DBRS Morningstar Confirms Ratings on All Classes of Citigroup Commercial Mortgage Trust 2020-420K

DBRS, Inc. (DBRS Morningstar) confirmed its ratings on the Commercial Mortgage Pass-Through Certificates, Series 2020-420K issued by Citigroup Commercial Mortgage Trust 2020-420K as follows:

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

All trends are Stable.

The rating confirmations reflect the overall stable performance of the transaction, which remains in line with DBRS Morningstar’s expectations at issuance. The single-asset/single-borrower transaction is collateralized by the borrower’s fee-simple interest in two Class A residential towers on the waterfront in the Williamsburg section of Brooklyn, New York. The $388.0 million total debt package consists of a mortgage loan of $298.0 million and a mezzanine loan of $90.0 million. The mortgage loan comprises $216.9 million in senior notes and $81.1 million in junior notes. The trust is made up of the $156.9 million senior A-1 note and the $81.1 million junior B-1 note for an aggregate principal amount of $238.0 million in the trust. The $60.0 million A-2 note is pari passu with the senior note, but is held outside the trust (contributed to the non-DBRS Morningstar-rated BMARK 2020-B21 conduit transaction). The mezzanine loan is not an asset of the trust. The notes evidence a 10-year fixed rate interest-only loan, maturing in November 2030, with no extension options. The total proceeds of $388.0 million were used to refinance $381.5 of existing debt, pay closing costs, fund upfront reserves, and return equity to the sponsor.

The collateral consists of two 22-story luxury residential towers, 416 Kent and 420 Kent, located directly along the waterfront just south of the Williamsburg Bridge. Both towers are built on one base, which also has a combined 18,827 sf of commercial space. The property has 857 units, with 468 units, or 54.6%, being studio apartments. The remaining units include 202 one-bedroom units and 187 two-bedroom units. The property has extensive amenities with two parking garages containing a total of 429 parking spaces, rooftop pools, resident lounges, fitness center, yoga studios, landscaped roof decks with outdoor lounges, wellness spa, lobby coffee bar, billiard and gaming lounge, co-working lounges, common dining areas with professional grade kitchens, library/quiet room, concierge services, shuttle bus services, and bicycle storage.

Both the 416 Kent and 420 Kent portions of the development benefit from significant 421-a tax exemptions during the loan term and, in return, the developer has designated between 20% and 25% of the units at each address as affordable (65 units at 416 Kent and 121 units at 420 Kent). The market rate units at 416 Kent generally are not subject to any restrictions on rental rates, while the market rate component at 420 Kent is subject to limits on rental rate increases set by the NYC Rent Guidelines Board during the exemption period. The tax abatements exempt each of the properties from 100% of the taxes on the improvements and continue well past loan maturity.

The properties were completed and began leasing up between January 2019 and September 2019, and were not fully stabilized at the time the Coronavirus Disease (COVID-19) pandemic broke out. At the time of issuance in November 2020, the properties were 83.7% occupied. The issuer noted that the borrower had been able to maintain positive leasing momentum despite the pandemic and, as of the June 2021 rent roll, the property was 92.6% occupied, with an average monthly rate of $3,483.83. This compares with the King’s County submarket vacancy rate of 3.2% and average asking rent of $1,847.62 as of Q2 2021, according to Reis data. During its initial analysis, DBRS Morningstar concluded an in-place vacancy rate of 20.0%, representing significant potential upside as the sponsor continues to lease units. Additionally, although the borrower plans to assess an additional amenity fee, in order to incentivize leasing during the pandemic, the property has temporarily waived that fee. No credit was given for the potential revenue from those amenity fees but, as the sponsor begins to collect, those fees could represent further upside.

DBRS Morningstar's net cash flow of $21.8 million and cap rate of 6.25% from issuance resulted in a DBRS Morningstar value of $348.6 million, a variance of 48.0% from the appraised value of $669.8 million at issuance. The DBRS Morningstar Value implies a loan to value ratio (LTV) of 85.5% (111.3% for the combined whole loan and mezzanine loan) compared with the LTV of 44.5% on the appraised value at issuance.

The sponsor and guarantor for the mortgage loan is Eliot Spitzer, the former governor of New York and the head of Spitzer Enterprises, a real estate firm started by his father, Bernard Spitzer. Spitzer Enterprises has a 60+ year history of developing, owning, and managing real estate in New York City and Washington, D.C. Spitzer Enterprises has completed nearly $1 billion in financings over the past 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.

Class X is an interest-only (IO) certificate that references 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.

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 the 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.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

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.

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

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