DBRS Morningstar Confirms All Classes of Citigroup Commercial Mortgage Trust 2022-GC48 Yorkshire & Lexington Towers Loan-Specific Certificates

DBRS Limited (DBRS Morningstar) confirmed its ratings on the Yorkshire & Lexington Towers Loan-Specific Certificates issued by Citigroup Commercial Mortgage Trust 2022-GC48 as follows:

-- Class YL-A at A (sf)
-- Class YL-B at BBB (low) (sf)
-- Class YL-C at BB (low) (sf)

All trends are Stable. The rating confirmations reflect the stable performance of the transaction, which remains in line with DBRS Morningstar’s expectations from issuance.

The transaction is secured by the borrower’s fee-simple interest in two multifamily properties, totaling 808 units, in Manhattan’s Upper East Side neighborhood. The 21-story Yorkshire Towers building is significantly larger, with 681 residential units and 63,778 square feet (sf) of commercial space, than the 15-story Lexington Towers building, which consists of 127 residential units and approximately 17,000 sf of commercial space. At issuance, there were 503 market-rate units (62.3% of the total) and 305 rent-stabilized units (37.7% of the total) across the two properties.

The $221.5 million subject transaction consists of the two junior B notes that are part of a larger $714.0 million whole loan. The whole loan consists of 18 senior A notes totaling $318.0 million, two junior B notes totaling $221.5 million, and four mezzanine loans totaling $174.5 million. Whole loan proceeds were primarily used to refinance $550.0 million of existing debt, return $55.3 million of borrower equity, fund $20.3 million of various upfront reserves, and cover closing costs. The fixed-rate loan is interest only throughout its five-year term and is scheduled to mature in June 2027, with no extension options available.

In addition to 57 unit renovations that have already been completed, the sponsor plans to carry out a $6.5 million renovation and has identified 311 units that will be renovated over the next three years. More specifically, the business plan contemplates 283 traditional renovations (estimated cost of $19,382 per unit) and 28 major renovations (estimated cost of $37,143 per unit). The major renovations are more complex, combining multiple units into a single floorplan or materially altering floorplans. When the unit size or floorplan is materially altered, rent stabilization regulations allow for the rent-stabilized legal rent to be reset to the first rent achieved following the renovation. Once renovations have been completed, the subject’s unit count is expected to decrease to 793 units, consisting of 492 market-rate and 301 rent-stabilized units. While DBRS Morningstar considers there to be an inherent risk in the business plan, it also believes that there are appropriate loan structures in place to mitigate the risk, including a $6.5 million upfront unit upgrade reserve and a $5.9 million upfront supplemental income reserve that will cover any income lost while units are undergoing renovation. DBRS Morningstar requested an update on the ongoing renovations; however, as of this press release, no updated information was received.

According to the February 2023 rent roll, the residential portion of the towers had a combined occupancy rate of 92.5%, with rental rates of $5,156 per unit and $2,717 per unit for fair market and stabilized units, respectively. While vacancy showed a moderate decline from 96.4% in March 2022, likely as a result of the ongoing renovations, rental rates improved from $4,930 per unit and $2,636 per unit for fair market and stabilized units, respectively, in March 2022. According to Reis, the Upper East Side submarket reported Q1 2023 average effective rental and vacancy rates of $5,027 per unit and 2.5%, respectively. Historically, the submarket has benefited from high barriers to entry, and, as of March 2023, Reis reports there will be no new competitive supply introduced to the submarket through YE2025.

DBRS Morningstar’s net cash flow derived at issuance was $29.4 million, a 16.9% haircut to the Issuer’s figure of $35.4 million, as the DBRS Morningstar net cash flow assumptions do not include any stabilization credit. DBRS Morningstar concluded that the capitalization rate for the collateral was 5.75%, which resulted in a DBRS Morningstar estimated value of nearly $511.4 million, implying DBRS Morningstar loan-to-value ratios (LTVs) of 105.5% on the secured debt balance of $539.5 million and 139.6% on the total debt of $714.0 million. The DBRS Morningstar concluded value estimate represents variances of -46.4% and -51.6% from the appraiser’s as-is and as-stabilized value estimates, respectively. If the sponsor is able to successfully carry out its business plan, leverage would considerably improve as the appraiser’s stabilized value estimate of $1.1 billion indicates an LTV of 67.5% on the whole loan of $714.0 million.

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.

DBRS Limited
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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 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.