DBRS Morningstar Assigns Ratings to CORE 2019-CORE Mortgage Trust

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

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

All trends are Stable.

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 7, 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upon withdrawal of MCR’s outstanding ratings, the DBRS Morningstar ratings will become the successor ratings to the withdrawn MCR ratings.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 underlying collateral for the transaction includes four pari passu notes comprising the $402.8 million nonrecourse, first-lien mortgage loan, which is secured by the borrower’s fee simple and leasehold interests in six office properties and one mixed-use property, totaling 2.6 million square feet (sf), located in New York, Pennsylvania, Maryland, and Virginia. Barclays Capital Real Estate, Inc.; Citi Real Estate Funding Inc.; Bank of America, N.A. (rated AA (low) with a Stable trend by DBRS Morningstar); and German American Capital Corporation originated the mortgage loan, which has an initial term of two years and allows for three one-year extension options. The transaction is also structured with a $92.2 million senior mezzanine loan held outside the trust, which has a spread of 4.000% over one-month Libor, and a $55 million junior mezzanine loan, which has a spread of 5.472% over one-month Libor.

At issuance, the portfolio was 84.4% occupied by 194 tenants, only two of which accounted for more than 5.0% of DBRS Morningstar’s rent figure. In addition, roughly 50.0% of the DBRS Morningstar rent came from investment-grade-rated tenants, including universities and government entities. The top 10 tenants had an average remaining lease term of six years at issuance with the consideration of early termination options, which is one year beyond the fully extended loan term. In addition, DBRS Morningstar notes the relatively low lease rollover exposure as leases representing a relatively minor 34.0% of the DBRS Morningstar rent are scheduled to roll during the fully extended loan term, suggesting healthy cash flow stability for the overall portfolio. According to the servicer’s reporting, the portfolio’s YE2019 occupancy rate was 85.0%, slightly above the issuance figure.

At issuance, several properties experienced occupancy declines driven by large tenant departures including Morgan Stanley, which vacated 202,980 sf of its space at One Pierrepont Plaza, and the State of New York Division of Alcoholic Beverages, which vacated 41,582 sf at Harlem Office; these departures caused the portfolio occupancy to drop to 84.4% as of the December 2018 rent roll from 94.8% in 2017. The portfolio includes two life sciences properties, which are historically sensitive to government funding; however, DBRS Morningstar believes that this risk is mitigated by the assets’ excellent locations near large university campuses and by strong tenancy under long-term leases, including Johns Hopkins University and the University of Pennsylvania, both ranked among the top 10 organizations receiving funding from the National Institutes for Health in 2018.

The collateral includes leasehold interests in One Pierrepont Plaza, Penn Life Sciences, and Harlem Office, which together represent 46.4% of the total loan amount. Additionally, according to the appraisal, the base ground-lease payment on One Pierrepont Plaza is scheduled to increase substantially to $2.3 million in May 2021 from $138,813 in 2019 and the ground-lease payment for Harlem Office is scheduled to increase to $2.1 million in December 2027 from $233,989 at present because of the revaluation of the land value, which would significantly affect the portfolio’s future cash flows. DBRS Morningstar accounted for the ground rent resets in its analysis.

The loan sponsor is Brookfield Strategic Real Estate Partners III GP L.P. Brookfield Property Partners L.P. (BPY; rated BBB with a Negative trend by DBRS Morningstar) is an owner, operator, and investor in commercial real estate with a diversified portfolio of office and retail assets as well as interests in multifamily, triple-net lease, industrial, hospitality, self-storage, student housing, and manufactured housing assets. BPY’s core office portfolio includes interests in 150 office properties in tier one cities around the world, totaling 99 million sf. The properties are cross collateralized and cross defaulted.

In the analysis for these rating actions, the DBRS Morningstar net cash flow (NCF) figure of $37.0 million derived at issuance was accepted and a cap rate of 7.52% was applied, resulting in a DBRS Morningstar Value of $492.5 million, a variance of 33.4% from the appraised value at issuance of $740.0 million. The DBRS Morningstar Value implies an LTV of 81.8% compared with the LTV of 54.4% 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 15.3% variance from the Issuer’s NCF, primarily driven by tenant improvements, leasing commissions, and rent step assumptions.

DBRS Morningstar applied a cap rate at the middle end of the DBRS Morningstar Cap Rate Ranges for office properties, reflecting several properties’ markets, high concentration of investment-grade tenants, and the properties’ older builds. In addition, the 7.52% cap rate DBRS Morningstar applied is above the implied cap rate of 5.9% 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 2.50% 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.

Class X-NCP is an interest-only (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.

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.

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

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