DBRS Morningstar Confirms Ratings on SG Commercial Mortgage Securities Trust 2020-COVE

DBRS, Inc. (DBRS Morningstar) confirmed its ratings on all classes of Commercial Mortgage Pass-Through Certificates, Series 2020-COVE issued by SG Commercial Mortgage Securities Trust 2020-COVE as follows:

-- Class A at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (low) (sf)
-- Class E at BB (low) (sf)
-- Class F at B (low) (sf)
-- Class X at BBB (sf)

The trends on all classes are Stable.

The rating confirmations reflect the stable performance of the transaction, which has remained in line with DBRS Morningstar’s expectations since issuance.

The trust loan of $160.0 million is part of a split loan structure comprising four notes totaling $210.0 million. The subject loan was used to facilitate the recapitalization and refinance of the property. The five-year interest-only loan matures in March 2025. The loan is secured by a 283-unit, Class A luxury multifamily property built in 1967 along the waterfront in Tiburon, California, across the bay from San Francisco. The property consists of 33 two- and three-story apartment buildings and a single-story clubhouse/management office building. Onsite amenities, which include a 52-plus-slip marina, a private beach, and both indoor and outdoor pools and spas, take advantage of the property’s location on the northern end of San Francisco Bay. Unit amenities include open-concept kitchen and living room areas, an upgraded kitchen package with a stainless-steel Bertazzoni range and microwave, Fisher & Paykel refrigerator, GE dishwasher, and in-unit washer/dryer, quartz countertops, and a wood-burning fireplace.

The sponsor has invested $50.4 million ($178,042 per unit) in capital improvements since acquiring the property in 2013. In addition to extensive exterior and common-area renovations, all apartment units were reconfigured and extensively renovated with updated, high-end finishes. Post-renovation, average rents at the property increased 83.2% from a propertywide average of $2.62 per square foot (psf) in 2014 to $4.80 psf average in-place rents at all non-Pointe Place units.

The property has maintained stable performance to date as occupancy remains unchanged since issuance at 94% as of September 2020. The annualized September 2020 NCF projects a 6% increase over DBRS Morningstar's net cash flow (NCF) at issuance.

Market fundamentals within the South Marin submarket of San Francisco have also remained stable during the Coronavirus Disease (COVID-19) pandemic. Depite vacancy rates increasing 10 basis points year-over-year, the South Marin submarket maintained a stable vacancy rate of 4.6% as of Q4 2020, according to Reis. Furthermore, demand is expected to outpace supply as Reis is forecasting market vacancy to decrease to 2.6% by 2023.

DBRS Morningstar's NCF of $10.7 million and cap rate of 5.25% resulted in a DBRS Morningstar value of $204.3 million, a variance of 25.5% from the appraised value of $274.1 million at issuance. The DBRS Morningstar Value implies a whole loan LTV of 102.8% compared with the LTV of 76.6% on the appraised value at issuance.

The cap rate DBRS Morningstar applied when assigning ratings is in the middle of the range of DBRS Morningstar Cap Rate ranges for multifamily properties, reflecting location and asset quality. In addition, DBRS Morningstar made positive qualitative adjustments to the final LTV sizing benchmarks when assigning ratings totaling 6.5% to account for cash flow volatility, property quality, and market fundamentals. No additional adjustments were made as part of this ratings analysis.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Class X 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.

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 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.

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

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