DBRS Morningstar Assigns Ratings to Natixis Commercial Mortgage Securities Trust 2019-NEMA

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

-- Class A at AAA (sf)
-- Class B at AAA (sf)
-- Class X at AA (high) (sf)
-- Class C at AA (sf)
-- Class D at BBB (sf)
-- Class V-ABC at AA (sf)
-- Class V-D at BBB (sf)
-- Class V2 at BBB (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 14, 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upon withdrawal of MCR’s outstanding ratings, the DBRS Morningstar ratings will become the successor ratings to the withdrawn MCR ratings.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 this deal is a $199.0 million ($263,926 per unit), first-lien mortgage loan backed by NEMA San Francisco, which is secured by the fee simple interest in 754 Class A luxury apartments in four high-rise towers in the Mid-Market neighborhood of San Francisco. The trust loan is part of a $384.0 million ($509,284 per unit) whole loan that consists of $274.0 million ($363,395 per unit) of secured senior notes and $110.0 million ($145,889 per unit) of secured subordinate notes. The whole loan consists of five pari passu senior notes (A-1 through A-5) with an outstanding balance of $205.0 million. There is also one senior-subordinate note (A-B) with an outstanding balance of $69.0 million. The trust contains the $130.0 million senior A-1 note and the $69.0 million senior-subordinate A-B note. The A-2 ($25.0 million) and A-4 ($10.0 million) notes were securitized in BBCMS 2019-C3 while the A-3 ($25.0 million) and A-5 ($15.0 million) notes were included in BBCMS 2019-C5. The secured subordinate notes were sold to unaffiliated third-party investors. Natixis Real Estate Capital, LLC originated the mortgage loan, which was used primarily to refinance existing debt. The full-term interest-only (IO) loan has a 10-year term and pays a fixed interest rate of 4.4360%.

The sponsor is one of a number of companies operating under the umbrella of Crescent Heights, founded in 1989 by its managing principals, Bruce A. Menin, Russell W. Galbut, and Sonny Kahn. The company focuses on developing, owning, and operating mixed-use high-rise buildings in major U.S. markets. In 2006, Crescent Heights acquired the land under the improvements and subsequently developed the residential towers at a total cost of $321.8 million. CH Management Services, LLC, an affiliate of the borrower, manages the collateral property under a development and management agreement which commenced on October 31, 2011.

Completed in 2013, the subject property offers residents modern, high-end unit finishes and numerous on-site services and amenities which should continue to attract tenants. Studio and one-bedroom units comprise 84.2% of the total unit count and are in high demand from young working professionals employed by technology, software, and social media companies in the Bay Area. The headquarters of Uber and Twitter are adjacent to the property. Other technology companies, such as Microsoft Corporation; Square, Inc.; and Salesforce.com, Inc. are spread throughout the South of Market (SoMa) neighborhood, which has gone through a long-term revitalization and transformation from what was once an area full of industrial buildings and warehouses. This has attracted the attention of many national and regional builders, delivering more than 5,000 units to the submarket since the start of 2013. The spike in new apartment units has increased competition, which has caused a moderate decline in the property’s net rentable income (NRI) since the end of 2016. The DBRS Morningstar NRI is 2.0% and 0.5% lower than YE2016 and YE2017 levels, respectively.

The property also has 11,184 square feet of commercial space with frontage on Market Street and 10th Street. As of the latest review, the commercial space is 54.6% physically occupied by three tenants, including Steel & Lacquer (a high-end hair salon), SimplexiTea (a coffee and tea shop), and Orangetheory Fitness (a boutique fitness studio). Currently, Steel & Lacquer and Orangetheory Fitness are temporarily closed because of citywide restrictions resulting from the Coronavirus Disease (COVID-19) pandemic. SimplexiTea is open for business but only offers takeout service.

The loan was added to the servicer’s watchlist in July 2020 as the borrower requested coronavirus-related relief for May, June, and July payments. However, the loan is paid through the July payment date, is not classified as delinquent, and there are no outstanding servicer advances. DBRS Morningstar has reached out to the servicer for clarification on the request.

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 $20.1 million and a cap rate of 5.50% was applied, resulting in a DBRS Morningstar Value of $364.8 million, a variance of -32.9% from the appraised value at issuance of $543.6 million. The DBRS Morningstar Value implies an LTV of 105.3%, as compared with the LTV on the issuance appraised value of 70.6%. The NCF figure applied as part of the analysis represents a -4.3% variance from the at issuance NCF, primarily driven by vacancy, operating expenses and commercial tenant improvements/leasing commissions, and capital expenditure. As of YE2019, the servicer reported a NCF figure of $22.1 million, a +10.1% variance from the DBRS Morningstar NCF figure.

The cap rate applied is at the lower end of the range of DBRS Morningstar Cap Rate Ranges for multifamily properties, reflective of the strong residential market, urban infill location, and above-average property quality. In addition, the 5.50% cap rate applied is substantially above the implied cap rate of 3.86% 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 5.0% to account for cash flow volatility, property quality, and market fundamentals. DBRS Morningstar also applied a negative LTV adjustment through the B (low) rating category to account for the fact that, under certain conditions, the borrower is not required to provide a new nonconsolidation opinion. For example, the loan agreement does not obligate the borrower to provide a new opinion even if it transfers more than 49.0% of its equity interests in the property to another entity.

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.

Classes V-ABC, V-D, and V2 are IO certificates that reference 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.

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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