DBRS Morningstar Downgrades Credit Ratings on Two Classes, Changes Trends to Negative From Stable on Nine Classes of CSAIL 2019-C15 Commercial Mortgage Trust

DBRS Limited (DBRS Morningstar) downgraded the credit ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2019-C15 issued by CSAIL 2019-C15 Commercial Mortgage Trust:

-- Class F-RR to B (sf) from BB (low) (sf)
-- Class G-RR to CCC (sf) from B (low) (sf)

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

-- Class A-2 at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class A-S at AAA (sf)
-- Class X-A at AAA (sf)
-- Class X-B at AA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (sf)
-- Class X-D at BBB (high) (sf)
-- Class D at BBB (sf)
-- Class E-RR at BBB (low) (sf)

DBRS Morningstar changed the trends on Classes A-S, B, C, D, E-RR, F-RR, X-A, X-B, and X-D to Negative from Stable. Class G-RR has a credit rating that does not typically carry trends in commercial mortgage-backed securities (CMBS) credit ratings. All remaining trends are Stable.

At the November 2022 review, DBRS Morningstar downgraded Classes B, D, E-RR, F-RR, G-RR, X-B, and X-D because of value declines for the collateral properties backing the loans in special servicing, as well as concerns surrounding the servicer’s watchlist loans, specifically Continental Towers (Prospectus ID#13, 3.1% of the pool), which is secured by a suburban office property located in the Chicago area. Since that time, the performance has deteriorated and the loan transferred to the special servicer in April 2023 for imminent monetary default. DBRS Morningstar also notes the pool has a moderate amount of exposure to loans backed by office properties, representing more than 20.0% of the pool balance. The office sector is currently challenged with rising vacancy rates in many submarkets and decreased investor appetite for this property type considering the shift in workplace dynamics. The One Lincoln Center loan (Prospectus ID#17, 2.7% of the pool), which is secured by an office property in Syracuse, New York, is on the servicer’s watchlist for a low debt service coverage ratio (DSCR), which has been below breakeven for the last few years. The credit ratings downgrades and Negative trends assigned with this review are reflective of continued performance declines for Continental Towers and ongoing concerns with the under-performing office loans, as further outlined below.

As of the October 2023 remittance, 34 loans remain in the pool, representing a collateral reduction of 2.8% since issuance. There are two loans in special servicing and 11 loans on the servicer’s watchlist, representing 6.0% and 38.8% of the pool balance, respectively. A majority of the loans on the servicer’s watchlist are being monitored for performance-related declines including low DSCRs and cash flow sweeps. Loans that have exhibited increased risk from issuance were analyzed with an elevated loan-to-value ratio (LTV) and/or probability of default penalty in the analysis for this review, as applicable.

The largest specially serviced loan, Continental Towers, is secured by a Class A office property in the Chicago suburb of Rolling Meadows, Illinois. The loan has consistently shown performance declines from issuance in recent years, with significant occupancy and DSCR declines reported. In April 2023, the loan was transferred to special servicing for imminent monetary default. Several large tenants have left the property, including Komatsu America Corporation (11.6% of the net rentable area (NRA)), which vacated at its July 2021 lease expiration. This tenant’s planned departure was known at origination and was accounted for in DBRS Morningstar’s analysis at issuance with an elevated vacancy loss applied, resulting in a DBRS Morningstar net cash flow (NCF) that was about 25% lower than the issuer’s NCF. Two additional tenants, Ceannate Corporation (Ceannate; 8.2% of NRA) and Panasonic (5.8% of NRA), both likely exercised early termination options with Ceannate vacating in September 2020 and Panasonic leaving in December 2022. Details surrounding these departures, including any termination fees collected, were requested from the servicer and a response is pending. Based on the issuance documents, Ceannate was required to pay a $2.9 million termination fee ($39.54 per square foot (psf) for its space).

At YE2022, the occupancy rate was reported at 67.0% with a DSCR of 0.52 times (x). The largest remaining tenant, Verizon (17.5% of NRA, lease expiry in April 2028), can terminate its lease in April 2026 and must provide written notice by January 2025, as well as pay a termination fee of $2.9 million ($15.00 psf). In the event Verizon terminates its lease, does not renew its lease, or goes dark in more than 50% of its space, a cash flow sweep would be initiated, subject to a cap of $55 psf (approximately $8.8 million based on the size of Verizon’s space), but this mechanism is generally useless given the low in-place cash flow. According to Reis, office properties in the subject’s Northwest Suburbs submarket reported a Q2 2023 vacancy rate of 29.3%, where Reis expects it to hover through the next five years.

The borrower is requesting a loan modification and the servicer is evaluating the request while also preparing for a potential placement of a receiver and/or the initiation of a foreclosure action if those negotiations fall through. The decline in performance and soft office submarket suggests the value of the property has significantly deteriorated since the issuance value of $121.7 million. It is also noteworthy that the sponsor, a joint venture between Rubenstein Properties Fund III, L.P. and Glenstar, injected approximately $50.0 million of equity at issuance and recently completed $20.0 million in renovations in 2020. Given the increased risks in the low in-place cash flows, lack of leasing activity and poor outlook for prospects for the high availability at the property over the near to moderate term, DBRS Morningstar analyzed the loan with a liquidation scenario based on a stressed value, resulting in a loss severity in excess of 45.0%.

