DBRS Morningstar Confirms Credit Ratings on All Classes of DBGS 2021-W52 Mortgage Trust

DBRS Limited (DBRS Morningstar) confirmed its credit ratings on all classes of DBGS 2021-W52 Mortgage Trust Commercial Mortgage Pass-Through Certificates issued by DBGS 2021-W52 Mortgage Trust as follows:

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

All trends are Stable.

The credit rating confirmations and Stable trends reflect the overall performance of the transaction, which remains in line with DBRS Morningstar’s expectations at issuance. Although occupancy has declined and additional space will become vacant over the next year, DBRS Morningstar anticipated this in its analysis at issuance. Further mitigating the increased vacancy are loan structural features, including a cash trap and major tenant sweep as well as upfront reserves that are available for taxes, ongoing leasing costs, and capital improvement work.

The transaction is collateralized by the borrower's fee-simple interest in 51 West 52nd Street (Black Rock Building), an 878,000-square foot (sf), Class A, office high-rise in Midtown Manhattan. The collateral was constructed in 1963 as the headquarters for CBS Corporation. The merger of CBS Corporation and Viacom Inc. was completed in December 2019, following which the current sponsor, which is managed by affiliates of Harbor Group International, LLC, acquired the subject property from the merged company (CBS) in a partial sale-leaseback. As noted at issuance, CBS executed a short-term lease for 283,917 sf (32.3% of the net rentable area (NRA)) of space at the property, with lease expirations in August 2023 and August 2024, after which CBS intends to fully vacate the property. The interest-only (IO) loan has an initial maturity in October 2024 with three one-year extension options available.

The $420 million mortgage loan, along with an initial $378.1 million in borrower's equity contribution, were used to acquire the property for $760 million, pay $32.6 million in closing costs, and fund $5.5 million in upfront tax reserve. At issuance, there was additional mezzanine financing of $25.0 million, providing additional upfront reserves for tenant improvement and leasing costs (TI/LC) and capital expenditures. The associated mezzanine loan provides for up to $113.4 million in future advances that would be reserved for additional future leasing costs ($87.9 million), additional capital improvement ($15.0 million), and future shortfalls ($10.5 million). According to the servicer’s recent update, the borrower continues to execute capital projects at the property. Per the October 2023 loan level reserve report, there is approximately $8.7 million of TI/LC reserves remaining, which translates to $48.19 per square foot (psf) of CBS’ remaining space.

According to the June 2023 rent roll, the property was 90.4% occupied, down from 96.4% at issuance. The decline is primarily the result of CBS physically vacating some of its space (down to 20.6% of the NRA from 32.3% of the NRA at issuance). It is expected that CBS will vacate the remainder of its space by October 2024. The other largest tenants are Wachtell, Lipton, Rosen & Katz (Wachtell; 28.6% of the NRA, lease expiration in July 2024), and Orrick, Herrington, & Sutcliffe (24.2% of NRA, lease expiration in November 2026). According to the servicer’s most recent update, Wachtell has exercised its renewal option; however, no terms or rates have been provided. Since closing, the borrower has been able to sign one tenant, representing 5.6% of the NRA, on a 17-year lease. As of June 2023, the property’s average rental rate increased to $79.80 psf from $75.77 psf at issuance as a result of rent steps. The property’s average rental rate remains below market when compared with the Reis reported average of $88.18 psf for Class A office space within a 0.1-mile radius of the subject. At issuance, the average submarket rental rate was $89.26 psf, suggesting rents have softened slightly but that there remains upside should the borrower backfill vacant space market rates. DBRS Morningstar’s analysis does not recognize the upside, despite the substantial upfront and future reserves.

The property reported a net cash flow (NCF) of $32.3 million for the trailing 12 months ended June 30, 2023, reflecting a debt coverage service ratio (DSCR) of 1.17 times (x), compared with the DBRS Morningstar NCF of $33.8 million derived at issuance. Debt service payments have increased, given the loan’s floating-rate coupon. Additionally, DBRS Morningstar anticipates cash flow will decline further once CBS fully vacates, resulting in a below breakeven DSCR. In its analysis, DBRS Morningstar assumed a 0% renewal rate for the tenant and elected to not provide credit for loan-to-value (LTV) thresholds to account for cash flow volatility and execution risk of the borrower’s business plan. The DBRS Morningstar estimated TI/LC costs were ultimately negated by an annualized credit for the $107.9 million in total leasing cost reserves that are intended to come from the associated mezzanine financing should the full mezzanine financing be ultimately delivered.

The loan has been on the servicer’s watchlist since November 2022 because of the commencement of the additional reserve sweep period. The cash sweep fund is capped at $25.0 million, with 40.0% allocated to a shortfall reserve, 45.0% to leasing cost reserve, and 15.0% to a capital improvement reserve. In addition, the lease sweep trigger also commenced in March 2023 after CBS began vacating its space. Per the loan agreement, excess cash flow will be swept up to $150 psf.

Overall, DBRS Morningstar maintains a favorable view on the collateral’s performance in the long run, given the institutional-level sponsorship backing the transaction and the significant financing available for the sponsor’s business plan. Given the property’s desirable location in Midtown Manhattan and its close proximity to the Rockefeller Center and Grand Central Terminal, the appraiser concluded a land value of $480.0 million at issuance, which fully covers the trust loan amount and 86.0% of the whole loan amount. At issuance, DBRS Morningstar derived a value of $519.8 million based on a concluded cash flow of $33.8 million and a capitalization rate of 6.5%, resulting in a DBRS Morningstar LTV of 80.8% compared with the LTV of 53.8% based on the appraised value at issuance. As noted above, DBRS Morningstar made positive qualitative adjustments totaling 4.0% to the LTV sizing benchmarks to account for the property quality and strong market fundamentals. Should the future mezzanine financing become undeliverable, DBRS Morningstar may take action to further stress the DBRS Morningstar as-is value of the property to account for TI/LC costs as necessary.

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

Classes X-CP and Class X-EXT are 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.

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.

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

North American Single-Asset/Single-Borrower Ratings Methodology (October 19, 2023;
https://www.dbrsmorningstar.com/research/422174)

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.