DBRS Morningstar Confirms All Classes of Natixis Commercial Mortgage Securities Trust 2019-MILE, Removes All Classes from Under Review with Negative Implications

DBRS, Inc. (DBRS Morningstar) confirmed its ratings on all classes of Commercial Mortgage Pass-Through Certificates, Series 2019-MILE issued by Natixis Commercial Mortgage Securities Trust 2019-MILE as follows:

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

Classes A, B, and C have Stable trends. Classes D, E, and F carry Negative trends as a reflection of DBRS Morningstar’s concerns regarding the collateral property’s exposure to WeWork and the general uncertainty surrounding that company’s future given the recent relinquishments of space at the subject and other prominent locations throughout the United States. The ratings have been removed from Under Review with Negative Implications, where they were placed on April 20, 2021.

In April, DBRS Morningstar placed all classes Under Review with Negative Implications as a result of the unexpected termination of one of WeWork’s existing leases at the subject property. DBRS Morningstar has since obtained additional information from the servicer regarding the lease termination and, given the substantial reserves and guarantees in place coupled with the sponsor’s demonstrated commitment to the subject property, the classes were removed from Under Review with Negative Implications. Further, the risk associated with WeWork’s leases was considered as part of DBRS Morningstar’s analysis when the ratings were assigned, with stressed assumptions for the WeWork spaces in a lower renewal probability and higher one-time tenant improvement costs included in the DBRS Morningstar net cash flow figure.

The transaction is backed by the fee-simple and leasehold interests in Wilshire Courtyard, which comprises two six-story, LEED Gold-certified office buildings with an aggregate of 1.1 million square feet (sf) in Los Angeles. The ground-leased parcel is 3.5% of the property’s total site area with a current ground rent of $215,066 through 2066 that increases every 10 years based on cumulative CPI increases. The trust’s assets consist of a $408.2 million fully funded floating-rate mortgage loan with a 36-month initial term and two 12-month extension options. In addition to the trust debt, there is mezzanine financing in the amount of $69.4 million.

At issuance, WeWork leased 335,386 sf (31% of the net rentable area (NRA)) that was split into two phases. Phase 1 totaled 158,663 sf on a lease that commenced in May 2020, while the lease for Phase 2, totaling 176,723 sf, was scheduled to commence in August 2020. In July 2020, WeWork vacated its Phase 1 space and the loan was added to the servicer’s watchlist in June 2020, after the borrower entered into an amendment of the WeWork lease without lender consent. The servicer subsequently confirmed that WeWork terminated its lease for the Phase 1 space in conjunction with a $6.5 million termination payment, which was collected and is being held in the tenant improvement/lease commission reserve that now totals nearly $44.0 million. In addition, the $3.5 million letter of credit (LOC) required at issuance as part of the ongoing build out for the Phase 1 space was released, but the Phase 2 LOC totaling $11.8 million remains in place, as does the $17.9 million lease guarantee provided by the tenant’s parent company. Finally, as noted at issuance, approximately $40.8 million of the underlying loan is recourse to the guarantor until the debt yield on the property’s in-place net operating income (NOI) and the total debt on the property is at least 7.5%. Based on the YE2020 NOI figure reported by the servicer, that threshold has not been met.

A February 2021 rent roll confirmed that the property’s physical occupancy rate fell to 73.0%, with WeWork occupying only the 176,723-sf Phase 2 space. Occupancy is expected to increase to 75.0% with a recent lease signing for a 27,461-sf space that is scheduled to commence in September 2021. After WeWork, the property’s second-largest tenant is IPG Mediabrands, which leases 8.4% of the NRA through June 2023. The third-largest tenant is Twentieth Television, Inc., occupying 7.1% of the NRA under a lease that expires in July 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.

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 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 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.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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