DBRS Morningstar Assigns Ratings to A10 SACM 2021-LRMR

DBRS, Inc. (DBRS Morningstar) assigned new ratings to the following classes of Commercial Mortgage Pass-Through Certificates, Series 2021-LRMR issued by A10 Single Asset Commercial Mortgage-LRMR (A10 SACM 2021-LRMR).

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 BB (low) (sf)
Class F at B (sf)

All trends are Stable.

RATING RATIONALE

The ratings reflect DBRS Morningstar's analysis of the sustainable cash flow and value for the property securing the loan held by the trust; the presence of loan structural features, such as the lack of amortization; a $25 million limited guaranty from the sponsor; and qualitative factors, such as DBRS Morningstar's opinion on the quality of the underlying collateral property, the sponsor’s business plan to renovate and stabilize the collateral property, the current and expected performance of the real estate markets in which the property is located, and the current and future state of the macroeconomic environment and its potential impact on the performance of commercial properties.

A10 SACM 2021-LRMR is supported by the payment stream from the borrower’s fee-simple and leasehold interests in Larimer Square, a 246,000-square-foot (sf) retail/office mixed-use development in Denver, Colorado. The collateral represents the Larimer Square protected historic district and comprises 26 buildings, including a parking garage on 12 separate real estate tax parcels. Two of the buildings are subject to ground leases. DBRS Morningstar determined the provisional ratings for each class of certificates by analyzing the stabilized cash flow generated by the property, giving consideration to the quality and location of the property, the sponsor’s business plan, fundamentals of the property’s real estate market, and legal and structural features of the mortgage loan. DBRS Morningstar’s analysis of the property’s operations, based on information provided on the arranger’s website as of June 29, 2021, yielded a stabilized net cash flow (NCF) of $7.2 million. DBRS Morningstar’s concluded NCF is 21.1% less than the sponsor’s projected Year 4 NCF of $9.2 million. The DBRS Morningstar NCF resulted in an interest-only debt-service coverage ratio (DSCR) of 1.70 times (x) (1.22x amortizing DSCR) on the fully funded mortgage loan of $88.7 million, based on the interest rate of 4.742%. DBRS Morningstar valued the collateral at a stabilized value of $96.4 million based on the concluded NCF and a capitalization rate of 7.50%. DBRS Morningstar’s valuation resulted in a loan-to-value ratio (LTV) of 92.03% on the fully funded first-mortgage loan.

The sponsor will provide a $25.0 million limited guaranty, which may be terminated upon meeting certain performance metrics including average occupancy of 90.0% or more in the prior six months, a debt yield of 9.0% or more based on trailing three months’ office and retail revenues, and an LTV of 60.0% or less based on a fresh appraisal. Borrower’s counsel provided a nonconsolidation opinion as to the limited guaranty. Given that the guaranty, at 28.2% of the fully funded loan balance, is significantly higher than typical market standards, it was reviewed by DBRS Morningstar counsel for substance and analysis and is considered acceptable by DBRS Morningstar.

DBRS Morningstar determined the ratings on each class of certificates by performing quantitative and qualitative collateral, structural, and legal analysis. This analysis incorporates DBRS Morningstar’s “North American Single-Asset/Single-Borrower Ratings Methodology” and the DBRS Morningstar LTV Benchmark Sizing tool.

DBRS Morningstar determined its concluded sustainable NCF and sustainable value of the underlying property by applying its “DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria.” DBRS Morningstar’s maximum LTV thresholds at each rating category were based on the transaction’s sequential-pay waterfall, underlying property type, lack of amortization, borrower, trust LTV, pari passu debt outside the trust, limited property type and geographic diversity, and other factors relevant to the credit analysis.

DBRS Morningstar will perform surveillance subject to North American CMBS Surveillance Methodology.

DBRS Morningstar adjusted its maximum LTV thresholds (the Quality/Volatility Adjustment) to account for the following factors:

1. Cash Flow Volatility: The sponsor’s business plan involves a substantial renovation of the collateral property, especially the office space to attract more institutional quality office tenants. In addition, the sponsor also intends to rebalance the retail tenant mix from its current 70% restaurant tenants to 55% to 60% restaurants and 40% to 45% daily use and soft goods retailers. As such, the DBRS Morningstar stabilized analysis assumes rolling to market all tenants with lease expirations through June 2022. Given the significant retenanting of the property, DBRS Morningstar did not make any adjustments based on cash flow volatility.

2. Property Quality: Twenty-three of the 26 buildings comprising the collateral were built between 1876 and 1890; the remaining three were built between 1992 and 2003. Although the buildings have undergone periodic renovations, they have certain deferred maintenance issues. In addition, the sponsor’s business plan involves a substantial renovation of the office spaces. The sponsor has a $30.9 million capital expenditure (capex) plan to cure the deferred maintenance, implement base building repairs, and renovate the office spaces. The lender will fund $21.1 or 68.4% of the capex budget. Based on the capex plan, DBRS Morningstar elected to increase its LTV thresholds by 0.5% to account for the improved property quality.

3. Market/Location: The property is located in the southern edge of the Lower Downtown district in Denver. It benefits from proximity to the Denver central business district with approximately 19 million sf of office space, Auraria Campus (located next to Larimer Square and houses facilities for University of Colorado Denver, Metropolitan State University of Denver, and Community College of Denver), the Denver Convention Center, and Ball Arena. The property has excellent public transport access via the Union Station transportation hub with commuter train, The property can also be accessed from Interstate 25 to the west and Colfax Avenue, one of the main east-west arterials, to the south. Based on the location and market fundamentals of the property, DBRS Morningstar increased its LTV thresholds by 1.5%.

4. Other Qualitative Adjustments – Business Plan Execution Risk: The collateral property is significantly transitional and the sponsor’s business plan includes a substantial renovation of the buildings as well as an almost total retenanting and lease-up. Fifty-six percent of the current rent roll will expire in the first three years of the loan term, including 28.4% in the first year alone. The sponsor has a $30.9 million capex plan for deferred maintenance and base building renovations, and a $10.1 million plan for releasing expenses. However, the lender will fund only $21.1 million (68.4%) of the capital expense plan and $6.6 million (65.0% ) of the leasing costs. In addition, while the sponsor provides a completion guaranty for the capital improvement program. Based on transitional nature of the property and the heavy lift required to stabilize it, DBRS Morningstar decreased its LTV thresholds by 7.5%.

Other Qualitative Adjustments – Ground Lease Provisions: Two of the parcels comprising the property are subject to a ground lease, which commenced in 1995 and had a twenty year initial term with four 10-year extensions. The fully extended ground lease will expire in 2056. The ground lease does not allow for the leasehold mortgagee to hold any insurance proceeds during the renovation of the overlying buildings, does not prohibit amendments without the consent of the leasehold mortgagee, and the loan agreement does not define a violation or termination of the ground lease as a recourse event. Based on the above considerations, DBRS Morningstar decreased its LTV thresholds by 0.5%.

ESG CONSIDERATIONS

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.

For supporting data and more information on this transaction, please log into www.viewpoint.dbrsmorningstar.com DBRS Morningstar provides analysis and in-depth commentary in the DBRS Viewpoint platform.

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.

The principal methodology is the North American Single-Asset/Single-Borrower Ratings Methodology (March 2, 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 rated entity or its related entities did not 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. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The DBRS Morningstar long-term rating scale definition indicates that ratings of CCC or lower are assigned when the bond is highly likely to default or default is imminent, thereby prevailing over a sensitivity analysis.

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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