Morningstar DBRS Downgrades Credit Ratings on Three Classes of Citigroup Commercial Mortgage Trust 2020-GC46, Changes Trend on Six Classes to Negative from Stable

DBRS Limited (Morningstar DBRS) downgraded its credit ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2020-GC46 issued by Citigroup Commercial Mortgage Trust 2020-GC46:

-- Class X-F to BB (low) (sf) from BBB (low) (sf)
-- Class F to B (high) (sf) from BB (high) (sf)
-- Class G-RR to B (sf) from BB (low) (sf)

In addition, Morningstar DBRS confirmed its credit ratings on the remaining classes as follows:

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-5 at AAA (sf)
-- Class A-AB at AAA (sf)
-- Class A-S at AAA (sf)
-- Class X-A at AAA (sf)
-- Class B at AA (high) (sf)
-- Class X-B at AA (low) (sf)
-- Class C at A (high) (sf)
-- Class D at BBB (high) (sf)
-- Class X-D at BBB (sf)
-- Class E at BBB (low) (sf)

Morningstar DBRS changed the trends on Classes D, E, F, G-RR, X-D, and X-F to Negative from Stable. All other trends are Stable.

The credit rating confirmations and Stable trends reflect the overall healthy performance of the pool, which continues to perform in line with Morningstar DBRS' expectations as evidenced by the pool's WA DSCR of 2.77 times (x) and WA debt yield of 11.4%.

The credit rating downgrades and Negative trends on Classes F, G-RR, and X-F reflect the increased loss expectations tied to a select number of loans that are concentrated within the top 20 loans in the pool, and have exhibited significant performance deterioration since Morningstar DBRS' last review, including the largest specially serviced loan in the pool, Parkmerced (Prospectus ID#18; 2.3% of the pool). The Negative trends on Classes D, E, and X-D generally reflect the pool's exposure to increased risks for the office sector in the past few years, given loans, representing 33.9% of the pool, are secured by office property types or mixed-use properties with a significant office component. Of these loans, four (17.9% of the pool), are secured by office properties with concentrated tenancy, whereby the largest and/or second largest tenants collectively represent over 50.0% of the net rentable area (NRA), including the largest loan in the pool, 650 Madison Avenue (Prospectus ID#1; 9.6% of the pool), which is already reporting a reduction in footprint for its largest tenant. While a majority of these large tenants at the other three properties are on long-term leases, and notably do not appear to have termination options, two are exposed to large leases currently scheduled to roll around the respective loan maturity dates. Morningstar DBRS believes the likelihood that those spaces are ultimately not renewed and/or are downsized at lease expiry has increased from issuance, further supporting the Negative trends for those classes.

In general, Morningstar DBRS has a cautious outlook for loans backed by office properties given the sustained upward pressure on vacancy rates in most markets and submarkets as office usage trends have shifted post pandemic. Where applicable, Morningstar DBRS increased the probability of default penalties (POD), and, in certain cases, applied stressed loan-to-value ratios (LTV) for loans exhibiting increased risks from issuance. The resulting weighted-average (WA) expected loss (EL) for these loans is nearly 230.0% higher than the pool average, which is primarily attributable to three large loans in 650 Madison Avenue, 805 Third Avenue (Prospectus ID#7; 3.7% of the pool), and Parkmerced. Although the collateral for all three of these loans is generally well positioned despite the increased risks in each case, with each also benefitting from subordinate debt held outside the trust and relatively low LTVs on the senior debt held in the subject transaction, Morningstar DBRS notes any unforeseen developments in the performance or property value trends could result in further credit rating downgrades given the weight these large loans carry in influencing the overall pool expected loss.

