DBRS Morningstar Confirms Ratings on Rosslyn Portfolio Trust 2017-ROSS

DBRS Limited (DBRS Morningstar) confirmed its ratings on the following classes of the Commercial Mortgage Pass-Through Certificates, Series 2017-ROSS issued by Rosslyn Portfolio Trust 2017-ROSS:

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

All trends are Stable.

The rating confirmations reflect DBRS Morningstar’s unchanged outlook on the transaction. Collateral for the loan consists of seven office properties within the Rosslyn submarket of Arlington, Virginia. The trust loan is sponsored by a joint venture between US Real Estate Opportunities (89.0%), a fund formed by Goldman Sachs and two sovereign wealth funds, and an affiliate of Monday Properties (11.0%).

This transaction closed in June 2017 with an initial trust balance of $500.0 million and mezzanine loans in the amount of $142.1 million held outside of the trust. At issuance, the sponsor had $110.6 million in additional mezzanine financing available to fund a portion of budgeted improvements and estimated leasing costs of approximately $118.3 million. The underlying loan is floating rate and pays interest only for the entire three-year term, with three one-year extension options available.

In July 2020, the borrower executed the first extension option and rebalanced the whole loan amount to satisfy a 7.75% debt yield hurdle requirement, resulting in a pro rata principal prepayment to the mortgage and mezzanine loans. This resulted in the trust debt being paid down by 14.7%. The second and third extension terms require the borrower to meet debt yield thresholds of 8.00% and 8.25%, respectively. There are release provisions in place allowing for the three Class A office properties to be released at 115.0% of the allocated loan amount (ALA) and for the four Class B office properties to be released at 100.0% of the ALA; however, none of the properties have been released to date. The servicer had previously noted that the loan was scheduled to pay off in full in March 2021, but the debt remained outstanding as of the April 2021 remittance.

As of YE2020, the loan reported a net cash flow (NCF) of $40.4 million, consistent with the YE2019 figure of $40.9 million, but well below DBRS Morningstar’s stabilized NCF figure of $47.6 million, which assumed a stabilized occupancy rate of 80.9%. While the portfolio has experienced moderate rent growth, reporting an average rental rate of $50.27 per square foot (psf) as of December 2020, leasing momentum has yet to garner any tangible momentum. Per the December 2020 rent roll, the portfolio had an occupancy rate of 65.6%; individual property occupancy rates currently range from 27.9% to 96.4%. The portfolio benefits from a granular tenant base, with the largest tenant representing just 5.7% of the net rentable area (NRA) and tenant rollover appears manageable during the fully extended loan term, as only 10.5% of the NRA is scheduled to roll through June 2023. As of Q4 2020, the Rosslyn/Courthouse submarket reported an average vacancy and asking rental rate of 19.4% and $44.48 psf, respectively.

At issuance, the sponsor’s business plan was to inject $118.3 million of capital expenditures and leasing costs into the portfolio over the initial loan term to garner leasing momentum, with $110.6 million to be funded by the junior mezzanine lender and the remaining $7.7 million to be funded by borrower equity. Of the total improvement plan, the borrower budgeted $65.3 million for speculative leasing costs, $22.9 million for building upgrades, and $30.1 million for committed leases given the leasing momentum prior to issuance.

While it is unclear how much the borrower has contributed to the initial business plan to date, it is apparent that the portfolio has not achieved stabilization during the initial loan term. The principal paydown of $73.4 million to the trust in July 2020 was a structural feature that served to deleverage the loan once it failed to meet the required debt yield hurdle; however, this deleveraging is offset by the lower than anticipated NCF at YE2020.

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.

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

The DBRS Viewpoint platform provides additional information on this transaction and underlying loans including DBRS Morningstar metrics, commentary, servicer-reported cash flows, and other performance-related data.

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com. The platform includes issuer and servicer 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.

The principal methodology is the North American CMBS Surveillance Methodology (March 26, 2021), 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 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@dbrsmorningstar.com.

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.

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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