DBRS Morningstar Finalizes Provisional Ratings on COMM 2021-2400 Mortgage Trust Commercial Mortgage Pass-Through Certificates

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following classes of Commercial Mortgage Pass-Through Certificates to be issued by COMM 2021-2400 Mortgage Trust Commercial Mortgage Pass-Through Certificates:

-- Class A at AAA (sf)
-- Class X-CP at AAA (sf)
-- Class X-EXT 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)

All trends are Stable.

DBRS Morningstar generally has a favorable view of the loan given the quality of the property and the relatively stable tenancy in place. There is some concern around one tenant, a private club that operates on two floors of the property; however, a site inspection suggests that the performance of the club, while down under the Coronavirus Disease (COVID-19) shutdowns, is beginning to recover.

The sponsors converted the property in 2019 to a Class A office building from a warehouse and secured a lease with Aramark Corporation (Aramark) to relocate its headquarters to the property. It later executed a lease with Audacy, an operator of radio stations, to relocate its office and local studios to the property. In addition, the loan sponsors moved their company's (Lubert-Adler) corporate offices and those of its subsidiaries and affiliates to the property. The office component of the property is 100% leased, and only 6.2% of the leases will roll prior to 2030, four years after the loan maturity date. Consequently, the cash flow from the majority of the tenants is likely to be stable.

The Fitler Club, an upscale private club that opened in 2019, was negatively affected during the coronavirus with the city shuttering indoor dining. The event spaces, restaurant, and bar were unable to generate revenue during the period, a key component of the club’s income. In addition, about one-third of the members suspended their memberships, with only half returning after the shutdowns were lifted. An added concern is that the lower floor of the property was flooded in September 2021, and the club was conducting ongoing remediation of the fitness center and event spaces as of November 2021. The loss of these spaces may affect membership growth and the club's ability to generate event revenue in the near term.

The club reported that it has continued to add members each month of 2021 and is projecting additional growth in 2022 as more workers return to Center City. Once the event space and amenities are back, the club may be able to increase its membership and generate additional revenue. In a site inspection of the property, the club appeared to be busy with individuals having lunch or in meeting spaces.

The club also operates a coworking facility, Offsite@Fitler (Offsite). The space is upscale compared with similar properties in the area, offering both desk space and private offices. Offsite reported that it retained about 80% of its tenants through the pandemic and has occupancy of about 75%. Coworking is an ongoing risk as the market continues to deal with work-from-home trends and light office attendance. In a site inspection, DBRS Morningstar noted that the space was being used and had a number of users on site.

The club accounts for 17.0% of the property's net rentable area (NRA) and could have a negative effect on cash flow if it is unable to sustain itself. During the pandemic, the club received a partial deferment from the sponsors, which it will begin repaying in 2022. DBRS Morningstar assumed a vacancy rate of 10% for the office component, which, considering the 100% occupancy of that space, is elevated and accounts for additional risk. DBRS Morningstar also assumed tenant improvements of $60 per square foot (psf) if that space at the property must be released, which generate a large net cash flow haircut of 18.1% to the in-place cash flow. The Issuer also included additional structure in the form of an upfront letter of credit (LOC) for one year of rent and an additional sponsor guaranty for another year of rent. These factors, while not accretive to cash flow, reduce the need for additional negative adjustments.

The property was converted to Class A office space from a warehouse at a cost of $235 million ($391 psf) and is one of the newest assets in the market. The property has large floorplates and an appealing interior build-out.

The property is in Reis' Center City West submarket of Philadelphia, which has attracted significant levels of new construction and lease signings. The property is a short distance from University City, which is bringing new life sciences companies, and 30th Street Station, which offers direct access to the Philadelphia suburbs as well as New York and Washington, D.C.

The largest tenant is Aramark, which occupies 49.5% of the space. Aramark relocated its corporate headquarters to the property and invested more than $30 million in its space. Audacy, which operates radio stations locally, relocated to the building in 2020 and invested in a multimillion dollar build-out that includes its broadcasting studios.

Loan sponsors Ira Lubert and Dean Adler co-founded Lubert-Adler, a Philadelphia-based developer that is headquartered at the property. The company has invested more than $20 billion in real estate since its founding, much of it in the Philadelphia region.

The property benefits from a tax abatement on the 2400 Market Street building, which expires in December 2028. The current in-place real estate taxes are $461,292; after the tax abatement expiration, according to the appraisal, unabated real estate taxes will be approximately $2,071,570. Given that the tax abatement runs two years beyond the fully extended loan term, DBRS Morningstar estimated the real estate tax expense based on an average of the real estate taxes through the fully extended loan term.

