DBRS Morningstar Finalizes Provisional Ratings on CRSNT Trust 2021-MOON

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2021-MOON issued by CRSNT Trust 2021-MOON:

Class A at AAA (sf)
Class A-Y at AAA (sf)
Class A-Z at AAA (sf)
Class A-IO at AAA (sf)
Class X-CP at AAA (sf)
Class X-NCP at AAA (sf)
Class B at AA (low) (sf)
Class C at A (low) (sf)
Class D at BBB (low) (sf)
Class E at BB (low) (sf)
Class F at B (low) (sf)

All trends are Stable.

Class X-CP, Class X-NCP, and Class A-IO are interest-only (IO) Certificates. The Notional Amount of the Class X-CP and Class X-NCP Certificates will be equal to the aggregate balance of the Class A Certificate balances. The Class A, Class A-Y, Class A-Z, and Class A-IO Certificates (the CAST Certificates) can be exchanged for other Classes of CAST Certificates and vice versa, as described in the Offering Memorandum. The Notional Amount of the Class A-IO Certificates will be equal to the sum of (1) 50% of the Certificate Balance of the Class A-Y Certificates and (2) 100% of the Certificate Balance of the Class A-Z Certificates.

CRSNT Trust 2021-MOON is a single-asset/single-borrower transaction collateralized by the borrower’s fee-simple interest in a 1.3 million-square-foot (sf) Class A+ office/retail building known as The Crescent in the Uptown/Turtle Creek submarket of Dallas. Goldman Sachs Bank USA, along with Deutsche Bank AG, New York Branch, will be funding total debt of $525.0 million, which comprises a $465.0 million first-mortgage loan and a $60.0 million mezzanine loan for the acquisition of the property. The IO floating-rate $525.0 million loan has an initial term of three years with two one-year extension options. The mezzanine loan will be held outside the trust. The total capitalization of $690.5 million, which includes $172.3 million of fresh equity, will be used to finance the $655.0 million acquisition of the property, fund $25.0 million of upfront tenant improvement (TI)/leasing commission (LC) reserves, and pay closing costs.

The sponsor of the transaction, Crescent Real Estate LLC (Crescent Real Estate), is a real estate operating company and investment advisor with reportedly more than $8.5 billion of assets under management, development, and investment capacity. Through the GP Invitation Fund I and the GP Invitation Fund II, Crescent Real Estate acquires, develops, and operates commercial real estate properties involving institutional investors and clients. The Crescent was contributed to the Crescent REIT in 1994. Crescent Real Estate retained an interest in the property until the seller (of which the majority ownership is held by J.P. Morgan Chase & Company) assumed full ownership in 2011. The seller continued to use Crescent’s leasing and management team, Crescent Property Services LLC, during its ownership. Crescent Property Services LLC is an affiliate of the sponsor with more than 25 years of experience operating the property, and will continue to manage the property going forward. This transaction involved Crescent Real Estate reacquiring the property from the seller. Crescent Real Estate indirectly controls the mortgage and mezzanine borrowers.

The transaction has a high loan leverage with the DBRS Morningstar issuance loan-to-value ratio (LTV) of 106.1% and 119.8%, based on the trust debt and total debt (including the mezzanine loan), respectively. The LTV based on the appraised value of $675.0 million is 68.9% and 77.8% on the trust debt and total debt, respectively.

DBRS Morningstar has a positive view on the near- to mid-term sustainability of the property’s NCF, based on its location, tenancy, and historical performance. The Crescent is in the Uptown/Turtle Creek submarket, one of the most desirable office submarkets in Dallas. According to the appraisal, the submarket has high barriers to entry because of the limited amount of vacant land suitable for commercial development, and the overall land values are higher than other submarkets in the Dallas/Fort Worth areas. The property is in the epicenter of the submarket with easy access to the Central Expressway, I-35 East, Dallas North Tollway, and DART M-Line trolley. The local area fosters a live/work/play environment with more than 200 restaurants and 160 shops, providing good amenities to the office tenants nearby.

