DBRS Morningstar Finalizes Provisional Ratings on DROP Mortgage Trust 2021-FILE

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following classes of Commercial Mortgage Pass-Through Certificates issued by DROP Mortgage Trust 2021-FILE:

-- Class A at AAA (sf)
-- Class X-CP at BBB (sf)
-- Class X-NCP at BBB (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (low) (sf)
-- Class E at BB (sf)
-- Class HRR at BB (sf)
-- Class A-Y at AAA (sf)
-- Class A-Z at AAA (sf)
-- Class A-IO at AAA (sf)

All trends are Stable.

The Class A, Class A-Y, Class A-Z, and Class A-IO Certificates (the CAST Certificates) can be exchanged for other CAST Certificates and vice versa. Proportions are constant proportions of the original Certificate Balance or Notional Amount of the CAST Certificates being exchanged. Following the Closing Date, the Class A certificates will be exchangeable for the CAST Certificates in the Exchanged Proportions indicated in the applicable combinations indicated above (each a Combination) and vice versa (each such completed exchange, an Exchange). The CAST Certificates required under the applicable Combination to result in the issuance of the other CAST Certificates in amounts at least equal to the applicable minimum denomination for such other Class(es) are referred to as the Required Exchangeable Proportion, and the proportion so exchanged, the Exchanged Proportion.

The DROP Mortgage Trust 2021-File (DROP 2021-FILE) single-asset/single-borrower transaction is collateralized by the borrower’s fee-simple interest in The Exchange, a 750,370-square foot (sf) office building with components in the Mission Bay submarket of San Francisco. DBRS Morningstar has a favorable view of the asset, given its desirable location, property quality, and institutional level sponsorship. KKR Real Estate (KKR) purchased the property from its developer, Kilroy Realty Corporation, for $1.08 billion. Built in 2018, the subject is in excellent condition and is Leadership in Energy and Environmental Design Platinum certified. The office property consists of 12 stories with ground floor retail space and boasts design elements, including building systems and floorplates, that can accommodate life sciences tenants. The property benefits from its dense urban location near many of the area demand drivers such as the University of California San Francisco’s (UCSF) Mission Bay campus, the Golden State Warriors’ Chase Center, the Kaiser Permanente hub, and new residential units.

The subject is 99.6% leased as of March 2021 to two tenants: Dropbox (98.4% of net rentable area (NRA)) and Kings & Convicts BP, LLC, doing business as Ballast Point (1.2% of the NRA). Dropbox recently subleased approximately 25.3% of its space at the building to two life sciences tenants: 133,896 sf (17.8% of the collateral’s NRA) to VIR Biotechnology, Inc. (VIR) and 52,604 sf (7.0% of the collateral’s NRA) to BridgeBio Pharma, Inc. Dropbox occupies the subject on a long-term lease through November 2033 and is responsible for all lease obligations, including subleased space, with no termination options during its lease term. Additionally, Dropbox’s performance under its lease is backed by a letter of credit of approximately $34 million.

The ongoing coronavirus pandemic continues to pose challenges and risks to virtually all major commercial real estate property types and has created an element of uncertainty around future demand for office space, even in gateway markets that have historically been highly liquid. Despite the disruptions and uncertainty, the collateral has largely been unaffected. Dropbox has been paying rent despite the pandemic and no cash flow disruptions are expected. Kings & Convicts has taken possession but is currently in a 50% rent and common area maintenance abatement until June 2021 so that it can finish the build-out it had not completed when the pandemic and local lockdown mandates began. The Kings & Convicts lease is guaranteed by Constellation Brands, Inc., which is investment-grade rated and is getting long-term credit tenant treatment. Since the beginning of the lockdown, Dropbox employees have been primarily working from home. VIR’s and BridgeBio’s leases have commenced; however, both subtenants need to complete their build-outs. VIR is expected to take occupancy in Q3 2021. In the case of both subtenants, Dropbox is fully responsible for paying direct rent, regardless of whether subtenants are paying sublease rent.

The property is predominantly leased to a single tenant, Dropbox, comprising 98.4% of the NRA, for the entirety of the loan term. This creates binary risk where the entire stream of cash flow is dependent on the performance of one tenant. As of YE2020, Dropbox reported revenue of $1.9 billion, a 15% increase over YE2019. Dropbox boasts more than $1.8 billion of liquidity with $1.12 billion of cash, cash equivalents, and short-term investments in addition to $680 million of available borrowing capacity under a revolving credit facility as of December 31, 2020. In February 2021, Dropbox issued a $1.3 billion convertible bond with the intent to use the proceeds for stock repurchases and other general corporate purposes. In March 2021, Dropbox announced its plans to acquire DocSend for $165 million. Dropbox is privately rated by DBRS Morningstar and exhibits characteristics consistent with a high below investment-grade credit rating. In addition, the appraiser concluded a dark value of $798 million ($1,063 per sf), which assumes the property is vacant and available for sale/lease. The appraiser’s dark-value conclusion implies a conservative 75.2% loan-to-dark-value on the whole loan. Additionally, the borrower has a Lease Recapture Right (defined in the Loan-Level Legal and Structural Features section of this report) to take back up to 250,000 sf of Dropbox space, and lease it to a Creditworthy Tenant (also defined in the Loan-Level Legal and Structural Features section), subject to pro forma debt yield following such an amendment being equal to or greater than the debt yield as of the origination date. This gives the sponsor the opportunity to find a replacement tenant with a better rent, a better credit profile, and an economically advantageous leasing package. Moreover, the loan is structured with a cash trap trigger that will sweep all cash flow into a lender-controlled account in the event of a material default under the lease to Dropbox or any other major lease.

The transaction is structured with an anticipated repayment date (ARD) beginning in April 2026 and a final maturity date in October 2033, one month before Dropbox’s lease expiration. In addition to penalty interest due on the mortgage after this date, all property cash flow after current debt service will be diverted away from the sponsor and toward amortizing the mortgage loan. This feature strongly incentivizes the sponsor to arrange takeout financing before the ARD and therefore reduces maturity risk for the certificateholders. DBRS Morningstar provided an explicit benefit for this structure; for more information please refer to the Ratings Rationale section of this report.

The property benefits from the experienced institutional sponsorship of KKR. As of December 2020, KKR had approximately $15.9 billion of assets under management (including proprietary investments) with a dedicated real estate team of more than 90 investment and asset management professionals across eight countries. Additionally, the sponsor contributed $499.3 million, which represents 45.4% of the cost basis, as part of the acquisition.

The property benefits from its dense infill location within San Francisco’s Mission Bay neighborhood, which is near area demand drivers such as UCSF’s Mission Bay campus, the Golden State Warriors’ Chase Center, and the Kaiser Permanente hub. Additionally, the supply of buildings that can accommodate life sciences tenants in the submarket is low because of zoning limitations, limited available land, and high construction costs, which is reflected by the low availability rate of 2.4% for life sciences facilities in the San Francisco submarket as of Q4 2020, as reported by Newmark Knight Frank.

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.

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

Classes X-CP, X-NCP, and A-IO are interest-only (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.

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/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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