DBRS Morningstar Downgrades Credit Ratings on Two Classes of 20 Times Square Trust 2018-20TS

DBRS Limited (DBRS Morningstar) downgraded its credit ratings on two classes of the Commercial Mortgage Pass-Through Certificates, Series 2018-20TS issued by 20 Times Square Trust 2018-20TS as follows:

-- Class H to CCC (sf) from B (low) (sf)
-- Class V to CCC (sf) from B (low) (sf)

In addition, DBRS Morningstar confirmed its credit ratings on the following classes:

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

All trends are Stable with the exception of Classes H and V, which have ratings that do not typically carry a trend in commercial mortgage-backed securities (CMBS) ratings.

The credit rating downgrades reflect the $195,334 interest shortfall affecting the Class H certificate as of the September 2023 remittance. Given DBRS Morningstar’s interest shortfall tolerance at the B (sf) rating category and the size of the shortfall, the downgrade to CCC (sf) is warranted. At the B (sf) rating category, the interest shortfall tolerance is six remittance periods. The shortfalls were accrued with the March 2023 remittance and listed as an Other Expense.

The credit rating confirmations and Stable trends reflect DBRS Morningstar’s view that, although the loan remains in special servicing and is outstanding well past its May 2023 maturity date, the mitigating factors in the confirmed willingness of the mezzanine lender to take over the borrower’s obligations, as well as the DBRS Morningstar value that suggests the trust loan-to-value ratio (LTV) remains just below 100%, were deemed sufficient to support the stable credit view for the transaction overall. In addition, the trust loan remains current, with full interest distributed to all classes as of the September 2023 remittance and all periods before that. The servicer is not currently reporting any outstanding advances; however, as noted above, there is $195,334 in interest shortfalls affecting Class H.

The trust’s underlying loan represents a $600 million pari passu participation of a $750 million whole first mortgage loan secured by the leased-fee interest in 16,066 square feet (sf) of land under 20 Times Square. There is also a mezzanine loan in place for $150.0 million. The property’s ground lease and the leased-fee financing are senior to the leasehold interest and leasehold financing. The 99-year ground lease expires in April 2117 and has no termination options. The initial ground rent payment was $29.3 million, increasing 2.0% annually during the first five years and then 2.75% per year thereafter. As of September 2022, the annualized ground rent payment reported by the servicer was $31.5 million and according to the September 2023 reporting for the subject trust, there is approximately $6.4 million in reserves.

The noncollateral improvements consist of a mixed-use property at the corner of Seventh Avenue and West 47th Street in New York’s Times Square neighborhood. The property comprises a 452-key Marriott Edition luxury hotel, 74,820 sf of retail space (5,500 sf of which is non-revenue-generating storage space), and 18,000 sf of digital billboards. The debt on the noncollateral leasehold interest went into default in December 2019, with the lender citing numerous undischarged mechanics liens against the property as well as a missed deadline to lease up the retail space. The leasehold interest was foreclosed and the lender took title in January 2022. As the outstanding mechanic’s liens are a breach of the terms of the ground lease, the subject loan was also transferred to special servicing, in November 2022.

The subject loan is now past its May 2023 maturity date and the special servicer has advised that payments on the mezzanine loan ceased in December 2022. The mezzanine lender has indicated its desire to proceed with a uniform commercial code (UCC) foreclosure to obtain the borrower’s interest in the leased fee portion of the property. A standstill agreement between the subject trust and mezzanine lender was put in place as of August 2023 to allow the mezzanine lender to complete the UCC foreclosure. The standstill agreement will remain in place until December 2023 or until the UCC foreclosure is completed; if necessary, the standstill agreement can be extended by the mezzanine lender for up to four successive two-month periods. According to the special servicer, following the completion of the UCC foreclosure, a loan modification is expected to be finalized that will include the mezzanine lender assuming the obligations of the subject loan and a two-year loan maturity extension to May 2025 in exchange for a $50.0 million principal curtailment. An additional one-year extension option will be exercisable provided an additional $25.0 million is paid and applied to the principal balance of the loan.

DBRS Morningstar estimated the value of the leased-fee component at approximately $758.6 million based on the payments expected from the ground lease at year 10 and a blended cap rate of 4.8%. Based on the derived value, the implied senior loan LTV is 98.9%. No positive or negative qualitative adjustments were made to the LTV sizing benchmarks in the analysis for this review. Given the trust loan is in default and there is some level of uncertainty surrounding the timeline and ultimate resolution of the mezzanine lender’s UCC foreclosure, a liquidation analysis was also considered based on a look-through cash flow analysis for the leasehold interest. A cash flow was derived based on stressed estimates for retail rent and hotel income, and a blended cap rate of 7.1%. The resulting value implies an LTV of approximately 75% for the subject loan, suggesting a liquidation scenario would yield enough proceeds to repay the outstanding debt in full. This analysis further supports the credit rating confirmations with Stable trends as part of this review.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) 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 (July 4, 2023) https://www.dbrsmorningstar.com/research/416784.

All credit ratings are subject to surveillance, which could result in credit 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 credit rating was initiated at the request of the rated entity.
The rated entity or its related entities did participate in the credit rating process for this credit 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 credit rating action.
This is a solicited credit rating.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the credit rating process.

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

The credit 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 22, 2023; https://www.dbrsmorningstar.com/research/420982)
North American Commercial Mortgage Servicer Rankings (August 23, 2023; https://www.dbrsmorningstar.com/research/419592)
Interest Rate Stresses for U.S. Structured Finance Transactions (June 9, 2023; https://www.dbrsmorningstar.com/research/415687)
Legal Criteria for U.S. Structured Finance (December 7, 2022;
https://www.dbrsmorningstar.com/research/407008)

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/417279.

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