DBRS Morningstar Confirms All Classes of KNDL 2019-KNSQ Mortgage Trust

DBRS, Inc. (DBRS Morningstar) confirmed all classes of the Commercial Mortgage Pass-Through Certificates, Series 2019-KNSQ issued by KNDL 2019-KNSQ Mortgage Trust (the Issuer) as follows:

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

All trends are Stable.

The rating confirmations reflect the stable performance of the collateral since the last review.

The collateral for the trust is a $628.0 million first-lien mortgage loan secured by Kendall Square, which comprises three Class A office/laboratory properties totaling 589,987 square feet (sf) and 2,147 below-grade parking spaces in Cambridge, Massachusetts. Kendall Square is part of the largest life sciences and biotechnology center in the United States with proximity to the Massachusetts Institute of Technology, Harvard University, and Massachusetts General Hospital. The three properties were constructed between 2002 and 2009 and offer desirable Class A office/laboratory space. The capital stack includes $180.0 million of mezzanine debt, which is subordinate to and held outside the trust. The interest-only (IO) mortgage loan features a two-year initial term with three 12-month extensions, the first of which was exercised in April 2021. Individual properties are permitted to be re-leased with customary requirements with the prepayment premium for the re-lease of individual assets at 110% of the allocated loan amount. Both the trust loan and the mezzanine loan are floating-rate loans based on Libor; the interest rate spread for both the trust mortgage loan and mezzanine loans will increase by 15 basis points during the extension periods.

The loan reported a trailing 12-month ended September 30, 2020, net cash flow (NCF) of $46.1 million, compared with $47.3 million for YE2019, and the Issuer-underwritten NCF of $52.0 million at issuance. The NCF decreased by 2.5% in September 2020 year-over-year primarily because of operating expenses increasing by 7.4% as a result of greater real estate taxes, utilities, and repairs and maintenance costs. DBRS Morningstar notes that other income and parking income appear to have been substantially affected by the coronavirus (COVID-19) pandemic; these line items decreased by 66.8% and 11.7%, respectively, compared with YE2019. The parking garage benefits from a substantial number of monthly parkers and contractual leased passes that mitigate the lower transient demand. The borrower stated that transient parking demand is in the process of recovering as the segment’s March 2021 revenue reached approximately 75% of comparable pre-pandemic revenue. The borrower anticipates the parking garage revenues will recover to pre-pandemic levels in the second half of 2021.

The September 2020 rent roll showed the collateral was 99.7% occupied, with an average base rent of $66.22 per sf (psf) compared with the issuance occupancy rate and average base rent of 100% and $66.19 psf, respectively. The three largest tenants are Alnylam Pharmaceuticals, Inc. (50.0% of net rentable area (NRA); lease expiration in January 2034), Baxalta US, Inc. (35.0% of NRA; lease expiration in January 2027), and IPSEN Bioscience, Inc. (10.7% of NRA; lease expiration of December 2024). The credit rating of Baxalta, Inc. is investment grade, according to Moody’s. Upcoming lease rollover is minimal over the loan term, including a parking contract with Gables Residential Services that expired in December 2020, Cloud Artscience Foundation (2.2% of NRA) with a lease expiration in May 2021, and Tatte Cambridge, LLC (0.4% of NRA) with a lease expiration in May 2022.

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.

Classes X-CP and X-EXT are IO certificates that reference 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.

The principal methodology is North American CMBS Surveillance Methodology (March 26, 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/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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