The 650 Madison loan is collateralized by a Class A office and retail tower that consists primarily of approximately 544,000 square feet (sf) of office space, with ground floor retail and storage space comprising the remaining sf. The trust loan represents a pari passu portion of the $586.8 million senior loan that combines with $213.2 million in subordinate debt for a whole loan of $800.0 million. The loan has been on the servicer's watchlist since April 2023 due to a low DSCR, driven by the departure of several tenants, including the former second-largest tenant, Memorial Sloan Kettering Cancer Center, in June 2022. According to the March 2024 rent roll, the property's occupancy was 78.9%, down from 97.0% at issuance. The occupancy rate will fall further from that March 2024 figure following the servicer-confirmed downsizing of both the largest tenant, Ralph Lauren (currently 40.7% of the NRA; lease expiration in December 2024) and the second-largest tenant BC Partners Inc. (previously 11.7% of the NRA; lease expiration in April 2024). According to the servicer, Ralph Lauren will remain in occupancy for 141,871 sf (23.6% of the NRA; new lease expiration in April 2036), but at a notably lower base rent of $63.00 psf (per sf; subject to an 8.0% annual escalation) as compared with the tenant's current base rent of $75.20 psf. The tenant allowance for the renewed space will be $74.07 psf. BC Partners Inc. has agreed to renew a portion of its space representing 7.4% of the NRA (lease expiration in August 2037), at a base rent of $90.00 psf, which is also below its pre-renewal rent, with no tenant improvement allowance. In addition, both tenants were given one year of free rent as part of their respective long-term renewals. With these developments, Morningstar DBRS estimates an availability rate of just under 43.0% for the property.

The declining occupancy trends have driven cash flows down significantly as compared with the issuance figures. Per the most recent financials for the trailing 12 months (T-12) ended March 31, 2024, the net cash flow (NCF) was $38.5 million (reflecting a DSCR of 1.71x on the senior debt; $1.36x on the whole loan), well below the Morningstar DBRS NCF derived at issuance of $50.8 million (DSCR of 2.45x on the senior debt). With the downsizings and renewals at lower rental rates as previously outlined, these trends are expected to escalate over the near term. Although the high availability rate and cash flow declines are indicative of significantly increased risks for this loan, Morningstar DBRS notes mitigating factors in the strong sponsorship provided by Vornado and Oxford Properties, the building quality and desirable location, which is in close proximity to major landmarks, including Central Park and the Rockefeller Center. The ground floor retail is a bright spot, with tenants generally on long-term leases which contribute over 30.0% of the total rent. To stress the loan in the analysis given the increased risks, Morningstar DBRS considered an elevated LTV and POD, resulting in an EL that is nearly twice the pool's WA EL.

The 805 Third Avenue loan is secured by a Class A building that consists of a 565,000-sf office tower and a 31,000-sf three-story retail pavilion. The whole loan amount of $275.0 million consists of $150.0 million in pari passu senior debt and $125.0 million in subordinate debt. The trust loan represents a pari passu portion of the senior debt. The loan has been on the servicer's watchlist since September 2020, and is currently being monitored for a low DSCR, which is driven by a decline in occupancy. According to the servicer's commentary, the property was 58.0% occupied as of September 2023, a further decline from 68.0% as of September 2022, given the departure of the former second-largest tenant, Toyota Tsusho America, Inc. in November 2022. The largest remaining tenant at the property is Meredith Corporation (36.0% of the NRA; lease expiration in December 2026), which is currently subleasing nearly all of its space to three firms after moving to Brookfield Place in 2018, and has been reported to be planning to terminate its lease at the end of 2024. The issuance information showed a termination option available in January 2024; Morningstar DBRS has requested clarification from the servicer on the tenant's plans for the space and options for exit ahead of the 2026 expiry.

Based on the most recent financials, the loan reported a YE2023 DSCR of 0.80x on the senior debt, a decline from the YE2022 DSCR of 1.05x on the senior debt, as a result of a -10.7% variance in gross potential rent. The loan is currently delinquent, with the last payment received in May 2024 as of the August 2024 remittance. Another area of concern is the loan's sponsor, Cohen Brothers Realty Corporation, which, per a May 2024 Bisnow article, has accumulated approximately $1.0 billion of loans in default. Given the extended delinquency, Morningstar DBRS expects the loan to be transferred to special servicing in the near term. To account for the significantly increased risks as outlined for this loan, Morningstar DBRS' analysis considered a stressed scenario to increase the LTV and POD, which resulted in an EL that is three times the pool's WA EL.

