DBRS Morningstar Assigns Ratings to Natixis Commercial Mortgage Securities Trust 2019-MILE

DBRS, Inc. (DBRS Morningstar) assigned ratings to the Commercial Mortgage Pass-Through Certificates, Series 2019-MILE issued by Natixis Commercial Mortgage Securities Trust 2019-MILE (the Issuer) as follows:

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

All trends are Stable with the exception of Classes D, E, and F, which carry a Negative trend because of DBRS Morningstar’s view on this transaction’s exposure to WeWork, previously expected to account for 31.6% of the asset’s net rentable area (NRA). WeWork’s status at the property is currently unclear because of an imminent lawsuit with Softbank Group Corp. (Softbank), its controlling member, and the Coronavirus Disease (COVID-19), which is negatively affecting short-term leases and the coworking market.

These certificates are currently also rated by DBRS Morningstar’s affiliated rating agency, Morningstar Credit Ratings, LLC (MCR). In connection with the ongoing consolidation of DBRS Morningstar and MCR, MCR previously announced that it had placed its outstanding ratings of these certificates Under Review–Analytical Integration Review and that MCR intended to withdraw its outstanding ratings; such withdrawal will occur on or about May 4, 2020. In accordance with MCR’s engagement letter covering these certificates, upon withdrawal of MCR’s outstanding ratings, the DBRS Morningstar ratings will become the successor ratings to the withdrawn MCR ratings. Information about the MCR ratings, including the history of the MCR ratings, can be found at www.morningstarcreditratings.com.

On March 1, 2020, DBRS Morningstar finalized its “North American Single-Asset/Single-Borrower Ratings Methodology” (the NA SASB Methodology), which presents the criteria for which ratings are assigned to and/or monitored for North American single-asset/single-borrower (NA SASB) transactions, large concentrated pools, rake certificates, ground lease transactions, and credit tenant lease transactions. For further information on the NA SASB Methodology, please see the press release dated March 1, 2020, on the DBRS Morningstar website at www.dbrsmorningstar.com.

The subject rating actions are the result of the application of the NA SASB Methodology in conjunction with the “North American CMBS Surveillance Methodology,” as applicable. Qualitative adjustments were made to the final loan-to-value (LTV) sizing benchmarks used for this rating analysis.

The Issuer is secured by the fee simple and leasehold interests in Wilshire Courtyard, which comprises two six-story, LEED Gold-certified office buildings with an aggregate of 1,061,144 square feet (sf) in Los Angeles. The ground-leased parcel is 3.5% of the property’s total site area with a current ground rent of $215,066 through 2066 and increases every 10 years based on cumulative CPI increases. The trust’s assets will consist of a $408,165,894 fully funded floating-rate mortgage loan with a 36-month initial term and two 12-month extension options.

In addition to the first mortgage, Natixis Real Estate Capital LLC originated a mezzanine loan of $69,445,112 assigned to an affiliate of Brookfield Real Estate Financial Partners, LLC. As sponsor, Panni Holdings Ltd. (the Panni Guarantor) used the first mortgage and mezzanine proceeds to finance its acquisition of the property, fund upfront reserves, and pay closing costs. The Panni Guarantor, the real estate holding vehicle for the De Cotiis family, and Rossano De Cotiis, the President of Onni Group (the Borrower Sponsor), are the joint and several guarantors for the mortgage loan. The Borrower Sponsor is a Vancouver-based real estate company that has constructed over 15,000 new homes; has built more than 11.5 million sf of office, retail, and industrial space; has an additional 28 million sf of space in different phases of development; and currently owns and manages more than 7,200 rental apartments.

While adjacent to Beverly Hills, the Miracle Mile submarket offers rents with a weighted-average rent per sf that is approximately 32% below the Beverly Hills submarket, according to Newmark Group Inc. The property’s significant exposure to WeWork (31.6% of the NRA), whose future remains unclear as it attempts to shed spaces and restructure after its recent failed initial public offering. Moreover, WeWork faces ongoing issues with Softbank, its managing member and controlling equity partner, as well as issues with closed locations caused by the coronavirus.

In the analysis for these rating actions, the DBRS Morningstar net cash flow (NCF) figure of $26.5 million derived at issuance was accepted and a cap rate of 7.5% was applied, resulting in a DBRS Morningstar Value of $355.2 million, a variance of -46.8% from the appraised value of $668.0 million at issuance. The DBRS Morningstar Value implies a total debt LTV of 134.5% compared with the LTV of 71.5% on the appraised value at issuance.

The DBRS Morningstar NCF was reanalyzed for the subject rating action to confirm its consistency with the “DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria.” The NCF figure applied as part of the analysis represents a -17.3% variance from the Issuer’s NCF, primarily driven by tenant improvements and leasing commissions.

DBRS Morningstar applied the cap rate at the middle of the higher DBRS Morningstar Cap Rate Ranges for office properties and at the higher end of the DBRS Morningstar Cap Rate Ranges for Los Angeles office properties, reflecting the submarket’s lower rents and higher vacancy. In addition, the 7.5% cap rate DBRS Morningstar applied is substantially above the implied cap rate of 5.25% based on the Issuer’s underwritten NCF and appraised value.

DBRS Morningstar made positive qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis, totaling 2.25% to account for cash flow volatility, property quality, and market fundamentals.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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.

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com The platform includes loan-level data for most outstanding CMBS transactions (including non-DBRS Morningstar-rated), as well as loan-level and transaction-level commentary for most DBRS Morningstar-rated and -monitored transactions.

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

The principal methodologies are the North American Single-Asset/Single-Borrower Ratings Methodology and North American CMBS Surveillance Methodology, which can be found on www.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 www.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.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

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

Generally, the conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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