DBRS Morningstar Assigns Provisional Ratings to BGME Trust 2021-VR

DBRS, Inc. (DBRS Morningstar) assigned provisional ratings to the following classes of Commercial Mortgage Pass-Through Certificates, Series 2021-VR to be issued by BGME Trust 2021-VR:

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

All trends are Stable.

Class X-A is an interest-only (IO) class whose balance is notional.

The BGME Trust 2021-VR single-asset/single-borrower transaction is collateralized by the borrower’s fee-simple interest in Burlingame Point, which consists of four newly built, Class A office and research and development buildings totaling 805,118 square feet (sf) in Burlingame, San Mateo County, California. The property, which is fully leased to Facebook, Inc. (Facebook), pursuant to a new 12.5-year triple net lease, will serve as the headquarters for its Oculus division. Oculus specializes and is an industry leader in immersive virtual reality hardware and software products. The property is a mission-critical location given the growing importance of the Oculus division and easy access and close proximity to the parent company’s headquarters in Menlo Park. Facebook has taken possession of the entire campus as of April 1, 2020 and is currently building out its space. All landlord’s required work with respect to the premises was completed (subject to certain punchlist items) as of November 19, 2020. Facebook is privately rated by DBRS Morningstar and exhibits characteristics consistent with a high investment-grade credit.

The 12.5-year lease term commenced on Buildings 1 & 2 on November 19, 2020 and with respect to Buildings 3 & 4 and the Amenity Space on April 1, 2021. Pursuant to the lease, rent commences on July 11, 2021 with respect to Building 1, January 11, 2022 with respect to Building 2, May 8, 2022 with respect to Building 3, November 7, 2022 with respect to Building 4 and November 7, 2021 with respect to the amenity space. It is expected that Facebook could take occupancy of each building and the amenity apace in approximately June 2021. The borrower has obtained final certificates of occupancy with respect to the core and shell of Building 1, Building 2, Building 3, Building 4 and the amenity space. Facebook has obtained temporary certificates of occupancy for Building 1 and Building 2 and it is expected Facebook could obtain temporary certificates of occupancy with respect to Building 3, Building 4 and the amenity space in May 2021. Facebook has no contraction or termination options (other than for casualty or condemnation, and with respect to a certain retail space of up to 2,000 sf) during the initial lease term.

In addition to 100% investment-grade tenancy, there is no lease rollover during the initial loan term. The weighted-average remaining lease term at the property is 11.8 years, which results in a stable, long-term cash flow stream with 3% annual contractual rent increases. Facebook’s lease expires on January 31, 2033, and has two unilateral eight-year extension options exercisable by the borrower at 95% of market rent as long as the tenant is not in default under the lease.

The single-tenant nature of the property creates a binary risk where the entire stream of cash flow depends on the performance of one tenant. However, the tenant’s investment-grade private credit rating, the mission-critical nature of the location, and significant investment in the build-out of the property help to mitigate this risk. In addition, the appraiser concluded a dark value of $730 million, which assumes the property is vacant and available for sale/lease. This implies an 84.9% and 102.7% loan-to-dark value ratio on the whole loan and total debt, respectively.

Burlingame Point is centrally located between Silicon Valley and downtown San Francisco and is the newest office development on the San Francisco Peninsula waterfront. The location offers access to the dynamic business environment that thrives in the Bay Area: Silicon Valley technology, Bay Area life sciences research, and the world’s largest grouping of venture capital fund managers. The property offers immediate access to U.S. Hwy. 101, Caltrain (commuter train), Bay Area Rapid Transit, and San Francisco International Airport.

The sponsor for the transaction is Kylli, Inc (Kylli), a full-service real estate investment management company focused on acquiring, developing, and managing institutional-quality assets in the Western United States. Kylli is a wholly owned subsidiary of Genzon Investment Group, which has successfully developed a variety of high-end projects, including mixed-use office buildings, boutique residential buildings, hotels, and golf clubs. The group currently has developed and owns more than 30 million sf of commercial properties and has about 20 million sf of projects that are under construction in the United States and internationally.

Kylli acquired the property, a former drive-in movie theater, in March 2015 for $49.7 million and spent approximately two years in the planning phase. The city of Burlingame approved design refinements to the already fully entitled project in 2016, broke ground in February 2017, and delivered the project to Facebook in August 2020. The sponsor’s current cost basis amounts to approximately $757 million ($942 psf), with Facebook planning additional out-of-pocket improvements of $171 million ($212 psf). Kylli is partially using proceeds from the whole loan and mezzanine debt to repatriate approximately $148 million of equity.

The transaction is structured with an anticipated repayment date (ARD) beginning in July 2030 and a final maturity date in January 2033, coterminous with Facebook’s initial lease expiry. In addition to penalty interest due on the mortgage after this date, property cash flow after current debt service will be diverted away from the sponsor to amortize the loan on a 30-year basis and additionally hyperamortize to the extent of available excess cash flow.

In addition to the $620 million whole loan, the capital stack includes $130 million of mezzanine debt from Athene Annuity and Life Company, which increases the DBRS Morningstar loan-to-value to 96.1% from 79.5%. The mezzanine loan is structured with three years of IO payments, amortizes on a 6.4-year schedule thereafter, and is anticipated to be fully paid down by the ARD in July 2030.

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-A is an IO certificate that references multiple 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.

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 2, 2021), 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/375376.

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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