DBRS Morningstar Confirms Ratings on All Classes and Maintains Negative Trends on Two Classes of M360 2019-CRE2, Ltd.

DBRS, Inc. (DBRS Morningstar) confirmed its ratings on the following classes of floating-rate notes issued by M360 2019-CRE2, Ltd. (the Issuer):

-- Class A Senior Secured Floating Rate Notes at AAA (sf)
-- Class A-S Second Priority Secured Floating Rate Notes at AAA (sf)
-- Class B Third Priority Secured Floating Rate Notes at AA (low) (sf)
-- Class C Fourth Priority Secured Floating Rate Notes at A (low) (sf)
-- Class D Fifth Priority Secured Floating Rate Notes at BBB (high) (sf)
-- Class E Sixth Priority Secured Floating Rate Notes at BBB (low) (sf)
-- Class F Non-Offered Floating Rate Notes at BB (low) (sf)
-- Class G Non-Offered Floating Rate Notes at B (low) (sf)

The trends for Classes A, A-S, B, C, D, and E were changed to Stable from Negative, while Classes F and G still have Negative trends.

The rating confirmations and Stable trends reflect the generally stable performance of the transaction. In conjunction with this press release, DBRS Morningstar has published its Surveillance Performance Update report with in-depth analysis and credit metrics for the transaction with business plan updates on the select loans. To access this report, please click on the link under Related Documents below or by contacting us at [email protected].

The transaction closed in August 2019 and the initial collateral consisted of 32 floating-rate mortgages secured by 32 mostly transitional properties with a maximum trust balance totaling $360.0 million. Per the August 2021 remittance report, there were 30 mortgages secured by 30 properties remaining in the pool with a total trust balance of $320.8 million, representing a 10.9% collateral reduction. The reinvestment period concluded in April 2021 and the transaction is paying sequentially. Since August 2020, 13 loans totaling $91.2 million, or 25.3% of the maximum trust balance, exited the pool with most of these loans being secured by office properties. Five loans totaling $55.7 million, or 15.5% of the maximum trust balance, which generally exhibited lower expected losses compared with the recently exited loans, were added to the pool. The pool concentrations for office and retail properties have been reduced to 31.2% and 14.7% of the pool balance, respectively, as of the August 2021 remittance report, compared with the issuance figures of 40.2% and 17.8%, respectively. The concentrations of multifamily and mixed-use properties, which have historically exhibited less risk, have increased to 20.6% and 19.7%, respectively, as of August 2021.

Four loans, totaling 17.1% of the trust balance, are in special servicing as of August 2021. One loan, St. Paul Athletic Club (Prospectus ID#18 – 2.1% of the pool balance), was hypothetically liquidated from the pool as part of this analysis and the probability of default for Baytech Research Center (Prospectus ID#7 – 4.5% of the pool balance) was increased to account for increased default risk. The Shops at Mauna Lani loan (Prospectus ID#4 – 6.1% of the pool balance) recently transferred to the special servicer in July 2021; however, the reason for the transfer and the workout plan were not provided. DBRS Morningstar is obtaining additional information regarding the transfer. Nine additional loans, representing 30.1% of the trust balance, are on the servicer’s watchlist primarily because of low occupancy rates and low debt service coverage ratios. Probability of default adjustments were made to the various watchlist loans because of increased default risk since issuance.

The St. Paul Athletic Club Building loan is secured by the leased fee interest in a 13-story mixed-use asset in Saint Paul, Minnesota. The asset contains a traditional office, banquet space, an athletic club, and a boutique hotel containing 56 rooms. The property was substantially affected by the Coronavirus Disease (COVID-19) pandemic, and the special servicer approved a 90-day forbearance package through June 2020 and granted an additional 90-day extension of the forbearance. The property was reappraised in August 2020 for a value of $8.5 million, down from the appraised value of $12.3 million at issuance, and the loan transferred to the special servicer in October 2020. In April 2021, a reinstatement agreement was executed effective October 2020 whereby (i) the payment accommodation provided in the forbearance agreement was modified and extended to June 2021, with an option to extend with special servicer approval to December 2021, and (ii) the reallocation of Flex Future Funding is permitted for property protective advances (taxes, liens, insurance, utilities), and approved capital expenditures. Upon full repayment, the accrued interest in connection with the payment accommodation will be subject to a decreasing percentage discount based on the payoff date, commencing with a 42.5% reduction and decreasing to a 25% reduction if paid-in-full by the January 2022 maturity date. As of the most recent rent roll from September 2020, the property was 66.2% occupied; however, the occupancy rate is anticipated to be approximately 57.3% after reports of the St. Scholastica tenant vacating upon lease expiration in December 2020. The two remaining tenants are St. Paul Athletic Club (45.3% of net rentable area (NRA); lease expiration of November 2028) and Hotel 340 (12.0% of NRA; lease expiration of December 2020). The athletic club’s website notes the club has reopened; however, fitness classes are conducted offsite as the air conditioning units are down and are being repaired, which is expected to be completed in September 2021. Per the hotel’s website, a portion of the hotel is being rented out on a short-term basis for pandemic-related uses. DBRS Morningstar hypothetically liquidated the loan from the pool based on the August 2020 appraised value resulting in an implied loss severity in excess of 10.0%.

The Baytech Research Center loan is secured by a two-story, suburban research and development (R&D) office building in San Jose, California, and is part of the Alviso Tech Park. At issuance, the single tenant, HyperGrid, a cloud-based software company that was related to the sponsor at the time, exercised an option to purchase the property in January 2019 for $14.0 million. In 2018, a major tech company had expressed an interest in purchasing the entire Alviso Tech Park and as such, HyperGrid vacated the subject in late 2018 in order to make the subject more attractive for a sale and to allow the new tenant to take occupancy quicker. HyperGrid was expected to continue its rental payments as its lease was scheduled to expire in May 2027; however, HyperGrid terminated its lease in May 2019, one month after the sponsor stepped down from his position as chief operating officer at HyperGrid. The loan transferred to the special servicer in July 2021 as the borrower failed to make more than one payment under the modification terms and loan payments are now more than 90 days delinquent with real estate taxes outstanding. The collateral was reappraised in April 2021 at an as-is value of $12.7 million, down from the as-is appraised value of $20.3 million at issuance. According to Q2 2021 Reis data, the North San Jose/Milpitas Flex/R&D submarket reported an average asking rent of $16.64 per square foot (psf) and an average vacancy rate of 20.8% compared with the entire San Jose market of $17.96 psf and 15.5%, respectively. At year-end (YE) 2019 (pre-pandemic), the submarket reported an average asking rent of $16.31 psf and an average vacancy rate of 15.8%. Reis projects the average asking rent to increase to $17.42 psf and for the vacancy rate to decline to 18.1% by YE2022. The probability of default was increased given the multiple relief packages for the borrower and the softened market demand for properties in the submarket.

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.

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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.

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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