On January 21, 2016, approximately 4,200 gallons of red-dyed #2 fuel oil was released from a day tank owned and operated by Lumen Technologies Group (Lumen; formerly known as CenturyLink). The release affected soil at two areas near the southwest corner of the structure and the surface water of the Schuylkill River. Approximately 3,447 gallons of diesel fuel were recovered from the Schuylkill River as free product or through absorbent materials as part of Lumen’s emergency response, recovery, and remediation efforts. Additionally, approximately 140 gallons of diesel fuel were recovered from land during emergency response excavation activities. According to the borrowers, Lumen is responsible for and required to remediate any environmental impacts of the oil spill. Lumen has been working with the Pennsylvania Department of Environmental Protection (PADEP) toward closure of the incident. According to the borrowers, Lumen has excavated, removed, and properly disposed of soil and backfilled and compacted the area of such excavation with clean soil, and submitted to the PADEP a Final Attainment Sampling Work Plan to collect samples necessary to demonstrate attainment of applicable remediation standards. This plan, dated October 18, 2021, was recently approved by the PADEP and full closure of the incident is expected in spring 2022 at a reported estimated cost to complete of $110,000. The remediation work is required to be completed, under the loan agreement, by November 2023 at the latest. Prior to that, the borrowers are required to (1) deliver within 10 days after receipt, Lumen's environmental consultant’s written recommendations for the completion of the remediation work, (2) provide the lender progress reports on the remediation work upon request, and (3) deliver within 10 days after receipt any related reports received from the PADEP. If the borrowers fail to satisfy these conditions, then they will cause an event of default (EOD) under the loan agreement.

Fitler Club and its coworking affiliate, Offsite, occupy 17.0% of the total NRA. The private, members-only club was founded in 2019 and was shuttered for much of 2020 during the coronavirus pandemic. The club depends on restaurant, bar, and event revenue in addition to its membership fees. This revenue remains depressed in 2021, and the club requested a rent deferment during the coronavirus. The club also sustained damage to its fitness center and event spaces during the September 2021 floods in Philadelphia. This may slow the recovery in membership. The club maintains an active roster of 1,100 members and reportedly is increasing its membership rolls each month. The sponsors posted an LOC that will cover one year of rent and a guaranty for an additional year of rent to mitigate risks of the club.

In September 2021, Hurricane Ida caused flooding of the lower level of the Fitler Club leased premises. The tenant estimates that the flooding caused approximately $3.8 million in property damages and approximately $1.3 million in consequential damages because of lost revenue and additional operating expenses. The tenant claims that the damage occurred because of certain building systems failures, including the failure to deploy a previously installed flood-wall system and the absence of backflow preventers and has, therefore, asserted that the borrowers are responsible for the damage. This may result in litigation and/or a default under the lease. The sponsors deposited $4.5 million into a reserve related to the remaining estimated damages. Additionally, to the extent the borrowers are responsible for any losses in excess of $4.5 million, any failure to reimburse such amounts will constitute a non-recourse carveout.

Coronavirus-Related Risks—The ongoing coronavirus pandemic continues to pose challenges and risks to virtually all major commercial real estate property types, creating an element of uncertainty around future demand for office space. On a site inspection, DBRS Morningstar noted that Aramark, the largest tenant, is requiring its employees to work on-site, with exceptions, and the facility was full at the time of the inspection.

The DBRS Morningstar loan-to-value (LTV) is high at 119.14% based on the $220 million in total mortgage debt. To account for the high leverage, DBRS Morningstar programmatically reduced its LTV benchmark targets for the transaction by 2.50% across the capital structure.

The borrower is a recycled special-purpose entity (SPE). The loan agreement requires the borrower to comply with certain covenants relating to their separateness from other entities and that the borrowers own no other assets other than the collateral. The borrower has provided representation in the loan agreement they have complied with such covenants and if the borrower’s SPE representations are breached, a guarantee from the sponsors is triggered.

The loan has three one-year extension options that may be exercisable by the borrowers subject to following conditions: (1) no EOD existing as of the commencement of the applicable extension term, (2) the borrowers’ extension of the cap agreement for each extension term, and (3) a minimum debt yield of 7.25% although the borrowers will have the ability to prepay the principal balance of the loan so as to satisfy the debt yield requirement.

The underlying mortgage loan for the transaction will pay a floating rate, which presents potential benchmark transition risk as the deadline approaches for the elimination of Libor. The transaction documents provide for the transition to an alternative benchmark rate, which is primarily contemplated to be either the Term Secured Overnight Financing Rate (SOFR) plus the Benchmark Replacement Adjustment or the Compounded SOFR plus the applicable Benchmark Replacement Adjustment.

ESG CONSIDERATIONS
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.

Classes X-CP and X-EXT are interest-only (IO) certificates that reference 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.

For supporting data and more information on this transaction, please log into www.viewpoint.dbrsmorningstar.com. DBRS Morningstar provides analysis and in-depth commentary in the DBRS Viewpoint platform.

Notes:
All figures are in U.S. dollars unless otherwise noted.

With regard to due diligence services, DBRS Morningstar was provided with the Form ABS Due Diligence-15E (Form-15E), which contains a description of the information that a third party reviewed in conducting the due diligence services and a summary of the findings and conclusions. While due diligence services outlined in Form-15E do not constitute part of DBRS Morningstar’s methodology, DBRS Morningstar used the data file outlined in the independent accountant’s report in its analysis to determine the ratings referenced herein.

The principal methodology is North American Single-Asset/Single-Borrower Ratings Methodology (March 2, 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.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at [email protected].

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

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