DBRS Morningstar Confirms Ratings on All Classes of SOHO Trust 2021-SOHO

DBRS Limited (DBRS Morningstar) confirmed the ratings on the Commercial Mortgage Pass-Through Certificates, Series 2021-SOHO issued by SOHO Trust 2021-SOHO as follows:

-- Class A at A (low) (sf)
-- Class B at BBB (low) (sf)
-- Class C at BB (low) (sf)
-- Class D at B (sf)
-- Class HRR at B (sf)

All trends are Stable.

The rating confirmations reflect the overall stable performance of the transaction, which benefits from the collateral property’s desirable location, the strong sponsorship and high concentration of investment-grade tenancy, and the limited tenant rollover during the loan term.

The collateral consists of the borrower’s fee-simple interest in a 786,891-square-foot (sf), Class A office/retail property known as One SoHo Square, comprising two adjacent mid-rise office buildings separated by an adjoined 19-storey glass tower on the northwest corner of Sixth Avenue and Spring Street in the SoHo neighbourhood in Manhattan, New York. The submarket has seen an increased demand in leasing over the past few years, most notably from technology companies, with Google, Facebook, and Amazon taking space in the vicinity. The sponsor, Stellar Management (Stellar), purchased the assets in 2012 and subsequently invested approximately $268.0 million in base building upgrades to reposition the asset. Stellar has more than 35 years of ownership and management experience in New York City and currently owns more than 2.0 million sf of office space, and more than 12,000 residential units across 100 buildings in New York City and Miami.

Whole loan proceeds of $785.0 million comprise 23 promissory notes: 20 senior A notes totalling $470.0 million and three junior B notes totalling $315.0 million. The subject transaction totals $316.0 million and consists of three senior A notes with an aggregate principal balance of $1.0 million and the three junior B notes with an aggregate principal balance of $315.0 million. The remaining companion senior A notes are securitized in other transactions not rated by DBRS Morningstar. Additionally, the mortgage lenders provided a $120.0 million mezzanine loan for a total debt of $905.0 million. The transaction represents a cash-in refinance of the existing debt on the property, and the loan will be used to pay off the existing debt of approximately $900.0 million and pay closing costs. The loan is interest only throughout its seven-year loan term.

The loan benefits from its investment-grade tenancy, including the three largest tenants: Flatiron Health (Flatiron) (29.0% of the net rentable area (NRA), expiring February 2031), Aetna Inc. (13.5% of the NRA, expiring July 2029), and MAC Cosmetics (11.3% of the NRA, expiring March 2034). In addition, five tenants, collectively representing 59.8% of the NRA, are headquartered at the property and have long-term leases. These tenants are Flatiron; MAC Cosmetics; Warby Parker (10.6% of the NRA, expiring January 2025); Glossier (5.0% of the NRA, expiring April 2028); and DoubleVerify, Inc. (DoubleVerify; 3.9% of the NRA, expiring November 2023). There is minimal rollover risk with only 22.3% of the NRA scheduled to roll throughout the loan term. The earliest lease expiration, Warby Parker, is scheduled to expire January 2025, and only 13.8% of the NRA is scheduled to roll by YE2027. DoubleVerify has a lease expiration in November 2023; however, Flatiron has already executed a lease for the space through February 2031.

Two tenants, Flatiron and Juul Labs (Juul; 6.9% of the NRA), have space marketed for sublease. Juul listed its entire space for sublease, with Flatiron initially putting all of its space in the West building (48.7% of its space) up for sublease as the company had strategically overleased with plans to ultimately grow into its space but later reduced the square footage listed for sublease to less than 15.0% of the NRA. As of Q1 2022, CB Richard Ellis reported a vacancy rate of 9.2% for Class A office properties in the Hudson Square/SoHo submarket, and no new inventory has been added to the submarket within the past year.

The all-in DBRS Morningstar loan-to-value ratio, inclusive of the $120 million mezzanine debt, is high at 109.9%. The high leverage point could result in an elevated refinance risk and loss severities in the event of default. Mitigating this risk is the property’s prime location, which attracts high-quality tenants, and strong submarket fundamentals.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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.

The DBRS Viewpoint platform provides additional information on this transaction and underlying loan 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.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is North American CMBS Surveillance Methodology (March 4, 2022), 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.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482.

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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