DBRS Morningstar Confirms Ratings on KNDL 2019-KNSQ Mortgage Trust

DBRS Limited (DBRS Morningstar) confirmed the ratings on all classes of Commercial Mortgage Pass-Through Certificates, Series 2019-KNSQ issued by KNDL 2019-KNSQ Mortgage Trust as follows:

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

All trends are Stable. DBRS Morningstar discontinued the rating on Class X-CP as the bond has exceeded its stated maturity date of May 2020 and is no longer receiving interest payments.

The rating confirmations reflect the overall stable performance of the underlying collateral, which remains in line with DBRS Morningstar’s expectations. The collateral for the trust consists of an $628.0 million first-lien mortgage loan secured by Kendall Square, which comprises three Class A office/laboratory properties totalling 589,987 square feet (sf) and 2,147 below-grade parking spaces in Cambridge, Massachusetts. Kendall Square is part of the largest life sciences and biotechnology center in the United States with proximity to the Massachusetts Institute of Technology, Harvard University, and Massachusetts General Hospital. The three properties were constructed between 2002 and 2009 and offer desirable Class A office/laboratory space. The capital stack includes $180.0 million of mezzanine debt, which is subordinate to and held outside the trust. The interest-only (IO) mortgage loan features a two-year initial term with three 12-month extensions, the first of which was exercised in April 2021. Both the trust loan and the mezzanine loan are floating-rate loans based on Libor; the interest rate spread for both the trust mortgage and mezzanine loans will increase by 15 basis points during the extension periods. Individual properties are permitted to be re-leased with customary requirements upon a prepayment premium of 110% of the allocated loan amount.

The loan reported a consolidated net cash flow (NCF) of $46.2 million for the trailing 12 months ended September 30, 2021, compared with $46.0 million for YE2020 and the Issuer’s NCF of $52.0 million at issuance. The decline in NCF compared with the issuance level is primarily attributed to a 8.1% increase in total operating expenses as a result of higher real estate taxes, property insurance, management fees, and general and administrative costs. DBRS Morningstar notes that parking income continues to be substantially affected by the Coronavirus Disease (COVID-19) pandemic, based on the 10.6% decline since issuance. Prior to the pandemic, the parking garage benefitted from a substantial number of monthly parkers and contractual leased passes that mitigated the lower transient demand. The loan’s in-place debt service coverage ratio remains healthy, however, and the property’s parking revenue and expense reimbursements should continue to increase over the near to moderate term.

The September 2021 rent roll showed the collateral was 99.0% occupied with an average base rent of $67.52 per square foot (psf) compared with the issuance occupancy rate and average base rent of 100% and $66.19 psf, respectively. The three largest tenants are Alnylam Pharmaceuticals, Inc. (50.0% of the total portfolio’s net rentable area (NRA); lease expiration in January 2034), Baxalta US, Inc. (35.0% of the NRA; lease expiration in January 2027), and IPSEN Bioscience, Inc. (10.7% of the NRA; lease expiration of December 2024). Upcoming lease rollover is minimal over the next 12 months.

Sponsorship is provided by subsidiaries of The Blackstone Group (Blackstone) and BioMed Realty Trust (BioMed), which together own a number of properties in the Kendall Square submarket. Blackstone, founded in 1991, is a global alternative asset manager with total assets under management of $881.0 billion as of Q4 2021. BioMed was founded in 2004 and focuses on acquiring, developing, leasing, owning, and managing laboratory and office space for the life sciences industry.

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-EXT is an IO certificate that references 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.

DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for this transaction.

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 4, 2022), 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.

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.

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

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