The property benefits from a highly granular rent roll with no single tenant accounting for more than 7.6% of the total base rent. The tenant roster is well diversified with local, regional, and national tenants from various industry sectors including law firms, financial institutions and services, and technology companies. As of March 15, 2021, the property was 87.1% leased. The largest tenant, McKool Smith P.C., representing 7.6% of the property’s total base rent, has been a tenant since January 1992 and has since expanded into three other suites at the property. The weighted-average lease term at the property is 7.0 years. Of the property’s net rentable area (NRA), 38.0% is leased to national tenants, which is credit positive as the cash flow will be less susceptible to revenue swings, making it more resilient during economic downturns such as the Coronavirus Disease (COVID-19) pandemic. In general, the property’s lease rollover schedule over the next 10 years is evenly distributed with less than 10% of the NRA expiring in any calendar year with the exception of 2022, when 18.5% of the NRA will be rolling. Over the past two years, Crescent Property Services LLC, as property manager and leasing agent, successfully secured renewals on 138,736 sf of space and new leases on 84,855 sf. This period includes the entire coronavirus pandemic disruption when leasing activity was generally slow in markets around the country. The loan also includes an upfront leasing reserve of $25.0 million for TI/LCs.

Since 2015, the property has received about $48.0 million or $36 per sf (psf) of capital improvements including restroom renovations, corridor refurbishment, management office remodel, fitness center addition, and lobby updates. Capital improvements often play a significant role in retaining existing tenants as well as attracting new tenants to a property. Historically, the property has proved itself to be a solid performer with an average occupancy of 91.0% over the past 10 years. DBRS Morningstar expects the occupancy at the property to remain stable and consistent with the historical data going forward given the property will continue to be managed by the existing leasing and management company who has been managing the property for the past 25 years.

The ongoing coronavirus pandemic continues to pose challenges and risks to virtually all major commercial real estate property types. The property has continued to show strong performance during these unprecedented times with less than 5% of the tenants based on total NRA requested rent relief, most being retail tenants. The property saw a drop in occupancy in late 2020; however, this was most notably caused by Morgan Stanley vacating when its lease expired in September 2020.

The property is located northwest of the Dallas CBD in the Uptown/Turtle Creek submarket with close proximity to a Ritz-Carlton, The Crescent Hotel, and the American Airlines Center which is home to the Dallas Mavericks and Dallas Stars. According to the appraisal, the submarket outperforms the greater Dallas/Fort Worth market with an average occupancy rate of 81.5% for Class A office space compared with the market’s average of 76.3%. Additionally, the average rent for full-service Class A office in the greater Dallas market is $31.60 psf, lower than the submarket average rent of $49.50 psf.

The Class A+ office and retail property is the focal point of the submarket and is part of a larger mixed-use development that includes the Crescent Court Hotel, which is not part of the collateral. The property recently received $48.0 million or $36 psf of capital improvements, and has historically demonstrated stable and consistent occupancy with an average of 91.0% over the past 10 years.

Crescent Real Estate, LLC is a real estate operating company and investment advisor with more than $8.5 billion assets under management, development, and investment capacity. The sponsor has extensive experience in the local market. It developed McKinney & Olive, which was completed in 2016, and recently redeveloped 2401 Cedar Springs. Crescent Property Services LLC, an affiliate of the sponsor, has been managing the property for more than 25 years and will continue to manage the property going forward.

The sponsor is contributing $172.3 million of fresh equity, representing 25% of the total acquisition cost, to the property at closing. The loan is also structured with a $25.0 million upfront leasing reserve for TI/LCs to be escrowed at closing. DBRS Morningstar generally views acquisition loans with significant amounts of cash equity more favorably, given the stronger alignment of economic incentives when compared with cash-out financings.

The property benefits from a highly granular rent roll with no single tenant accounting for more than 7.6% of the base rent. There are 115 unique tenants, creating a significant level of diversity in tenancy. This granularity also creates a stable tenant rollover schedule at the property over the long term.

