DBRS Morningstar Confirms Ratings on BBCMS Trust 2019-CLP

DBRS, Inc. (DBRS Morningstar) confirmed all ratings on the Commercial Mortgage Pass-Through Certificates, Series 2019-CLP issued by BBCMS Trust 2019-CLP (the Issuer) as follows:

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

All trends are Stable.

The rating confirmations reflect the overall stable performance of the transaction. At issuance, the trust consisted of a $290.4 million mortgage loan secured by 56 industrial assets totaling 6.4 million sf in Sacramento and Stockton, California. Per the May 2021 remittance report, the trust balance was reported at $231.2 million, representing a 20.4% collateral reduction since issuance. The cumulative outstanding mezzanine debt has been reduced to $119.1 million. Ten properties have been released from the collateral with 46 properties consisting of 5.2 million square feet (sf) remaining within the collateral. Per the servicer, there were three additional properties (Arden 1, 2, and 3) with a total allocated loan amount of $4.0 million that were released from the collateral in May 2021 but the figures were not yet reflected in the May 2021 remittance report.

The loan is structured with a two-year initial term followed by three one-year extension options. The borrower exercised the first option extending the loan maturity to December 2021. The capital stack also includes the two mezzanine loans referenced above. The floating interest-only loan is based on the one-month LIBOR plus 1.14% and the borrower was required to purchase interest-rate cap protection at a strike rate of 4.25%. Blackstone, one of the world’s largest private-equity companies, controls the loan sponsor and has nearly $55 million in cash equity at risk.

Individual properties are permitted to be released with a 105.0% premium relative to the allocated loan balance for the first 25.0% of the total loan balance. The premium increases to 110.0% after the loan balance reduces to $217.8 million, which could occur in the near term. The trust originally was structured as a partial pro rata pay; however, the trust has since surpassed the 15.0% threshold and future principal paydowns will be applied sequentially.

The entire portfolio is secured by industrial properties located in Northern California. Industrial properties are viewed favorably following the Coronavirus Disease (COVID-19) pandemic as e-commerce demand accelerated, which subsequently increased demand for industrial space. The portfolio is relatively diverse by property size and has a granular/diverse tenancy. Per the servicer, the largest tenant represents just 4.9% of the remaining net rentable area (NRA) as of May 2021. The Sacramento market also features high barriers to entry as construction and entitlement costs are still substantial relative to rental rates and limit new construction within the market.

During the fully extended loan term, leases representing 78.2% of NRA are scheduled to expire. The lease rollover risk was evenly spread throughout the loan term. At issuance, it was noted the collateral properties were located in low vacancy markets that exhibited rental rate appreciation over recent years. The collateral’s occupancy rate was 97.3% as of December 2019 and 92.9% as of December 2020, according to the servicer. The occupancy rate decline is attributed to the loss of tenants with lease expirations and releases of well-occupied collateral properties. As of March 2021, there are two properties, Overland (3.2% of the collateral NRA) and Arden 3 (0.6% of the collateral NRA), that are completely vacant and overall occupancy was 93.2% per rent rolls provided by the servicer. Near-term lease rollover risk comprises 38 tenants, representing 11.8% of collateral NRA, with lease expirations in 2021 and an additional 65 tenants, representing 19.6% of the collateral NRA, with lease expirations in 2022.

Reis data as of April 2021 for Sacramento warehouse/distribution properties reported an average asking rent of $5.17 per sf (psf) and an average vacancy rate of 10.6%. Overall, the market has displayed moderate rental income growth and a gradual vacancy rate increase since issuance. Sacramento’s warehouse/distribution market had an average asking rent of $4.87 psf and an average vacancy rate of 8.2% as of Q4 2018. Reis projects the market’s average asking rent will increase to $5.50 psf and for the average vacancy rate to decrease to 9.2% as of Q4 2022. Demand for warehouse/distribution will remain strong in the near to medium term as rental growth continues and the vacancy rate compresses. The vacancy rate increase in 2020 is partially attributed to the 1.3 million sf of new inventory delivered to the market and only 143,000 sf of net absorption. Another 2.0 million sf of additional stock is projected to be delivered in 2021. Overall, total inventory stock is projected to increase 2.9% between Q4 2018 and Q4 2021.

The adjusted underwritten Issuer Net Cash Flow (NCF) for the remaining properties totaled $24.0 million as of May 2021. DBRS Morningstar applied a pro rata reduction by the trust balance to the original DBRS Morningstar NCF to derive an updated DBRS Morningstar NCF of $21.5 million for the subject analysis. The NCF reduction equates to a 10.3% haircut relative to the adjusted underwritten Issuer NCF for the remaining properties. Cash flow growth has exceeded underwitten figures thus far; however, the release of several well-occupied properties and upcoming lease rollover could cause NCF growth to slow over the next few years..

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.

The DBRS Morningstar Viewpoint platform provides additional information on this transaction and underlying loans including DBRS Morningstar metrics, commentary, servicer-reported cash flows, and other performance-related data.

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 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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