DBRS Morningstar Upgrades Four Classes and Confirms One Class of Natixis Commercial Mortgage Securities Trust 2018-ALXA, Removes UR-Dev. Status

DBRS, Inc. (DBRS Morningstar) upgraded the ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2018-ALXA issued by Natixis Commercial Mortgage Securities Trust 2018-ALXA (the Issuer):

-- Class B to AA (sf) from AA (low) (sf)
-- Class C to A (high) (sf) from A (low) (sf)
-- Class D to BBB (high) (sf) from BBB (low) (sf)
-- Class E to BB (high) (sf) from BB (low) (sf)

DBRS Morningstar also confirmed the rating on the following class:

-- Class A at AAA (sf)

All trends are Stable. The ratings have been removed from Under Review with Developing Implications, where they were placed on November 14, 2019.

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.

Prior to the finalization of the NA SASB Methodology, the DBRS Morningstar ratings for the subject transaction and all other DBRS Morningstar-rated transactions subject to the methodology in question were previously placed Under Review with Developing Implications, as the proposed methodology changes were material.

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 subject loan is secured by the fee interest in a 356,909-square foot (sf) condominium portion of a newly constructed Class A office building in downtown Bellevue, Washington, approximately 10.0 miles east of Seattle. The condominium interest includes 98.3% of the leasable square footage within the 16-story structure in addition to the entire eight-level underground parking garage. Completed in Q2 2017, the collateral is situated in the heart of downtown Bellevue, which includes nearly 5.0 million sf of retail and entertainment developments and just under 7.0 million sf of office space. The subject’s immediate area is home to the 1.3 million sf Bellevue Square retail center as well as its mixed-use and retail-centric sister properties, Lincoln Square and Bellevue Place, all three of which are connected via aboveground pedestrian skybridges. The sponsor used loan proceeds of $266.1 million ($745 per sf (psf)), including $57.6 million of mezzanine debt and $71.7 million of borrower equity, to finance the acquisition of the subject for a purchase price of $313.0 million ($877 psf); fund upfront free rent and tenant improvement/leasing commission reserves totaling approximately $18.0 million; and pay closing costs. The loan is a 10-year fixed-rate interest-only mortgage loan with an anticipated repayment date (ARD) structure and final loan maturity in 2033.

The property is currently 100.0% occupied by two investment-grade-rated tenants, Amazon.com, Inc. (Amazon) and Starbucks Corporation (Starbucks), with Amazon accounting for 99.4% of the net rentable area. In 2017, Amazon executed a 16-year triplet net (NNN) lease that extends well beyond the 10-year loan term to September 30, 2033. Amazon’s initial base rental payment is $34.63 psf with annual escalations of 2.25%, which equates to a gross equivalent rent of roughly $50.00 psf; this compares favorably with the average Class A submarket rents in the $45.50 psf to $47.00 psf gross range. Based on Amazon’s long-term investment-grade characteristics at the subject, its rent has been straight-lined over the loan term to $38.35 psf. Starbucks signed a 10-year NNN lease in 2017, paying $39.90 psf base rent for the first five years of the lease term and escalating by 10.0% to $43.89 psf for the last five years.

The sponsors for this loan are RFR Holding LLC (RFR) and TriStar Capital, LLC (TriStar Capital). RFR is a private full-service company established in Manhattan, New York, in 1991 with a current multinational portfolio of over 100 assets across a diverse array of property types and markets. TriStar Capital is a real estate investment firm based in New York with more than two decades of experience in the financing and development of commercial real estate. The principals of the sponsors—David Edelstein of TriStar Capital and Aby Rosen and Michael Fuchs of RFR—will serve as guarantors for the transaction. The guarantors have a combined net worth and liquidity of $3.4 billion and $146.9 million, respectively.

The DBRS Morningstar net cash flow (NCF) derived at issuance was reanalyzed for the subject rating action to confirm its consistency with the “DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria.” The resulting NCF figure was $15.3 million and a cap rate of 6.50% was applied, resulting in a DBRS Morningstar Value of $234.7 million, a variance of -25.7% from the appraised value at issuance of $316.0 million. The DBRS Morningstar Value, excluding the mezzanine debt, implies an LTV of 88.8% compared with the LTV of 66.0% on the appraised value at issuance. The NCF figure DBRS Morningstar applied as part of the analysis represents a +0.2% variance from the Issuer’s NCF, primarily driven by the management fee.

The cap rate DBRS Morningstar applied is at the lower end of the DBRS Morningstar Cap Rate Ranges for office properties, reflecting the above-average property quality, strong market, and long-term investment-grade tenancy. In addition, the 6.50% cap rate DBRS Morningstar applied is substantially above the implied cap rate of 4.80% 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 6.50% to account for cash flow volatility, property quality, and market fundamentals. DBRS Morningstar also made other positive adjustments to account for the loan’s five-year ARD tail, resulting in an implied amortization of 20.5%.

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 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 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.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

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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