DBRS Morningstar Assigns Ratings to BBCMS Trust 2019-CLP

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

-- Class A at AAA (sf)
-- Class B at AA (sf)
-- Class C at A (high) (sf)
-- Class D at BBB (low) (sf)
-- Class E 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 August 5, 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upon withdrawal of MCR’s outstanding ratings, the DBRS Morningstar ratings will become the successor ratings to the withdrawn MCR ratings.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 transaction is a $290.4 million first-lien mortgage loan on 56 industrial assets consisting of 6.4 million square feet (sf) in Sacramento and Stockton, California. As of September 30, 2018, the properties were 93.8% occupied and leased to 263 unique tenants. Blackstone Real Estate Advisors L.P. is using the proceeds to refinance the portfolio, which it acquired from Westcore Properties Inc. in 2017. Since origination, two properties have been released and the current loan amount is $279.4 million.

The portfolio benefits from positive dynamics in the Sacramento industrial market, particularly the Natomas/Northgate submarket centered around the confluence of the major distribution arteries, I-80 and I-5, where about two-thirds of the portfolio is located. Sacramento has seen falling vacancies, rising rental rates, and limited new supply as well as strong employment growth throughout the metropolitan area. The industrial market gains stem from a combination of factors, including growth in e-commerce, strong national and local economies, in migration from the San Francisco Bay Area, as well as an onerous and costly entitlement process contributing to limited availability of quality industrial properties and limited speculative development.

DBRS Morningstar expects the portfolio to perform well in the near term, considering the market’s healthy fundamentals, and DBRS Morningstar has a favorable view of longer-term performance because of the portfolio’s granular and diverse tenancy, diverse building types and sizes, and economies of scale as the sponsor will control about 30% of the Natomas/Northgate submarket. DBRS Morningstar believes that the portfolio can achieve rental rate gains in the short term because tenants that have leases expiring are paying below-market rent on average. Leases covering 50.3% of the portfolio by sf roll in the first three years and 78.2% roll within the fully extended loan term. Tenants on these leases are paying an average of $5.40 per sf (psf) compared with the market rental rate of about $7.22 psf and higher. Additionally, DBRS Morningstar believes that the portfolio’s occupancy level is sustainable because of its historical 81.2% retention rate, according to the previous owner, combined with the portfolio’s ability to accommodate any number of tenant space requirements. Since acquisition, the current owner has executed 76 new and renewal leases covering 1.2 million sf and reported an average of only three months of downtime between leases.

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 $25.9 million and a cap rate of 7.8% was applied, resulting in a DBRS Morningstar Value of $331.3 million, a variance of -46.6% from the appraised value at issuance of $620.4 million. The DBRS Morningstar Value implies an LTV of 129.5% compared with the LTV of 70.9% on the appraised value at issuance. The NCF figure applied as part of the analysis represents a -6.6% variance from the Issuer’s NCF, primarily driven by vacancy, management fees, and leasing costs.

The cap rate DBRS Morningstar applied is at the lower end of the DBRS Morningstar Cap Rate Ranges for industrial properties, reflecting the portfolio’s location and asset quality. In addition, the 7.8% cap rate DBRS Morningstar applied is above the implied cap rate of 4.5% 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 2.0% 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

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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