DBRS Morningstar Confirms Ratings on SLG Office Trust 2021-OVA

DBRS Limited (DBRS Morningstar) confirmed its ratings on the following classes of Commercial Mortgage Pass-Through Certificates (the Certificates), issued by SLG Office Trust 2021-OVA:

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

All trends are Stable.

The rating confirmations reflect the demonstrated progression of the underlying collateral from delivery to stabilization, which has remained in line with DBRS Morningstar’s expectations.

The transaction is collateralized by the borrower’s fee-simple interest in One Vanderbilt, a 1.6 million square foot (sf) ultra-luxury Class A office high rise located directly adjacent to Grand Central Terminal in Midtown Manhattan, New York. The collateral was developed by the sponsor, SL Green Realty Corp, who owns 71% of the property. The National Pension Service of Korea, one of the largest pension funds in the world with AUM of $771.0 billion, and Hines Interests Limited Partnership, one of the largest privately held real estate investors, own the remaining 29% of the property.

At closing for the underlying loan, the property was in the final stages of construction and was 89.1% leased, with approximately $460 million in up front reserves to cover the remaining work for the property and tenant spaces, as well as scheduled free rent periods for signed tenants. As of April 2022, the tenant reserve had a balance of $194.0 million indicating tenant improvements and build-outs are likely ongoing. The subject’s general composition includes more than 1.5 million sf of luxury office space, a roughly 67,000-sf observation deck called the Summit, nearly 32,000 sf of high-end retail and restaurant space (inclusive of the Summit’s reception area), and nearly 30,000 sf of tenant amenity space.

The property’s largest tenant and second-largest tenant are TD Bank and Carlyle Investment Management, with lease expirations in July 2041 and September 2041, respectively. As per the December 2021 rent roll, TD Bank and TD Securities occupied 342,894 square feet (sf) of the building, representing 20.8% of total net rentable area (NRA) and 27.5% of in-place annual rent; Carlyle Investment Management occupied 194,702 square feet (sf) of the building, representing 11.8% of total net rentable area (NRA) and 38.2% of in-place annual rent. Given many tenants are currently in rent-free periods, TD Bank and Caryle currently contribute a large share of total rental income, however as rent-free periods for other tenants expire, overall contribution rates are expected to level out. At issuance, 34.8% of the collateral’s total net rentable area (NRA) was leased to tenants with investment-grade ratings and 35.9% of the collateral’s in-place base rent was derived from investment-grade tenants that qualified for long-term credit tenant treatment as part of DBRS Morningstar’s Net Cash Flow (NCF) analysis. In addition to the institutional-grade tenancy and contractual rent increases built into many of the leases, the collateral benefits from nearly zero lease rollover during the 10-year lease term with only 5.2% of total NRA (representing 5.0% of the DBRS Morningstar gross rent) scheduled to roll prior to loan maturity. As of the December 2021 rent roll, 13 new tenants signed leases in 2021, of which 12 have leases expiration dates beyond 2032, resulting in a stable, long-term cash flow stream.

As of year end (YE) 2021, the servicer reported a physical occupancy rate of 80.6%, a DSCR of -0.32 times (x), and an annualized NCF of -$27.5 million. Given the collateral's recent delivery in 2021, the majority of tenants are currently in rent-free and/or buildout phases, which DBRS Morningstar accounted for in its analysis. As such, the negative cashflow reported at (YE) 2021, is not reflective of stabilized property performance. According to Q1 2022 Reis data, the average asking rents for office properties in the Grand Central submarket is $75.81 per square foot (psf) with a vacancy rate of 10.8% . Rent growth is projected to accelerate and reach a level of $77.23 psf during 2023 and 2024.

The property benefits from experienced sponsorship, its prime location, luxury amenities and a large proportion of long-term, institutional-grade tenancy. DBRS Morningstar believes that the collateral is well positioned to remain an attractive option for the market’s top office tenants.

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.

Class X is an 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.

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 Canadian 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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