DBRS Morningstar Assigns Ratings to MKT 2020-525M Mortgage Trust

DBRS, Inc. (DBRS Morningstar) assigned ratings to the Commercial Mortgage Pass-Through Certificates, Series 2020-525M issued by MKT 2020-525M Mortgage Trust as follows:

-- Class A at AAA (sf)
-- Class B at AA (sf)
-- Class X-A at AA (sf)
-- Class C at AA (low) (sf)
-- Class D at A (low) (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. As such, in conjunction with these rating actions by DBRS Morningstar for the subject transaction, the MCR ratings will be withdrawn. 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upon withdrawal of MCR’s outstanding ratings, the DBRS Morningstar ratings will become the successor ratings to the withdrawn MCR ratings.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.

MKT 2020-525M Mortgage Trust is secured by the fee, leasehold, and subleasehold interests in 525 Market Street, a 38-story, 1,034,170-square foot (sf) Class A office tower in San Francisco’s central business district (CBD). The $682.0 million, or $659 per sf (psf), 10-year, fixed-rate, interest-only (IO) loan was originated by Barclays Capital Real Estate Inc.; Goldman Sachs Bank USA; and Wells Fargo Bank, National Association to an affiliate of New York State Teachers’ Retirement System. It was advised by J.P. Morgan Asset Management and RREEF America REIT II, Inc. (RREEF), a Maryland corporation, in connection with the recapitalization of the 525 Market Street property and acquisition by an affiliate of RREEF of a 49.0% interest in the borrower.

At the time of closing, the property was approximately 97% occupied by major tenants such as Amazon.com Services, Inc.; Zurich Insurance; Sephora USA, Inc. (Sephora); The Walt Disney Company; Wells Fargo Bank, N.A. (Wells Fargo Bank); and Willis Towers Watson. Over the past five years, the sponsor has invested approximately $102.1 million, or $99 psf, of capital work into the property including enhanced ground-floor retail, repositioned and renovated lobby and plaza, and new amenities and improvements to the office tenant interiors. Tenants representing more than 20.0% of the net rentable area, including two of the top three tenants, have been at the property for more than 15 years. The second-largest tenant, Sephora, has been at the property since 2004, and the third-largest tenant, Wells Fargo Bank, since 1997. There have been no substantive changes at the property since issuance in March 2020. Approximately 80% of the cumulative square footage has lease expirations throughout the 10-year loan term.

In the analysis for these rating actions, the DBRS Morningstar net cash flow (NCF) figure of $52 million derived at issuance was accepted and a cap rate of 6.5% was applied, resulting in a DBRS Morningstar Value of $794 million, a variance of 37% from the appraised value at issuance of $1.27billion. The DBRS Morningstar Value implies an LTV of 86%, as compared with the LTV on the issuance appraised value of 54%.

The cap rate applied is at the lower end of the range of DBRS Morningstar Cap Rate Ranges for Urban Core Office properties, reflective of the top-tier market and CBD location. In addition, the 6.5% cap rate applied is substantially above the implied cap rate of 4.74% 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 6% 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-A is an 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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