Morningstar DBRS Finalizes Provisional Credit Ratings on DBSG Commercial Mortgage Trust 2024-ALTA

DBRS, Inc. (Morningstar DBRS) finalized provisional credit ratings on the following classes of the DBSG 2024-ALTA Mortgage Trust Commercial Mortgage Pass-Through Certficates (the Certificates) issued by DBSG 2024-ALTA Mortgage Trust (DBSG 2024-ALTA or the Trust) as follows:

-- Class A at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (sf)
-- Class HRR at BB (high) (sf)

All trends are Stable.

The DBSG 2024-ALTA single asset/single-borrower transaction is collateralized by the borrower’s fee-simple interest in a 43-story, Class A high-rise apartment building totaling 467 units with 42,878 square feet of retail space in Long Island City, New York. Transaction proceeds of $217.0 million along with cash equity of $4.8 million from the transaction sponsor (the sponsor) will be used to refinance $216.5 million of debt, fund a $300,000 capital expenditure (capex) reserve for the remaining transition costs to reposition the co-living units to conventional units, fund a $1,633,636 free rent reserve for the remaining free rent associated with the Waves retail lease, and cover closing costs. The sponsor will have approximately $114.5 million of equity remaining in the transaction at closing. Developed in 2018, the property’s current occupancy rate is 94.5 % based on the April 2024 rent roll.

In 2023, the sponsor terminated a management lease for 169 units with Common, which operated a co-living program at the asset since 2021, for expense savings, to better manage the asset, and to push rents. The sponsor is in the process of re-positioning the remaining 115 co-living units to traditional leases at market rents per 421-a regulations. To date, 54 units have transitioned to conventional units and, of those, 37 have been re-leased, achieving rent premiums of approximately 6.9%. Common previously offered fully furnished private rooms in apartments along with cleaning services, Wi-Fi, and basic common-area supplies. In order to execute this business plan, the sponsor will utilize the capex reserve to remove furniture, refresh units, and/or remove drywalls in select units to make a more traditional floor plan. During the course of the property tour, Morningstar DBRS learned that only four units had had drywall removed. It was also indicated on the tour that, going forward, few to no units would go through similar major renovations. As the business plan to convert the 169 master-leased previous co-living units to traditional apartments is minor, Morningstar DBRS believes there is minimal execution risk for the business plan. Additionally, the master lease final expiry is in September 2024, with no more than 23 units rolling at any given time.

The collateral is located in Long Island City, which is part of the Reis-designated Queens County submarket. The submarket has exhibited favorable vacancy rates and rent growth since Q4 2020. Between Q4 2020 and Q4 2023, the submarket experienced a large 50% increase in effective rents to $3,453 from $2,372. The vacancy rate improved to 2.1% as of Q4 2023 from 2.8% in Q4 2020. Although rent growth in Queens County has moderated throughout 2023, the collateral’s weighted-average (WA) rent of $4,135 favorably with the average submarket rent. Per Reis, average asking rent for properties of a similar vintage (i.e., 2010–19), is $4,416, which is higher than the subject’s WA rent. The sponsor will be able to raise rents as the 421-a abatement comes to term. The subject’s vacancy rate of 0.8% is lower than the submarket vacancy rate of 2.1%; however, occupancy is expected to fluctuate during the transition process.

Alta+ benefits from significant 421-a tax exemptions during the loan term. In return, the property has a cap on rent growth, therefore the average rent at the property is currently 9.4% below market rent.

Morningstar DBRS’ credit rating on the Certificates address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations are the related Principal Distribution Amounts and Interest Distribution Amounts for the rated classes.

Morningstar DBRS’ credit ratings do not address nonpayment risk associated with contractual payment obligations contemplated in the applicable transaction document(s) that are not financial obligations.

Morningstar DBRS’ long-term credit ratings provide opinions on risk of default. Morningstar DBRS considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued. The Morningstar DBRS short-term debt rating scale provides an opinion on the risk that an issuer will not meet its short-term financial obligations in a timely manner.

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 Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://dbrs.morningstar.com/research/427030 (January 23, 2024).

All credit ratings are subject to surveillance, which could result in credit ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by Morningstar DBRS.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is North American Single-Asset/Single-Borrower Ratings Methodology (March 1, 2024), https://dbrs.morningstar.com/research/428799.

Other methodologies referenced in this transaction are listed at the end of this press release.

With regard to due diligence services, Morningstar DBRS was provided with the Form ABS Due Diligence-15E (Form-15E), which contains a description of the information that a third party reviewed in conducting the due diligence services and a summary of the findings and conclusions. While due diligence services outlined in Form-15E do not constitute part of Morningstar DBRS’ methodology, Morningstar DBRS used the data file outlined in the independent accountant’s report in its analysis to determine the credit ratings referenced herein.

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.

Morningstar DBRS 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, Inc.
22 West Washington Street
Chicago, IL 60602 USA
Tel. +1 312 332-3429

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

-- DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 22,2023), https://dbrs.morningstar.com/research/420982

-- Legal Criteria for U.S. Structured Finance (April 15, 2024), https://dbrs.morningstar.com/research/431205

-- North American Commercial Mortgage Servicer Rankings (August 23, 2023), https://dbrs.morningstar.com/research/419592

For more information on this credit or on this industry, visit dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.