The One Lincoln Center loan is secured by an office building in Syracuse, New York, and is currently on the servicer’s watchlist for a low DSCR, with the trailing six months (T-6) ended June 30, 2023, financials reporting a figure of 0.77x. Occupancy has been at the 70.0% range in the last few years and tenants representing more than half of the NRA have leases scheduled to roll during the term of the loan. This includes the largest tenant, Bond Schoeneck & King PLLC (31.3% of NRA, lease expires in October 2027). Again, this loan is structured with a cash flow sweep that will be initiated 18 months prior to the tenant’s lease expiration, but the structure’s effectiveness is eliminated by the low in-place cash flows that mean there are no excess funds to collect. According to Reis, office properties located in the subject’s Downtown submarket reported a Q2 2023 vacancy rate of 16.4% but vacancy is expected to decrease by 2028 to 12.3%. Considering the depressed performance and significant tenant rollover risk, DBRS Morningstar analyzed this loan with an elevated LTV, resulting in an expected loss that was more than double the pool average.

The second loan in special servicing is Nebraska Crossing (Prospectus ID#15, 2.9% of the pool), which is secured by an anchored retail property in Gretna, Nebraska. The loan transferred to special servicing because of defaults on special-purpose entity covenants. Although the details of the defaults were not provided, the servicer noted that the borrower has provided a settlement agreement and the special servicer will continue to monitor this loan before returning to the master servicer. The Brooklyn Multifamily Portfolio loan (Prospectus ID#23, 1.7% of the pool) was previously in special servicing but a loan modification was executed, where the borrower provided a $500,000 principal curtailment and brought the loan current, with the loan returned to the master servicer in June 2023.

At issuance, DBRS Morningstar shadow rated 787 Eleventh Avenue (Prospectus ID#4, 5.6% of the pool balance) investment grade. This loan is secured by a Class A mixed-use property in the Midtown West neighborhood of Manhattan. The first five floors consist of automotive showroom space for luxury car brands, with the remaining space configured for office use. The loan has been on the servicer’s watchlist for low DSCR since 2020, primarily a factor of rent abatements that were provided to several tenants. Mitigating these risks is a free rent reserve of approximately $15.5 million funded at issuance. The former third-largest tenant, Spaces International Workplace (19.3% of NRA), a subsidiary of Regus PLC, vacated the subject ahead of its October 2031 lease expiration. However, the space was backfilled by Mount Sinai’s Icahn School of Medicine (Mount Sinai), which already occupied a unit at the subject, bringing the tenant’s total footprint to approximately 30.0% of NRA. According to news articles, the tenant’s location at the subject will serve as an outpatient and research center, and build-outs appear to be near completed. Mount Sinai received rental abatements but is expected to start paying rent in March 2024. The servicer noted that the property is fully leased and once Mount Sinai starts paying its rent, NCF is expected to continue to trend upwards. As of YE2022, the DSCR was 1.35x, compared with YE2020 of 1.08x. Given the high occupancy rate and expectation that cash flows will soon return to levels expected at issuance, DBRS Morningstar confirms with this review that the loan performance trends remain consistent with investment-grade loan characteristics.

Two other loans, SITE JV Portfolio (Prospectus ID#3, 6.2% of the pool balance) and 2 North 6th Place (Prospectus ID#8, 4.2% of the pool balance), were shadow rated investment grade at issuance. With this review, DBRS Morningstar confirms that the loan performance trends for these loans also remain consistent with investment-grade loan characteristics.

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 https://www.dbrsmorningstar.com/research/416784 (July 4, 2023).

Classes X-A, X-B, and X-D are interest-only (IO) certificates that reference a single rated tranche or multiple rated tranches. The IO rating mirrors the lowest-rated applicable reference obligation tranche adjusted upward by one notch if senior in the waterfall. At closing, DBRS Morningstar noted that the transaction pricing resulted in no excess interest proceeds from the Class C Certificate being available to contribute to the Class X-B Certificates and as such, only excess interest proceeds from the Class B Certificate will be contributed.

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. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The DBRS Morningstar Long-Term Obligations Rating Scale definition indicates that credit ratings of CCC or lower are assigned when the bond is highly likely to default or default is imminent, thereby prevailing over a sensitivity analysis.

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 credit ratings are monitored.

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

North American CMBS Multi-Borrower Rating Methodology (March 16, 2023)/North American CMBS Insight Model v 1.1.0.0 (https://www.dbrsmorningstar.com/research/410913)

Rating North American CMBS Interest-Only Certificates (December 19, 2022; https://www.dbrsmorningstar.com/research/407577)

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.