DBRS Morningstar Assigns Ratings to 20 Times Square Trust 2018-20TS

DBRS, Inc. (DBRS Morningstar) assigned ratings to the Commercial Mortgage Pass-Through Certificates, Series 2018-20TS issued by 20 Times Square Trust 2018-20TS as follows:

-- Class A at AAA (sf)
-- Class B at AAA (sf)
-- Class C at AA (high) (sf)
-- Class D at AA (low) (sf)
-- Class E at A (low) (sf)
-- Class F at BBB (low) (sf)
-- Class G at B (high) (sf)
-- Class H at B (low) (sf)
-- Class V at B (low) (sf)

All trends are Negative because the underlying collateral continues to face performance challenges associated with the Coronavirus Disease (COVID-19) global pandemic.

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 October 22, 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upon withdrawal of MCR’s outstanding ratings, the DBRS Morningstar ratings will become the successor ratings to the withdrawn MCR ratings.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, at www.dbrsmorningstar.com. On March 27, 2020, DBRS Morningstar placed the ratings on its outstanding SASB transactions secured by hospitality properties Under Review with Negative Implications while MCR placed the ratings on its outstanding SASB transactions secured by hospitality properties Under Review Negative as the global shelter-in-place and travel restrictions related to the coronavirus have had an extreme impact on the short-term performance of this asset class. For further information on these rating actions, please see the DBRS Morningstar press release dated March 27, 2020, at www.dbrsmorningstar.com and the MCR press release dated March 27, 2020, at www.morningstarcreditratings.com.

The subject rating actions result from DBRS Morningstar’s application of the NA SASB Methodology in conjunction with the “North American CMBS Surveillance Methodology,” as applicable. Because the property closed shortly after opening because of the coronavirus’ impact, DBRS Morningstar valued the property in two ways: (1) valuing the future ground lease payments, and (2) determining a liquidation value as additional validation to support the valuation of the future ground lease payments. DBRS Morningstar utilized these methods to determinate the subject ratings as an alternative to a look-through analysis to derive the fee-simple value for the collateral. The DBRS Morningstar Value determined by future ground lease payments was $758.6 million, resulting in a loan-to-value (LTV) ratio of 98.9% supported by the liquidation value of $798.3 million, resulting in an LTV of 94.0%. DBRS Morningstar used the value of the ground-rent payments (the leased-fee interest) to assign the ratings to this transaction. This leased-fee valuation was supported by the liquidation value that DBRS Morningstar also calculated as part of this analysis. The purpose of calculating the liquidation value was to illustrate that, if the project experienced a severe decline in revenue and subsequently value, there was still sufficient value to justify the foreclosure by the leased-fee financing source. DBRS Morningstar did not make qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis.

LOAN/PROPERTY OVERVIEW
The underlying collateral is 20 Times Square, a mixed-use property comprising a 452-key Marriott Edition luxury hotel; 74,820 square feet (sf) of retail space (5,500 sf of which is non-revenue-generating storage space); and 18,000 sf of digital billboards. Because of the coronavirus pandemic’s effects and a dispute with the property owner related to the delinquent leasehold mortgage discussed below, the hotel is currently closed. A significant amount of the retail space is vacant as the NFL Experience, which occupied 43,130 sf, closed after only a few months of operation in 2019. At present, the only retail in place is the 8,440-sf Hershey’s Chocolate World flagship store while the remaining 66,380 sf is vacant. At this time, determining cash flow assumptions for look-through (fee-simple) valuation is challenging.

The subject of this rating action is the financing (leased-fee mortgage) of $750.0 million. The property’s ground lease and the leased-fee financing are senior to the leasehold interest and leasehold financing. In addition to the leased-fee mortgage, there is additional leased-fee financing in the form of a $150.0 million mezzanine note. The total leased-fee financing is $900.0 million. In addition to the leased-fee financing, there is an additional leasehold mortgage with an estimated balance of $1.1 billion. This mortgage is reported to be in default; however, the leased-fee financing (which is the subject of this rating action) is reportedly current based on the servicer’s response dated October 6, 2020. The ground lease is also not in default per the servicer’s response on October 6, 2020.

Metropolitan Valuation Services Inc. performed the origination appraisal dated April 20, 2018, which valued the leased-fee interest at $1.6 billion.

DBRS Morningstar reanalyzed the net cash flow (NCF) derived at issuance for the subject rating action to confirm its consistency with the “DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria.” However, because of the uncertainty related to the property’s performance and the leasehold mortgage default, DBRS Morningstar focused its analysis on the ground lease value and the leased-fee mortgage. Ground-rent payments are fixed under the terms of the ground lease, and the ground lease and leased-fee financing are senior to the leasehold interest and the leasehold financing. The leasehold interest owner and the leased-fee mezzanine lender are both motivated to prevent the leased-fee mortgage from defaulting to protect their security interest.

Therefore, for purposes of this analysis, DBRS Morningstar analyzed the payments expected from the in-place ground lease and applied a blended cap rate to the ground-rent payment at maturity to determine a DBRS Morningstar Value for the leased-fee interest. Using this value and the dollar amount allocated to each class, DBRS Morningstar derived the LTV for each of the designated classes and assigned ratings based on the resulting LTV.

The cap rate DBRS Morningstar applied was a blended cap rate of 8.0% applied to the original DBRS Morningstar-projected hotel income and 6.5% applied to the original DBRS Morningstar-projected retail/digital billboard income. This blended rate of 7.28%, which reflects a cap rate for the fee-simple interest, was reduced by 250 basis points to reflect the senior position of the ground lease and low cash flow volatility of the ground rent compared with the look-through cash flow.

DBRS Morningstar used the actual ground-rent figure of $36.3 million in its analysis (based on the scheduled ground rent at loan maturity) and applied a blended cap rate of 4.78%, resulting in a DBRS Morningstar Leased-Fee Value of $758.6 million, a variance of 53.6% from the appraised value of $1.6 billion at issuance. Using the total leased-fee mortgage amount of $750.0 million and the origination value of the leased-fee interest of $1.6 billion, the LTV at origination was 45.8%. Using the leased-fee mortgage amount of $750.0 million and the DBRS Morningstar-estimated value of $758.6 million, the LTV at origination was 98.9%.

Additionally, because the leasehold financing is in default, DBRS Morningstar also determined a liquidation value consistent with its “North American CMBS Surveillance Methodology” as the ability to make ground-rent payments is at more risk in this transaction than is typical for leased-fee transactions. DBRS Morningstar determined the liquidation value of $798.3 million by applying the cap rates described above to a stressed cash flow for the project. DBRS Morningstar derived this stressed cash flow by adjusting the original DBRS Morningstar revenue estimates, including reducing the projected rental rates for the now-vacant retail space by 50%, eliminating retail percentage-rent income, and reducing the expected NCF generated by the hotel component by 25%.

DBRS Morningstar did not deem additional scenarios for coronavirus impact to be necessary as the analysis itself incorporates the impact of the coronavirus.

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 (March 1, 2020) and North American CMBS Surveillance Methodology (March 6, 2020), 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.

Generally, the conditions that lead to the assignment of a Negative trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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