DBRS Morningstar Finalizes Provisional Ratings on BBCMS 2020-BID Mortgage Trust

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2020-BID issued by BBCMS 2020-BID Mortgage Trust:

-- Class A at AAA (sf)
-- Class B at AA (high) (sf)
-- Class C at A (high) (sf)
-- Class D at BBB (high) (sf)
-- Class E at BB (high) (sf)
-- Class HRR at BB (sf)
-- Class X-CP at AAA (sf)
-- Class X-EXT at A (low) (sf)

All trends are Stable.

The Class X-CP and X-EXT Certificates are interest-only (IO) classes whose balances are notional.

The BBCMS 2020-BID Mortgage Trust single-asset/single-borrower transaction is collateralized by the borrower’s fee-simple interest in a Class A office building in the Upper East Side submarket of Manhattan, New York. DBRS Morningstar takes a positive view on the credit characteristics of the collateral, which has served as the global headquarters and primary North American auction house for Sotheby's for the past 40 years.

The building benefits from the long-term tenancy of Sotheby's, which executed a brand new 15-year triple-net (NNN) lease with three, 10-year extension options concurrently with the closing of the mortgage loan. In addition to having been at the property since 1980, Sotheby's has also invested more than $50 million in its space in 2018 and 2019 alone. Furthermore, to the extent Sotheby's space needs change, the property is ideally located to take advantage of captive demand from a cluster of major medical office space users including NewYork-Presbyterian/Weill Cornell Hospital and the Hospital for Special Surgery.

The property benefits from a substantial floor value based on its desirable location on the Upper East Side. The appraiser's concluded land value was approximately $485 million, or at least $1,100 psf, which covers the entire whole loan balance, including the $60 million mezzanine loan, and provides additional downside protection.

The borrower is primarily using whole loan proceeds to refinance existing debt on the property held by BNP Paribas, and is not returning any equity to itself as a part of the transaction. DBRS Morningstar views cash-neutral refinancings more favorably than when the sponsor withdraws significant equity, which results in reduced skin in the game.

The transaction also benefits from an upfront interest reserve of approximately $16.7 million, which was funded by the borrower at close. The reserve represents approximately 12 months of debt service on the mortgage loan, assuming zero cash flow was available from the property to pay debt service (based on the identical Libor cap and floor strike rate of 0.25%).

The property is entirely leased to a single tenant, Sotheby's, which executed a new 15-year NNN lease in conjunction with the mortgage loan. In the event that Sotheby's were unable to meet its obligations under the terms of the lease, the sponsor (also an affiliate) would need to lease a significant amount of space. While DBRS Morningstar believes this scenario is unlikely during the five-year fully extended loan term, and medical offices provide a logical downside hedge, we concluded that tenant improvement allowances for the space were consistent with medical office conversion.

Despite its long history and prominent position in the global auction industry, Sotheby's raised significant doubt regarding its ability to operate as a going concern in its 2019 annual report and reported a loss of $71.2 million for YE2019. Furthermore, Sotheby's reported an operating loss of $77.2 million for the six months ended June 30, 2020, and like many other businesses, has experienced disruptions in its operations attributable to the ongoing Coronavirus Disease (COVID-19) pandemic. It was also reported that, in response to the pandemic, the firm had furloughed approximately 12% of its staff and reduced employee pay by 20% for its remaining employees in the U.S. and the UK.

The mortgage loan is IO through the five-year fully extended term and does not benefit from deleveraging through amortization.

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 X-CP and X-EXT are IO certificates that reference a single rated tranche. The IO rating generally mirrors the lowest-rated applicable reference obligation tranche adjusted upward by one notch if senior in the waterfall. The IO rating on the Class X-EXT mirrors the rating of Class D, adjusted upward by one notch because of its seniority in the waterfall to A (low) (sf), based on its entitlement to certain “additional interest” amounts attributable to the Class A, B, C, and D certificates.

All ratings are subject to surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by DBRS Morningstar.

For supporting data and more information on this transaction, please log into www.viewpoint.dbrsmorningstar.com. DBRS Morningstar provides analysis and in-depth commentary in the DBRS Viewpoint platform.

Notes:
All figures are in U.S. dollars unless otherwise noted.

With regard to due diligence services, DBRS Morningstar was provided with the Form ABS Due Diligence-15E (Form-15E), which contains a description of the information that a third party reviewed in conducting the due diligence services and a summary of the findings and conclusions. While due diligence services outlined in Form-15E do not constitute part of DBRS Morningstar’s methodology, DBRS Morningstar used the data file outlined in the independent accountant’s report in its analysis to determine the ratings referenced herein.

The principal methodology is the North American Single-Asset/Single-Borrower Ratings Methodology (March 1, 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.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at [email protected].

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

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