DBRS Morningstar Confirms All Ratings on MOFT 2020-B6 Mortgage Trust with Stable Trends

DBRS Limited (DBRS Morningstar) confirmed its ratings on the Commercial Mortgage Pass-Through Certificates issued by MOFT 2020-B6 Mortgage Trust as follows:

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

All trends are Stable.

The rating confirmations reflect the overall stable performance of the transaction, which has remained in line with DBRS Morningstar’s expectations in the year since issuance. The underlying loan is secured by a 314,400-square-foot (sf) Class A office building in Sunnyvale, California. The collateral is one of six identical buildings that make up the Moffett Place campus within the greater Moffett Park development. The subject was constructed in 2020 and is 100.0% leased to Google LLC (Google) through January 2029. Google’s parent company, Alphabet Inc., is rated investment grade. The whole loan of $200.0 million is composed of eight pari passu senior notes with an aggregate principal balance of $133.1 million and two junior notes with an aggregate principal balance of $66.9 million. The total trust portion is $67.0 million, which consists of the two junior notes and $500,000 of senior debt. In addition, there is mezzanine debt of $49.0 million. The 10-year, fixed-rate loan is interest only through the loan term.

Whole-loan proceeds repaid $164.5 million of existing debt; funded $12.1 million in free rent reserves, $2.8 million in leasing reserves, and $2.5 million in debt service reserves; covered $10.1 million of closing costs; and returned $57.2 million of equity to the sponsor. According to the July 2021 loan-level reserve report, it appears that all funds from the leasing and free rent reserves have been disbursed, with the debt service reserve reporting a remaining balance of $2.5 million.

The build-out work for Google began in May 2020 and, as of issuance for the subject transaction, the work remained ongoing, and Google had not taken occupancy or commenced rent payments as of the closing date. According to the terms of the lease, Google started paying its base rent in May 2021 and the build-out was scheduled to be completed by October 2021; however, the servicer has confirmed that the anticipated completion date has since been pushed to November 2021. This coincides with Google’s plan to extend its work-from-home policy to Q3 2021 amid the Coronavirus Disease (COVID-19) pandemic. Google’s initial lease is scheduled to expire before the August 2030 loan maturity, and there are two seven-year renewal options available. The appraiser’s estimated market rent was $60.00 per sf (psf) at issuance, which is higher than Google’s base rental rate for year one of $49.56 psf; however, the lease is structured with annual rent steps of approximately 2.0%, and a renewal would be at a market rental rate. In addition, the loan is structured with a cash flow sweep if notice to renew is not received 20 months prior to lease expiration. The sweep is expected to generate $12.3 million (approximately $40.00 psf) for future re-leasing costs.

Since the beginning of 2021, Google has been reported to be offering employees the option of applying for a fully remote work arrangement. An August 11, 2021, article by The Register cited an estimate from the company’s chief executive officer (CEO) that stated that four out of five of the company’s employees would continue to work in physical office locations once coronavirus restrictions are fully lifted. The same article referenced an earlier statement by the CEO that approximately 60.0% of the workforce was working in some capacity in offices that had reopened or partially reopened thus far in 2021. Finally, the article also noted that Google may be reducing pay for employees in some areas that choose to work remotely, a factor that could reduce the final number of workers choosing that option. It’s unclear to what extent the shifts in how and where Google employees work (and employees of other companies across the country) will affect office usage, but it seems likely that some level of increase in remote work is here to stay. The subject transaction benefits from the long-term lease to Google and the collateral building’s strong location, which should support its continued desirability for Google or other firms with a need for a presence in a prominent area of Silicon Valley.

The sponsor for this transaction is an affiliate of Jay Paul Company, which is a privately held real estate development firm founded in 1975 and based in San Francisco. Jay Paul Company focuses on the acquisition and development of high-end build-to-suit office projects for large Silicon Valley technology firms. The sponsor has developed more than 13 million sf of institutional office space for clients including Apple, Amazon, Facebook, Microsoft, Nokia Corporation, and Tencent Holdings Ltd. Several other sponsor-owned Moffett Park buildings have been securitized in previous DBRS Morningstar-rated transactions, such as MOFT Trust 2020-ABC and MFTII 2019-B3B4 Mortgage Trust. The collateral is one of 25 buildings developed by the sponsor within the Moffett Park office campus.

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 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 related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at [email protected].

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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