DBRS Morningstar Confirms Ratings on DC Office Trust 2019-MTC

DBRS Limited (DBRS Morningstar) confirmed its ratings on the Commercial Mortgage Pass-Through Certificates, Series 2019-MTC issued by DC Office Trust 2019-MTC as follows:

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

All trends are Stable.

The rating confirmations reflect the overall stable performance of the transaction, which remains in line with DBRS Morningstar’s expectations at issuance. The collateral for the underlying loan consists the Midtown Center, an 867,654-square-foot (sf), newly constructed, 14-story Class A office campus in Washington, D.C., with ground-floor retail and a three-level below-grade parking garage with 562 spaces. The sponsor, Carr Properties, founded in 1994, is an experienced owner, developer, and manager of commercial properties primarily in Washington, D.C. and Boston. The sponsor acquired the site in 2014, demolished the existing buildings and began construction of Midtown Center in 2015.

Whole-loan proceeds of $525.0 million were primarily used to refinance existing debt of $472.3 million, cover closing costs, fund upfront reserves of $32.3 million, and return $17.1 million of equity to the sponsor. The trust loan balance of $404.0 million has a split-loan structure composed of three senior pari passu A notes totaling $261.0 million and three subordinate B notes totaling $143.0 million. The remaining $121.0 million of the whole loan is composed of pari passu A notes (companion notes), which are held in the BANK 2019-BNK22 (DBRS Morningstar rated) and the COMM 2018-GC44 (not rated by DBRS Morningstar) transactions. The underlying loan for the subject transaction is interest only (IO) throughout its 10 year term and will pay interest at a fixed rate of 3.085%. It has a stated maturity of 14 years with an anticipated repayment date of 10 years.

The two largest tenants are Fannie Mae (82.2% of the net rentable area (NRA), expiring September 2033) and WeWork (12.7% of the NRA, expiring November 2036). Fannie Mae is an investment-grade tenant, paying an average rental rate (excluding the penthouse space) of $49.71 psf, approximately 19.0% below the appraisers market estimate of $62 psf for Class A office space in the market. While WeWork’s operations have been affected by the pandemic, there has been no indication that WeWork has sought any type of rent relief at the subject. WeWork’s lease does not have a termination option, but its lease does include stiff penalties if the space were to go dark, which would include an $8.5 million surety bond that WeWork posted at lease execution and one year’s rent and carry expenses estimated at $8.3 million. DBRS Morningstar has requested an update from the servicer regarding the tenant’s standing and will continue to monitor the loan for updates.

The DBRS Morningstar value was $659.1 million at issuance, which was 31.3% lower than the $960.0 million appraised value provided in connection with the origination of the whole loan. The DBRS Morningstar valuation applied a 6.5% cap rate, well above the 4.5% implied cap rate utilized by the Issuer, resulting in an LTV of 79.7%, as compared with the LTV on the issuance appraised value of 54.6%. The cap rate applied is in the lower end of the range of DBRS Morningstar Cap Rate Ranges for office properties and is reflective of the quality and location of the property.

DBRS Morningstar’s NCF derived at issuance was $42.8 million. As of Q3 2019, the servicer reported an annualized net cash flow of $41.6 million, in line with expectations. The September 2019 rent roll showed an occupancy rate of 99.7% for the property.

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.

The Class X certificate is an IO certificate that references 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 issuance metrics and all historical surveillance commentary on the DBRS Viewpoint platform.

DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform. For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com. The platform includes issuer and servicer 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 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/375376.

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info@dbrsmorningstar.com.

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.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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