Morningstar DBRS Assigns Provisional Credit Ratings to ONNI Commercial Mortgage Trust 2024-APT

DBRS, Inc. (Morningstar DBRS) assigned provisional credit ratings to the following classes of Commercial Mortgage Pass-Through Certificates, Series 2024-APT (the Certificates) to be issued by ONNI Commercial Mortgage Trust 2024-APT (the Trust):

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

All trends are Stable.

The collateral for the Trust includes the borrower¿s fee-simple interest in eight Class A multifamily properties totaling 2,791 apartment units located in Chicago; Los Angeles; and Long Beach, California. Transaction proceeds of $875.0 million along with $125.0 million of mezzanine debt will be used to refinance $930.5 million of debt across the portfolio; fund various reserves including leasing, replacement, and tax reserves totaling $17.4 million; and cover $13.5 million in closing costs. The sponsor has developed all properties between 2015 and 2023 and the portfolio has an average vintage of 2020. Due to the recent delivery of several assets, the primary business plan is to successfully lease the commercial office and retail spaces throughout the portfolio and maintain performance of the multifamily units. Five assets, totaling 1,830 units, are located in Chicago with the remaining 961 units located in Los Angeles and Long Beach. The portfolio benefits from a unique product offering in the form of short-term rental units. Branded under the Levels name, these are furnished multifamily units that are leased out on a short-term rental basis but which can be signed to long-term leases on a case-by-case basis. The sponsor currently operates 565 of the 2,791 total units in such fashion. As of the May 2024 rent roll, and excluding the furnished units, the portfolio is approximately 97.1% occupied.

All properties have exceptional amenities with modern condominium-quality unit finishes and represent some of the highest-quality rental units in their respective markets. Common-area amenities for properties in the portfolio include resort-style pools, several tenant lounges in each property, work-from-home spaces for tenants, professional chef¿s kitchens, gyms outfitted with commercial equipment, saunas, spas, massage rooms, cold plunges, a yoga room/Pilates studio, and a basketball court and/or a bowling alley. Interior unit finishes include hardwood flooring, floor-to-ceiling windows, imported custom countertops, custom wood cabinetry, and modern lighting finishes. All units have in-unit washers/dryers. The average unit size of the multifamily units across the portfolio is 797 square feet (sf) while the short-term rental units are slightly larger and average approximately 869 sf. The average in-place rent for the multifamily units is approximately $3,220 per unit ($4.18 per sf). In addition to the multifamily units, there is approximately 175,000 sf of commercial space that was 57.4% occupied as of the May 2024 rent roll. Several letters of intents are currently being negotiated across the portfolio, implying cash flow upside should they be executed as they were not accounted for in the Morningstar DBRS analysis. The sponsor intends to cover the projected tenant improvement allowances and leasing commissions associated with the commercial lease-up via a $8.4 million leasing reserve. Despite the recent delivery of several assets, the in-place multifamily occupancy rate of 97.1% showcases an impressive lease-up velocity that Morningstar DBRS views as a testament to the quality and expertise of the sponsor, which also serves as the property manager for each asset within the portfolio.

The Morningstar DBRS portfolio average rent for the traditional market rate units is $3,313 per unit, notably higher than the Reis average portfolio rent of $3,023 per unit. Furthermore, the Morningstar DBRS physical occupancy rate of 92.2% results in a physical vacancy rate of 7.8%, inline with the Reis weighted-average vacancy rate of 7.8%. For the five Chicago assets specifically, the current market multifamily vacancy rate of 5.5% per the issuer is lower than the national average of 7.8% and the Morningstar DBRS concluded physical occupancy rate of 92.2%. The above-average performance metrics observed in the portfolio contribute to Morningstar DBRS¿ opinion that each property in the portfolio is among the market leaders in its respective submarket, a view further cemented by the quick lease-up demonstrated by Onni Fulton Market (373 units) and Onni East Village (432 units), which were both delivered in 2023.

As mentioned above, the sponsor operates a short-term rental operation known as Levels. Onni started the program in 2009 and currently manages approximately 1,300 units across Chicago, Long Beach, Los Angeles, Seattle, and Vancouver. Levels offers modern suites with upscale amenities to tenants for shorter lease periods and captures demand primarily for corporate relocations, corporate trainings, and temporary housing following a casualty involving their primary residence. Housekeeping and concierge services for short-term rental tenants are negligible, equivalent to a traditional multifamily apartment lease. Furthermore, Level is a full-floor offering that is distinctly separate from traditional multifamily units in order to not disrupt the traditional multifamily tenants occupying the building. Occupancy for the Levels units are elevated, exhibiting an occupancy of 83.4% in 2022 before the introduction of supply at Onni Fulton Market and SMB Hollywood which went online in 2022 and 2023, respectively. As demonstrated in the historical occupancy chart below, as of the March 2024 financials the assets continue to see success in leasing which Morningstar DBRS anticipates remaining stable if not increasing as the new deliveries in Onni Fulton Market and SMB Hollywood continue to capture market share as their popularity amongst their respective submarkets grow.

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¿ 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.

A provisional credit rating is not a final credit rating with respect to the above-mentioned securities and may change or be different than the final credit rating assigned or may be discontinued. The assignment of final credit ratings on the above-mentioned securities is subject to receipt by Morningstar DBRS of all data and/or information and final documentation that Morningstar DBRS deems necessary to finalize the credit ratings.

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.