The DBRS Morningstar issuance LTVs are high based on the trust debt and total debt (including the mezzanine loan) at 106.1% and 119.8%, respectively. The high leverage point, combined with the lack of amortization, could potentially result in elevated refinance risk and/or loss severities in an event of default.

In 2022, the tenant leases on 18.5% of the NRA will be rolling. The expiring tenants include Stanley Korshak L.P. and Holland & Knight LLP, which account for 4.2% and 3.4% of the total NRA, respectively. Both are long-term tenants at the property with Stanley Korshak being a tenant since 2003 and Holland & Knight since 2013. Stanley Korshak is an upscale bridal salon that typically performs well because of the adjacent Crescent Court Hotel, which includes luxury wedding and event space.

The ongoing coronavirus pandemic continues to pose challenges and risks to virtually all major commercial real estate 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. While some tenant spaces are not completely occupied as employees have continued to work from home during the pandemic, all tenants are now open and operating. Fewer than 5% of the tenants based on total NRA have requested rent relief, most of which are retail tenants. Between December 2020 and March 2021, collections equated to approximately 98.0% with deferrals and abatements combined equating to less than 1% of total revenue.

The debt yield and debt service coverage ratio (DSCR) triggers for the cash flow sweep event are low at less than a 5.0% debt yield and less than 1.15 times (x) DSCR on the initial term. The low thresholds increase the term and balloon default risks.

GP Invitation Fund II, LP is the nonrecourse carveout guarantor on this transaction. The guarantor is required to maintain a domestic net worth of at least $100.0 million and liquidity of at least $10.0 million throughout the loan term. These requirements are low, considering they only represent DBRS Morningstar’s net worth and liquidity loan multiples of 0.19x and 0.02x, respectively. Per the Mezzanine Inter-Creditor Agreement, the net worth and liquidity requirements applicable to the Replacement Guarantor or New Third Party Obligor are consistent with the requirements under the closing date guaranty, where the qualified guarantor will be required to maintain a minimum $100.0 million of net worth and $10.0 million of liquidity with the exception to the U.S. Real Estate Core Mezzanine Debt REIT, LLC, where the minimum liquidity was waived. DBRS Morningstar views these thresholds, particularly the net worth requirement and lack of liquidity requirement, as relatively weak in the context of the size of the loan in this transaction.

The underlying mortgage loan for the transaction will pay floating rate, which presents potential benchmark transition risk as the deadline approaches for the elimination of Libor. The transaction documents provide for the transition to an alternative benchmark rate, which is primarily contemplated to be either Term Secured Overnight Financing Rate (SOFR) or Compounded SOFR plus the applicable Alternative Rate Spread Adjustment. Term SOFR does not currently exist and there is no assurance it will fully develop or be widely adopted. Compounded SOFR, which is expected to be a backward-looking rate generally calculated using actual rates during the applicable interest accrual period, is considered by some servicers to be less practical to implement. The servicer for the transaction will have sole discretion over various aspects of a benchmark transition. Any uncertainty or delay in transitioning to an alternative to Libor could lead to unforeseen issues for both the mortgage loan borrower and certificates. Additionally, in order to extend the loan, the borrower must also obtain a replacement interest rate cap agreement. If a replacement agreement is not commercially available, the borrower can propose an alternative hedging instrument that would provide substantially equivalent protection from increases in the interest rate. However, the servicer can reject proposal and impose its own hedging solution, if any.

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 https://www.dbrsmorningstar.com/research/373262.

Classes Class X-CP, Class X-NCP, and Class A-IO 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 ratings are subject to surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by DBRS Morningstar.

DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for this transaction. For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com The platform includes loan-level data for most outstanding CMBS transactions (including non-DBRS Morningstar-rated), as well as loan-level and transaction-level commentary for most DBRS Morningstar-rated and -monitored transactions.

Notes:
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 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.

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.

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

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at info@dbrsmorningstar.com.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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