The Parkmerced loan is secured by a 3,165-unit apartment complex in San Francisco. The $1.5 billion mortgage loan consists of a $547.0 million senior loan and subordinate debt comprising a $708 million B note and a $245.0 million C note. There is also $275.0 million of mezzanine debt in place. The trust debt represents a pari passu portion of the senior loan. At Morningstar DBRS' last credit rating action for the subject transaction, the loan was on the servicer's watchlist for a low DSCR and was being cash managed. Although the low DSCR was a concern, Morningstar DBRS noted mitigating factors in an occupancy improvement as of the March 2023 rent roll and the strong historical performance for the subject collateral as support for maintaining the investment-grade shadow rating assigned at issuance. However, despite slow and steady improvements over the next six months reporting, the loan eventually transferred to special servicing as of the April 2024 reporting period, with the loan last paid in June 2024 as of the August 2024 remittance. The property was revalued in July 2024 at $1.4 billion, reflecting a 34.1% decline from the issuance value of $2.1 billion. Although the value decline and declined performance are indicative of significantly increased risks from issuance, the implied LTV for the senior debt with the updated value remains quite healthy, at 39.4%, suggesting the likelihood of loss to the trust at resolution remains low. In light of the default and generally increased risks from issuance, Morningstar DBRS removed the shadow rating and increased the POD, resulting in a loan EL that is nearly double the pool's WA EL.

At issuance, five other loans were shadow-rated investment grade, including 1633 Broadway (Prospectus ID#2; 9.1% of the trust balance), Southcenter Mall (Prospectus ID#3; 4.9% of the trust balance), CBM Portfolio (Prospectus ID#5; 4.2% of the trust balance), Bellagio Hotel and Casino (Prospectus ID#20;1.7% of the trust balance), and 510 East 14th Street (Prospectus ID#31;1.2% of the trust balance). With this review, Morningstar DBRS confirms that the loan performance trends remain consistent with the investment-grade shadow ratings.

Morningstar DBRS' credit ratings on the applicable classes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. Where applicable, a description of these financial obligations can be found in the transactions' respective press releases at issuance.

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, AND GOVERNANCE CONSIDERATIONS
There were no Environmental, Social, or 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 Factors in Credit Ratings (August 13, 2024) at https://dbrs.morningstar.com/research/437781.

Classes X-A, X-B, X-D, and X-F 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.

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 CMBS Surveillance Methodology (March 1, 2024), https://dbrs.morningstar.com/research/428798.

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

The credit ratings assigned to Classes B, C, and D materially deviate from the credit ratings implied by the predictive model. Morningstar DBRS typically expects there to be a substantial likelihood that a reasonable investor or other user of the credit ratings would consider a three-notch or more deviation from the credit rating stresses implied by the predictive model to be a significant factor in evaluating the credit ratings. The rationale for the material deviations is uncertain loan-level event risk. Although there is a concentration of larger loans exhibiting increased risks in this pool as previously outlined, Morningstar DBRS notes mitigating factors are present such as low senior debt LTVs driven by the presence of significant subordinate debt, desirable property locations and generally favorable property quality characteristics. Although the stressed ELs analyzed for those loans are contributing to negative credit ratings pressure in the middle of the capital stack, Morningstar DBRS believes those classes remain well insulated against realized loss. As the stories with those loans continue to evolve, Morningstar DBRS will closely monitor for developments.

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-DBRS@morningstar.com.

The credit ratings were initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for these credit rating actions.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with these credit rating actions.

These are solicited credit ratings.

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

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS' outlooks and credit ratings are monitored.

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

-- North American CMBS Multi-Borrower Rating Methodology (March 1, 2024)/North American CMBS Insight Model version 1.2.0.0, https://dbrs.morningstar.com/research/428797
-- Rating North American CMBS Interest-Only Certificates (June 28, 2024), https://dbrs.morningstar.com/research/435294
-- Morningstar DBRS North American Commercial Real Estate Property Analysis Criteria (June 28, 2024), https://dbrs.morningstar.com/research/435293
-- North American Commercial Mortgage Servicer Rankings (August 23, 2023), https://dbrs.morningstar.com/research/419592
-- Legal Criteria for U.S. Structured Finance (April 15, 2024), https://dbrs.morningstar.com/research/431205

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/417279. (July 17, 2023)

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