DBRS Morningstar Assigns Ratings to MOFT Trust 2020-ABC

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

-- Class X-A at A (sf)
-- Class A at A (low) (sf)
-- Class B at BBB (low) (sf)
-- Class C at BB (low) (sf)
-- Class D at B (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 July 24, 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upon withdrawal of MCR’s outstanding ratings, the DBRS Morningstar ratings will become the successor ratings to the withdrawn MCR ratings.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 collateral for the $770.0 million ($790 per square foot (psf)) first-mortgage loan is the fee-simple interest in three Class A office buildings totaling more than 950,000 square feet (sf) in Sunnyvale, California. The A, B, and C buildings were built in 2008 by Jay Paul Company and are a component of the larger Moffett technology office campus, with firms like Amazon and Facebook occupying significant space in other nearby buildings. The whole loan comprises 21 pari passu senior notes with an aggregate principal balance of $442 million and three junior notes with an aggregate principal balance of $328 million for a total whole loan balance of $770 million. The MOFT 2020-ABC mortgage trust consists of the three junior notes in addition to three of the 21 senior notes, including the controlling senior note, for a total trust balance of $328 million. The remaining $442 million in senior notes will not be assets of the MOFT 2020-ABC mortgage trust and are likely to be contributed to future securitizations. Loan proceeds were used to pay off existing debt totaling $364.0 million, return $314.1 million of cash equity to the sponsor, cover unfunded sponsor obligations totaling $89.2 million, and pay closing costs of $2.7 million.

The three buildings are 100.0% leased to five tenants, with high-investment-grade tenants Google LLC (Google; 835,328 sf) and Comcast Corporation (114,419 sf) accounting for more than 97% of the portfolio’s base rent. Google expanded its footprint by recently signing a lease for all of Building B and more than half of Building C. The Google leases have no termination options and have seven-year extension options with 3% annual escalations. Additionally, the Google lease for Building A is currently below market compared with the new lease the firm signed for Building B. Google is paying approximately $60 psf gross for Building A, but executed a new lease for about $70 psf gross for Building B. The lease for Building A has a fair market value renewal option, and DBRS Morningstar believes that there is potential upside in the property’s cash flow if and when Google renews its Building A lease at market rates.

Leases representing approximately 65% of DBRS Morningstar’s underwritten base rent and 67% of the property’s net rentable area (NRA) are scheduled to roll over through the fully extended loan term. Furthermore, the Google lease for Building B is scheduled to expire just 11 months after loan maturity, which would mean that 100% of the property’s underwritten base rent and NRA is expiring within 12 months of loan maturity. While demand for this type of office space remains strong, the loan could experience elevated refinance risk if the sponsor is unsuccessful in negotiating lease extensions or signing replacement tenants.

The buildings are a part of a larger development known as Moffett Towers. The campus, centrally located in the heart of Silicon Valley in Sunnyvale, counts other large tech firms such as Facebook and Amazon as major tenants. The Moffett campus is easily accessible via the U.S. 101 freeway and the Valley Transportation Authority’s light-rail system, which has four stops across the campus. The Sunnyvale office market is also desirable because of its relative affordability compared with nearby markets like Mountain View and Palo Alto. The Sunnyvale submarket has a Class A office vacancy rate of less than 4.0%, and the Moffett Park complex, which has more than 9 million sf of space, currently has a vacancy rate of only 1.5%. The continued growth and expansion of major technology firms in the area, along with the rent discount compared with Mountain View and Palo Alto, likely means that market dynamics will remain favorable.

The sponsor is an affiliate of Jay Paul Company, a well-known San Francisco real estate owner and developer with an extensive portfolio of build-to-suit Class A office assets. The firm was founded in 1975 and has built and leased office space to a long list of Silicon Valley technology firms including Amazon, Facebook, Microsoft, HP, among others. Jay Paul Company has developed and/or acquired over 13 million sf of office space and closed more than $10 billion in debt and equity financing since its inception. The sponsor’s other major projects include the 181 Fremont tower in downtown San Francisco, the Central and Wolfe campus, and various other Moffett buildings.

The DBRS Morningstar net cash flow (NCF) derived at issuance was re-analyzed 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 $47.9 million and a cap rate of 6.50% was applied, resulting in a DBRS Morningstar Value of $737.6 million, a variance of -35.6% from the appraised value at issuance of $1.15 billion. The DBRS Morningstar Value implies an LTV of 104.4%, as compared with the LTV on the issuance appraised value of 67.3%. The NCF figure applied as part of the analysis represents a -15.7% variance from the Issuer’s NCF, primarily driven by tenant improvements and leasing commissions, rent steps, and real estate taxes.

The cap rate applied is at the lower end of the range of DBRS Morningstar Cap Rate Ranges for office properties, reflective of the property’s location, high quality, and position in the market. In addition, the 6.50% cap rate applied is above the implied cap rate of 4.97% 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.

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 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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