DBRS, Inc. (DBRS Morningstar) assigned provisional ratings to the following classes of Commercial Mortgage Pass-Through Certificates (the Certificates) to be issued by Manhattan West 2020-1MW Mortgage Trust (the Issuer):
-- Class A at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (low) (sf)
-- Class E at BBB (low) (sf)
-- Class HRR at BB (high) (sf)
-- Class X at AAA (sf)
All trends are Stable.
The Class X balance is notional.
The Manhattan West 2020-1MW Mortgage Trust single-asset/single-borrower transaction is collateralized by a trophy Class A office building in the Hudson Yards submarket of Manhattan, New York. DBRS Morningstar takes a positive view on the credit characteristics of the collateral, which was completed in July 2019 and is a component of Brookfield Property Partners' larger "Manhattan West" mixed-use development project.
The building benefits from long-term, institutional-grade tenancy with a weighted-average (WA) remaining lease term of over 17 years, which DBRS Morningstar believes should largely shield the property from any short- or medium-term dislocations in the Manhattan office market resulting from the ongoing Coronavirus Disease (COVID-19) pandemic. Furthermore, the building's superior asset quality and convenient location between Related's Hudson Yards development and Penn Station make the remaining vacant square footage (approximately 128,000 sf; 6.6% of NRA) an attractive option for a variety of tenants.
DBR Investments Co. Limited (23.1%), Citi Real Estate Funding Inc. (23.1%), Wells Fargo Bank, National Association (23.1%), JPMorgan Chase Bank, National Association (17.8%), and Barclays Capital Real Estate Inc. (12.9%) are expected to originate the seven-year loan that pays fixed-rate interest of 2.59% on an interest-only basis through the initial maturity of the loan, contingent upon final pricing.
The $1.8 billion whole loan is composed of six senior A notes totaling $1.150 billion, five junior B notes totaling $350 million, a senior mezzanine loan totaling $100 million, and junior mezzanine loan totaling $200 million. Five of six senior A notes and all of the junior B notes are being securitized in this transaction. Both mezzanine loans are being held by third parties. The whole loan proceeds are being used to refinance existing construction financing held by a syndicate of banks scheduled to mature in April 2021, return equity to the sponsor, fund up-front reserves, and pay closing costs.
The property is well-located in a prime location in the Hudson Yards submarket of Manhattan, with good commuter rail and subway hubs positioned to the east and west of the building, respectively. The Hudson Yards submarket has also become one of the most desirable office locations in Manhattan as major space users have opted to move west and sign major leases. Completed in 2019, the collateral is a 70-story trophy, Class A LEED Gold certified building with sweeping panoramic views of the Hudson River to the west, midtown to the east, and the financial district to the south. DBRS Morningstar considers One Manhattan West to be among a small group of ultra-Class A office buildings financed in the public debt markets, and concluded the building's property quality to be "Excellent." The building features high ceilings and efficient floor plates that are almost column-free, which allows for significant natural light and flexible office layouts.
Nearly a quarter (22.6%) of the building's concluded in-place base rent is derived from investment-grade tenants that qualified for long-term credit tenant (LTCT) treatment in our concluded net cash flow (NCF). Furthermore, approximately 80% of the base rent is derived from institutional tenants not explicitly rated investment-grade, including Skadden (AmLaw Top 5) and E&Y (Big 4 Accounting).
In addition to institutional-grade tenancy, there is virtually zero lease rollover during the seven-year loan term. The WA remaining lease term at the property is 17.43 years, which results in a stable, long-term cash flow stream with contractual rent increases built into many of the leases. The earliest scheduled lease expirations of any of the major tenants (Skadden, E&Y, Accenture, NHL, McKool Smith, and W.P. Carey), which together are responsible for 94.5% of base rent, is almost eight full years after loan maturity.
The subject has a WA occupied in-place rent of $93.19 psf, which is well below the appraisal WA market rent of $112.25 psf. Additionally, each of the top three tenants is below-market based on the appraiser's concluded rent for its space. The lack of lease rollover provides for minimal opportunity to capture the upside during the seven-year loan term, but the property will likely benefit in the long run from increased rental revenue as leases expire and roll to market.
The transaction benefits from strong, experienced institutional sponsorship in the form of a joint venture (JV) partnership between Brookfield Property Partners L.P. (BPY) and the Qatar Investment Authority. BPY, together with its affiliate Brookfield Asset Management, is one of the largest commercial landlords in New York City. BPY's core office portfolio includes interests in 134 Class A office buildings in gateway markets around the world totaling 72.6 million sf.
The ongoing coronavirus pandemic continues to pose challenges and risks to virtually all major CRE property types, and has created an element of uncertainty around future demand for office space, even in gateway markets that have historically been highly liquid. Despite the disruptions and uncertainty, the collateral has largely been unaffected. No tenants have requested rent relief or are currently subject to any kind of rent deferral, and the Sponsor collected 100% of July rent at the property.
The Borrower Sponsor for the transaction, a JV partnership between Brookfield Property Partners L.P. and the Qatar Investment Authority, is partially using loan proceeds to repatriate $355.58 million of equity. DBRS Morningstar views cash-out refinancing transactions as less favorable than acquisition financings because sponsors typically have less incentive to support a property through times of economic stress if less of their own cash equity is at risk. Based on the appraiser’s as-is valuation of $2.525 billion, the sponsor will have approximately $725 million of unencumbered market equity remaining in the transaction.
The property's tenancy is heavily concentrated, with the top three tenants (Skadden, E&Y, and Accenture) accounting for 74.5% of the building's NRA and 76.8% of base rent while the building's top five tenants collectively account for 87.7% of the NRA and 91.1% of base rent.
While the DBRS Morningstar trust LTV is moderate at 84.56%, the leverage increases substantially to an all-in DBRS Morningstar LTV of 101.48% when both the senior and junior mezzanine loans are factored in, which collectively total $300 million.
The mortgage loan is IO through the full seven years of its seven-year term and does not benefit from deleveraging through amortization.
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.
Class X is an interest-only (IO) certificate that references 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 ratings are subject to surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by DBRS Morningstar.
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All figures are in U.S. dollars unless otherwise noted.
With regard to due diligence services, DBRS Morningstar 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 DBRS Morningstar’s methodology, DBRS Morningstar used the data file outlined in the independent accountant’s report in its analysis to determine the ratings referenced herein.
The principal methodology is the North American Single-Asset/Single-Borrower Ratings Methodology (March 1, 2020), which can be found on dbrsmorningstar.com under Methodologies & Criteria. For a list of the structured-finance-related methodologies that may be used during the rating process, please see the DBRS Morningstar Global Structured Finance Related Methodologies document, which can be found on dbrsmorningstar.com in the Commentary tab under Regulatory Affairs. Please note that not every related methodology listed under a principal structured finance asset class methodology may be used to rate or monitor an individual structured finance or debt obligation.
With regard to the Coronavirus Disease (COVID-19) pandemic, the magnitude and extent of performance stress posed to global structured finance transactions remain highly uncertain. This considers the fiscal and monetary policy measures and statutory law changes that have already been implemented or will be implemented to soften the impact of the crisis on global economies. Some regions, jurisdictions, and asset classes are, however, feeling more immediate effects. DBRS Morningstar continues to monitor the ongoing coronavirus pandemic and its impact on both the commercial real estate sector and the global fixed-income markets. Accordingly, DBRS Morningstar may apply additional short-term stresses to its rating analysis, for example by front-loading default expectations and/or assessing the liquidity position of a structured finance transaction with more stressful operational risk and/or cash flow timing considerations.
For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.
For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.
For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.
The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.
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