DBRS Assigns Provisional Ratings to Morgan Stanley Capital I Trust 2019-AGLN, Commercial Mortgage Pass-Through Certificates, Series 2019-AGLN

DBRS, Inc. (DBRS) assigned provisional ratings to the following classes of Commercial Mortgage Pass-Through Certificates, Series 2019-AGLN to be issued by Morgan Stanley Capital I Trust 2019-AGLN (the Issuer):

-- Class A at AAA (sf)
-- Class X-CP at AAA (sf)
-- Class X-NCP at AAA (sf)
-- Class B at AA (high) (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 G at B (low) (sf)

All trends are Stable.

All classes will be privately placed. Classes X-CP and X-NCP are notional.

The loan collateral consists of 42 properties totaling 5,746,649 sf. The portfolio, comprising 38 industrial and four office properties, is currently 96.5% leased to over 250 tenants. Tenants’ industries include grocery, health care, business services, biotech, manufacturing, insurance and retail, among others. The largest tenants are United Natural Foods, Inc. (8.1% of net rentable area (NRA)); General Motors LLC (7.0% of NRA); and CEVA Logistics (5.8% of NRA). The largest concentration by state is Texas with 37.9% of NRA, followed by Florida with 15.8% of NRA, Illinois with 13.9% of NRA and Georgia with 13.7% of NRA. The largest property by value is Naperville Woods Office Center, an office property located in Naperville, Illinois, which accounts for 12.7% of the total portfolio appraised value of $472.5 million. This portfolio is part of the take-private of Agellan Commercial REIT by the Sponsor and this securitization is part of the acquisition financing provided by the Originator.

DBRS reviewed the portfolio net cash flow (NCF), which increased to $35.6 million for the trailing 12-month period ending September 2018 from $25.9 million in 2015. The increase in the portfolio NCF is primarily the result of additional properties. In 2015, the portfolio consisted of 28 assets compared with its current size of 42 assets. On a same-store basis, cash flow growth has been generally flat. The DBRS NCF was $28.9 million, a -7.5% variance from the Issuer’s NCF of $31.2 million. The main drivers of the variance were DBRS’s estimates of ongoing capex, tenant improvement (TI) assumptions and mark-to-market adjustments of some tenants’ rents. DBRS estimated capex based on a weighted average (WA) of the inflated costs indicated in the property condition reports. DBRS used the appraiser’s estimate for TI expenses for the 38 industrial properties in the portfolio, but assumed $30.00 per square foot (psf) and $15.00 psf for new and renewal TIs, respectively, for the four office properties. DBRS made mark-to-market adjustments for 47 tenants where total rent exceeded DBRS’s estimate of market rent, including a 110.0% tolerance factor.

DBRS considers the term default risk to be moderate as the DBRS Term debt service coverage ratio (DSCR) is 1.75 times (x), which is derived using a stressed LIBOR of 3.24%, based on DBRS’s “Interest Rate Stresses for U.S. Structured Finance Transactions” methodology, and a spread of 1.89%. The DBRS Refinance DSCR is 0.98x, indicating maturity risk, especially as the collateral is encumbered by two mezzanine loans totaling $82.4 million. In addition, the loan has high leverage with a DBRS loan-to-value (LTV) ratio of 99.6% for the trust debt and 125.1% for the total debt. However, the DBRS LTV is based on a stressed valuation assuming a significant increase in market cap rates. Based on the appraiser’s current market valuation of $470.8 million, the LTV is 66.3%, which is moderate and considerably lower than the DBRS LTV.

The DBRS value is $322.4 million, a -31.5% variance from the appraised value. The DBRS value is based on the DBRS NCF divided by the DBRS cap rate of 8.95%. The cap rate is developed on a WA basis across market types and ranges from 8.0% to 10.0%. The DBRS cap rate is 230 basis points higher than the implied market cap rate based on the portfolio NCF and appraised value, allowing for significant reversion to the mean in industrial valuation metrics.

Classes X-CP and X-NCP are interest-only (IO) certificates that reference 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.

For supporting data and more information on this transaction, please log into www.viewpoint.dbrs.com.

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 a description of the information that a third party reviewed in conducting the due diligence services and a summary of the findings and conclusions. While due diligence services outlined in Form-15E do not constitute part of DBRS’s methodology, DBRS used the data file outlined in the independent accountant’s report in its analysis to determine the ratings referenced herein.

The principal methodology is North American Single-Asset/Single-Borrower Methodology, which can be found on www.dbrs.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 Global Structured Finance Related Methodologies document, which can be found on www.dbrs.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 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.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process

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.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

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