DBRS Finalizes Provisional Ratings on MFTII 2019-B3B4 Mortgage Trust

DBRS, Inc. (DBRS) finalized its provisional ratings on the following classes of Commercial Mortgage Pass-Through Certificates Series 2019-B3B4 issued by MFTII 2019-B3B4 Mortgage Trust:

-- Class A at AA (low) (sf)
-- Class B at A (sf)

All trends are Stable.

All classes are privately placed.

The loan is secured by the Borrower’s fee simple interest in Moffett Towers II – Building 3 and Building 4, two Class A office buildings totaling 701,266 sf. While not part of the collateral, the tenant has access to and pays rent on 23,860 sf of allocated amenity space. The two buildings are located at 1190 Discovery Way (350,633 sf) and 900 5th Avenue (350,633 sf), which are the addresses of Building 3 and Building 4, respectively. Loan proceeds of $590.0 million refinanced $408.9 million of existing construction debt, returned approximately $114.3 million of sponsor cash equity, funded $39.8 million of upfront tenant improvements/leasing commissions and free rent reserves and covered closing costs of $27.0 million. The $590.0 million debt package is composed of a $350.0 million A-note, a $155.0 million B-note and $85.0 million of mezzanine debt. This transaction contains the full $155.0 million B-note piece and only $5.0 million of A-note proceeds in the trust. The fixed-rate financing has a ten-year term, is fully interest only and represents a relatively high 74.7% loan to value (LTV) based on the appraised value of $790.0 million. The loan has been structured with an anticipated repayment date (ARD) after ten years and a final maturity date approximately five years beyond the ARD. This five-year tail allows for substantial principal repayment estimated by DBRS at $158.9 million prior to when the Facebook, Inc. (Facebook) leases expire in 2034.

The collateral is well located in the Sunnyvale, California, submarket of the greater San Jose-Sunnyvale-Santa Clara metropolitan statistical area (MSA). The Sunnyvale submarket is rapidly developing into one of the most desirable submarkets for office space nationally with the heavy influx of San Francisco-based technology companies. Per Reis, the Santa Clara/Sunnyvale office submarket features nearly 29.1-million sf of Class A office space with an average vacancy rate of 10.1% and average asking rents of $52.90 per square foot (psf) for office product constructed after 2009. For 2018, Reis identified approximately 1.9 million-sf of new construction under development in the local market that is evidence of the push of Bay Area technology firms into the Sunnyvale area. Per Reis, office properties constructed after 2009 throughout the Sunnyvale submarket accounted for 46.0% of submarket inventory as of Q1 2019. The strength of the market is also evident in that all Moffett buildings have been 100.0% leased since construction began.

The properties are currently being constructed as build-to-suit office space for Facebook. The tenant signed 15-year leases for the office and amenity spaces in the two office towers that expire in April 2034 and May 2034 for Building 4 and Building 3, respectively. The triple-net leases feature two renewal options to extend the leases for 84 months each at 95.0% of the fair market values. The sponsor offered seven months of rent concessions to Facebook to account for the buildings’ approximate construction schedule to build out the collateral. The tenant’s in-place base rent of $52.20 psf is in line within the appraiser’s market rent estimate of $53.77 psf.

The sponsor for this loan is Jay Paul Company, a leading real estate development and investment management firm. Jay Paul Company is an experienced developer and has developed or acquired 13.0 million sf of office property since its inception in 1975 and closed more than $13.0 billion in debt and equity financings. The sponsor specializes in creating superior office product for leading technology firms in California and has previously leased projects to Facebook, Amazon, Apple Inc., Microsoft Corporation, Google, and many others. Jay Paul Company’s extensive experience in institutional real estate development and ownership will benefit the subject collateral. The sponsor has developed the entirety of the Moffett office park and has substantial experience with other office buildings in the Moffett area, demonstrating the company’s relevant expertise constructing Class A office product in this submarket.

The DBRS LTV on the $505.0 million mortgage loan is high at 90.6%, although the high level of curb appeal and strong location bring stability to the value over time. Given the stellar quality of the Class A office product, superior amenity offerings and location amid the talented Silicon Valley workforce, DBRS believes that there would be high levels of demand for this asset through different real estate cycles, which will suppress future downside volatility. In addition, all income at the collateral is generated by a tenant that DBRS considers investment-grade quality with a long-term lease, so cash flow stability is expected to remain high over the foreseeable future.

Facebook is considered by DBRS to be a long-term credit tenant and will occupy 100.0% of the total net rentable area. The tenant’s two leases extend approximately five years beyond the loan maturity. DBRS performed an internal assessment on Facebook and considers the company to have characteristics consistent with a high investment-grade credit rating. Both Building 3 and Building 4 have been 100.0% leased to Facebook since construction began. Further, Facebook is the third-largest technology tenant in San Francisco with over 6.0 million sf of leased office space across the Bay Area, indicating a strong commitment to Sunnyvale and the greater Bay Area market. The collateral is well positioned within the Bay Area because of its central location in Silicon Valley. Situated between the San Jose and San Francisco MSAs, the subject properties can effectively attract the most talent employees in the Bay Area’s tech workforce thanks to its strategic location. The properties are also closely situated to Stanford University (which is located 7.5 miles west in Palo Alto) and the University of California-Berkeley. The subject buildings are newly constructed LEED Platinum-Certified Class A facilities with strong curb appeal. In addition, Facebook is expected to spend $200 psf on interior buildout on top of the $60 psf landlord-funded TI allowance, resulting in a world-class property inside and out.

The loan is full-term IO, providing no reduction to the loan basis over the initial loan term. However, Facebook’s two leases extend almost five years beyond the initial loan maturity date, providing stable cash flow beyond the loan maturity from an investment-grade-credit tenant. In addition, the loan ‘s five-year ARD period following the initial ten-year loan term amortizes the loan balance down 31.5% to a maturity balance of $346.1 million, establishing a low DBRS LTV at lease expiry of only 62.1%. It’s worth noting that the DBRS NCF analysis is highly dependent upon the investment-grade treatment of Facebook. Any future internal assessment at a non-investment grade level may impact DBRS’s analysis and ratings on this transaction. The appraiser estimates replacement cost of the assets, including land value, at $520 million, which is slightly above the rated debt proceeds of $505 million. The recent construction vintage, high property quality and strong location of the assets would make them highly re-leasable.

Although the subject is located in the booming Sunnyvale submarket, it is located in a competitive office market with high vacancy and availability rates. The subject is located in a highly desirable area that is booming with development as many of Silicon Valley’s largest tech firms have moved into the submarket. The collateral offers best-in-class amenities and spectacular Class A office space that should position the properties at the forefront of Sunnyvale office product in the coming years. Although availability rates in the submarket are high, this is primarily a function of an abundance of new supply coming on-line recently; however, the majority of new Class A office buildings in Sunnyvale are build-to-suit developments that are pre-leased to other leading tech firms.

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. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The DBRS 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.

The full report providing additional analytical detail is available by clicking on the link under Related Research 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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