the borrower’s failure to meet the debt service coverage ratio (DSCR) threshold required to exercise the loan’s final maturity extension option approaching in July 2023. While the servicer has confirmed that Sony Pictures Entertainment Inc. (Sony; 21.0% of the net rentable area (NRA)) signed a new long-term through May 2036, the tenant is not expected to take occupancy until June 2024, with additional leases representing 17.6% of NRA scheduled to expire prior to the loan’s fully extended maturity date in July 2024. To determine the bonds most exposed to the increased risks, DBRS Morningstar relied on the hypothetical as-is value scenario derived as part of the June 2022 review, as further described below.

The rating confirmations and Stable trends for the remaining classes reflect DBRS Morningstar’s view that the overall credit profile of the transaction remains healthy given the sponsor’s significant equity contribution at close and the sizable reserves in place.

The transaction is secured by the fee-simple and leasehold interests in Wilshire Courtyard, which comprises two six-story, LEED Gold-certified office buildings with an aggregate of 1.1 million square feet (sf) in Los Angeles. The ground-leased parcel is approximately 3.5% of the property’s total site area, with an expiration in March 2066, subject to rent increases every 10 years based on cumulative CPI increases. The trust’s assets consist of a $408.2 million fully funded floating-rate mortgage loan, with an additional $69.4 million of mezzanine financing held outside of the trust. The borrower exercised the first maturity extension option, extending the loan’s maturity to July 2023, with one extension option remaining, exercisable under a DSCR of 1.10 times (x). As of this publication, no updates have been provided regarding the borrower’s remaining extension option; however, as the loan was recently transferred to special servicing, DBRS Morningstar believes the borrower has likely requested a loan modification.

According to the March 2023 rent roll, the property was 75.5% leased and 48.3% occupied, as Sony is not scheduled to take occupancy until June 2024. Vacancy increased significantly in February 2021 when WeWork (previously 31.5% of NRA) vacated its space. In addition, Twentieth Television, Inc. (previously 7.1% of NRA) vacated ahead of its lease expiration in December 2024. The servicer has also confirmed that two tenants, Mediabrands Worldwide (8.4% of NRA, expiring June 2023) and Skydance Media (4.9% of NRA, expiring October 2023), will vacate upon their respective expiration dates, with leases representing an additional 4.3% of NRA scheduled to roll prior to the fully extended loan maturity in June 2024. These all suggest that, barring any new leases signed between now and then, occupancy could be around 64% at the 2024 maturity date. Per the YE2022 financials, the loan reported a net cash flow (NCF) of $20.0 million (a DSCR of 0.93x), a decline from the YE2021 figure of $23.5 million (a DSCR of 1.19x) and the DBRS Morningstar NCF of $26.5 million (a DSCR of 1.21x).

The sponsor contributed $208.2 million in equity to close the subject transaction, and in 2021, there were plans for an extensive redevelopment of the property, per a June 23, 2021, Urbanize article. The plans include building two new interconnected high-rise buildings, containing 1.8 million sf of office space and approximately 120,000 sf of retail space, doubling the property’s gross leasable area to roughly 2.3 million sf. However, given the uncertainty of office demand in the Los Angeles core and surrounding areas, it seems unlikely these plans will materialize in the near to moderate term.

The property is well located in an affluent area with high barriers to entry; however, market vacancy rates are high. According to Reis, Class A office space within a two-mile radius from the property reported an average asking rent of $42.00 per square (psf) and a vacancy rate of 17.0% as of Q1 2022. In comparison, the subject achieved an average rental rate of $56.11 psf as of the March 2023 rent roll, with Sony slated to pay an initial rate of $53.79 psf. Reis projects that the Mid-Wilshire/Miracle Mile/Park Mile submarket will experience an annualized average rent growth of 1.7% by 2024, with vacancy declining to 19.6%.

To assign ratings to the transaction in April 2020, DBRS Morningstar derived a value of $355.2 million ($334 psf), a variance of -46.8% from the appraised value of $668.0 million ($629 psf) at issuance. As part of the June 2022 rating action for this deal, DBRS Morningstar stressed that value given increased vacancy rates and general uncertainty for office demand. The analysis considered two value stress scenarios, resulting in a hypothetical as-is value of approximately $281 million ($265 psf) and a hypothetical dark value of $200 million ($188 psf). In evaluating the impact of these scenarios, DBRS Morningstar gave credit to the $55.8 million ($53 psf) held between leasing reserves, termination fees, and the letters of credit, all of which may be used to re-lease the property or in the event of default, be held as additional cash collateral for the subject loan. DBRS Morningstar maintains that its assumptions to derive these values remain applicable to this review, with all reserves in place as of the May 2023 reporting.

While Sony’s lease is a positive, DBRS Morningstar generally has a cautious outlook on this asset type given the anticipated upward pressure on vacancy rates in the broader office market, challenging landlords’ efforts to backfill vacant space. As it stands, the property’s occupancy rate may fall to approximately 64% prior to the fully extended maturity, which would likely impair efforts to find replacement financing. These factors, as well as the value stress analysis outlined above, support the Negative trends for Classes D, E, and F, which would be most exposed to the possibility of interest shortfalls and/or losses should vacancy continue to increase during the remainder of the loan term or at maturity. DBRS Morningstar notes the loan remains current, with no indication to date that the sponsor’s commitment to the asset or loan has changed since issuance.

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).

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.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.

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

North American Single-Asset/Single-Borrower Ratings Methodology (February 23, 2023; https://www.dbrsmorningstar.com/research/410191)

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 12, 2022; https://www.dbrsmorningstar.com/research/402646)

North American Commercial Mortgage Servicer Rankings (September 8, 2022; https://www.dbrsmorningstar.com/research/402499)

Interest Rate Stresses for U.S. Structured Finance Transactions (August 30, 2022; https://www.dbrsmorningstar.com/research/402153)

Legal Criteria for U.S. Structured Finance (December 7, 2022; https://www.dbrsmorningstar.com/research/407008)

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.