DBRS Assigns Provisional Ratings to Natixis Commercial Mortgage Securities Trust 2018-TECH

DBRS, Inc. (DBRS) assigned provisional ratings to the following classes of Commercial Mortgage Pass-Through Certificates, Series 2018-TECH to be issued by Natixis Commercial Mortgage Securities Trust 2018-TECH (the Issuer):

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

All trends are Stable.

The Class X-CP, Class X-EXT and Class X-F balances are notional.

The subject loan is secured by a 626,233 sf complex comprising seven Class B office and research and development (R&D) buildings located in Santa Clara, California, just outside an area known as the Golden Triangle. Built between 1970 and 1998, the collateral is situated within the Scott Boulevard Corridor submarket, which is part of the greater South Bay/San Jose, California, market. The seven buildings that serve as loan collateral are spread across a 37.6-acre parcel of land and range in size from 46,338 sf to 200,000 sf. The site is improved with expansive landscaped areas and surface/garage parking for up to 1,880 vehicles.

The property is currently 100.0% occupied and has been since 2009. Tenancy at the property is concentrated between two tenants: NVIDIA Corporation (NVIDIA), the largest tenant that leases 60.7% of the total NRA and contributes 57.7% of the total DBRS Base Rent, and Huawei Technologies Co., Ltd. (Huawei), which occupies 39.3% of the total NRA and contributes 42.3% of the total DBRS Base Rent. NVIDIA has had a presence at the property — specifically, the 2880 Scott Boulevard building — since 1997, while Huawei has been in occupancy since 2009. Both tenants have shown strong commitment to the subject by having collectively invested approximately $14.0 million ($22.36 psf) into their respective build-outs. Furthermore, NVIDIA is in the process of converting the 99,800 sf of office space at the 2770-2800 Scott Boulevard property into additional lab space at a cost of $150 psf, or nearly $15.0 million. In addition to conventional office space, the collateral houses critical R&D facilities for both NVIDIA and Huawei, which utilize these specialized labs for research, design and implementation purposes across several sectors of both companies’ product lines. The collateral ultimately serves a mission-critical role for both tenants.

The loan is sponsored by Preylock Real Estate Holdings, a Los Angeles–based real estate investment and development firm that has acquired 1.0 million sf of commercial space since its inception, primarily in major West Coast submarkets. The company was founded by two of the guarantors for the loan, Brett Lipman and Farshid Shokouhi, who have substantial real estate experience in land acquisitions, asset management and development. The third guarantor for the loan, Ivan Reitman, is a well-known Hollywood producer and director who has been involved with many popular films, including Ghostbusters (1984). The guarantors have a combined net worth and liquidity of $225.3 million and $23.5 million, respectively, and no credit history of foreclosures, defaults or bankruptcies.

Cushman & Wakefield has determined the as-is value of the property to be $261.2 million ($417 psf) based on a direct capitalization method utilizing a 6.0% overall cap rate. The DBRS value is substantially lower at $166.5 million ($266 psf) and was calculated by applying an 8.0% cap rate to the DBRS NCF, resulting in a DBRS LTV of 90.1%. While the DBRS LTV on the $150.0 million mortgage loan is relatively high, the leverage is reflected in the below-investment-grade last-dollar rating of B (high). The cumulative investment-grade-rated proceeds of $123.5 million reflect a more modest 74.2% DBRS LTV and represent just 51.4% of the purchase price. Further, the investment-grade exposure psf of $197 is considered very favorable compared with the five-year average sales price of $372 psf for properties in the surrounding area, according to Real Capital Analytics. The average sales price for the past 12 months is far higher at $553 psf and reflects the extremely high investor interest in the market, though these prices may ultimately be unsustainable.

The property benefits from a favorable location in Santa Clara, which is part of Silicon Valley, the premier market for high-technology companies. The subject has favorable access and visibility, as it is located at the junction of Central Expressway and San Tomas Expressway, two highly trafficked thoroughfares that facilitate access to several demand generators in the local area.

The collateral was in good physical condition and aesthetically appealing at the time of the DBRS site inspection. Although the improvements were built between 1970 and 1998, no significant deferred maintenance was noted at the site. It was evident that the facilities are well maintained because of the fact they house mission-critical R&D space for both NVIDIA and Huawei.

The property has a concentrated tenant roster, with NVIDIA and Huawei leasing 100.0% of the total NRA. Of the seven buildings that serve as loan collateral, three are fully occupied by NVIDIA and the remaining four are leased to Huawei. Essentially, the subject property operates as a single-tenant office and R&D complex. Both tenants have been in occupancy for many years. NVIDIA has had a presence at the property since 1997, while Huawei has been at the site since 2009. Over the years, the tenants have renewed their leases and expanded their spaces on several occasions, demonstrating the subject’s desirability and strong historical performance. More importantly, NVIDIA and Huawei appear to be growing their businesses and are financially sound, as indicated by recent performance results.

NVIDIA’s three leases at the property expire in 2020, 2021 and 2023 with a WA of 4.7 years remaining. The three leases expire well within the seven-year fully extended loan term. Additionally, the company recently built new 500,000 sf headquarters across the street from the collateral, increasing the risk of the tenant consolidating at another location upon lease expiry. Headquartered in Santa Clara, NVIDIA’s need for additional office space has been increasing over the past few years as the company’s various businesses have experienced substantial growth. The company currently employs nearly 5,000 employees in Santa Clara and plans to grow its payroll to 13,000 employees over the next five to seven years. Reportedly, NVIDIA is currently hiring 120 new engineers per month.

NVIDIA is in the process of converting certain office space to additional labs at the property, including the $15.0 million reconfiguration of the 2770-2800 Scott Boulevard building. It is expected that the collateral’s importance to NVIDIA’s R&D efforts will continue to grow over time, while more corporate and administrative functions will be transitioned into the new headquarters across the street. Recently, NVIDIA entered into a direct lease with the landlord for 200,000 sf at the 2880 Scott Boulevard building, which the tenant had been subleasing from Renesas Electronics Corporation since 2013.

Although R&D areas were off limits during the property tour, DBRS noted that most labs had specialized equipment and layouts that could potentially be difficult to re-tenant and may require considerable capital investment to reconfigure for alternate uses. The collateral serves a very unique market that is home to numerous technology companies that rely on specialized R&D spaces to conduct and grow their various business lines. If NVIDIA or Huawei vacate or reduce the size of their spaces, the sponsor could potentially find other similar tenants to occupy the buildings without necessarily having to convert every suite back to conventional office space.

Classes X-CP, X-EXT and X-F are interest-only (IO) certificates that reference a single rated tranche or multiple rated tranches. The IO rating mirrors the lowest-rated reference tranche adjusted upward by one notch if senior in the waterfall.

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

For more information on this transaction and supporting data, please log into viewpoint.dbrs.com. DBRS will continue to monitor this transaction with periodic updates provided in the DBRS Viewpoint platform.

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

With regard to due diligence services, DBRS was provided with the Form ABS Due Diligence-15E (Form-15E), which contains the description of the information that the third party reviewed in conducting the due diligence services and a summary of the findings and conclusions. While DBRS did not require due diligence services outlined in Form-15E, DBRS did use the Data File outlined in the Independent Accountant’s Report in its analysis to determine the ratings.

The principal methodology is North American Single-Asset/Single-Borrower Methodology, which can be found on dbrs.com under Methodologies. For a list of the Structured Finance related methodologies that may be used during the rating process, please see the DBRS Global Structured Finance Related Methodologies document on www.dbrs.com. 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.
This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

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

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