DBRS Morningstar Confirms Ratings on Hamlet Securitization Trust 2020-CRE1

DBRS Limited (DBRS Morningstar) confirmed the ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2020-CRE1 issued by Hamlet Securitization Trust 2020-CRE1:

-- Class A 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 (high) (sf)
-- Class F-RR at B (low) (sf)

All trends are Stable.

The ratings confirmations reflect the overall stable performance of the transaction, which remains in line with DBRS Morningstar expectations. At issuance, the transaction consisted of 23 fixed-rate loans secured by 48 commercial and multifamily properties, four of which are transitional loans. As of the April 2022 remittance, there has been a collateral reduction of 8.8% since issuance with a current pool balance of $1.7 billion with 22 of the original 23 loans remaining in the pool. One loan, 111 River Street (Prospectus ID#4), which was formerly secured by an office property in Hoboken, New Jersey, repaid from the trust as of the January 2022 remittance.

There are three transitional loans in the transaction, representing 21.7% of the current pool balance. This includes the largest loan, 20 Broad Street (Prospectus ID#1; 12.8% of the pool), which is secured by a 533-unit multifamily apartment with floor 39,029-square foot (sf) retail component in the Financial District of Manhattan. Most of the properties securing the transitional loans are of recent construction, and the business plans generally consist of plans to lease up space to market occupancy levels. The pool is concentrated with loans secured by office and multifamily properties, which represent 42.0% and 20.8% of the current pool balance, respectively.

One loan, 545 & 555 North Michigan (Prospectus ID#12; 3.2% of the current pool), is in special servicing, and the borrower is 60 to 89 days delinquent on its debt service payments as of the April 2022 remittance. An additional five loans, representing 28.2% of the current pool, are on the servicer’s watchlist. All of these loans were initially flagged for performance-related issues; however, in its analysis, DBRS Morningstar determined that no loans exhibited significantly greater credit risks when compared with issuance. The largest loan on the servicer’s watchlist, 20 Broad Street, was added to the servicer’s watchlist in July 2021 for a low debt service coverage ratio (DSCR), stemming from a depressed occupancy rate in light of the Coronavirus Disease (COVID-19) pandemic as well as the departure of Sonder, which terminated its 10-year master lease for 235 units at the subject. As of the September 2021 rent roll, the residential portion was 96.0% occupied with an average in-place rental rate of $3,974 per unit and an average concession loss of $1,040 per unit. The commercial portion remained 17.3% occupied by four tenants with the two below-grade vacancies (15,700 sf and 11,300 sf) representing 69.2% of the retail net rentable area. A $1.6 million reserve was established at closing to fund the costs to lease the retail space. According to September 2021 financials provided by the servicer, the annualized net operating income for the property was $2.4 million, which has triggered a full cash flow sweep as the debt yield on the $250.0 million A-Note is less than 7.0%. The cash flow sweep will be in effect until the debt yield remains greater than 7.0% for two consecutive quarters. The decline in performance is expected to be temporary given the improvement in residential occupancy as concessions burn off and the A-Note exhibits low leverage with an issuance loan-to-value ratio of 58.3%. As such, DBRS Morningstar ultimately expects the loan to be removed from the servicer’s watchlist.

The 545 & 555 North Michigan loan is secured by two adjacent low-rise retail buildings on Chicago’s Magnificent Mile, on the corner of North Michigan Avenue and East Ohio Street totalling 61,909 sf. The 555 building includes 45,904 sf with the remaining 16,005 sf contained within the 545 building. At closing, both buildings were leased to single tenants; however, as of the September 2021 rent roll, the collateral was 74.2% vacant. The loan transferred to special servicing in February 2022 for imminent monetary default following its failure to make its February 2022 payment. As of the April 2022 remittance, the loan is 60 to 89 days delinquent on debt service payments, and according to the servicer, the borrower has indicated its inability to continue making future payments. A prenegotiation letter was executed, and the lender is currently waiting on a proposal from the borrower with discussions, including a potential A/B Note structure.

At issuance, the 545 building was leased to luxury watch boutique retailer, Tourbillon, through its parent company, Swatch. The space was sublet to UGG and is coterminous with Swatch’s original lease expiration in January 2023. Tourbillon failed to provide notice to renew its lease by January 2022, and reportedly, Ugg is currently touring the market to consider its future leasing options. At issuance, the 555 building was leased to GAP, serving as its flagship store in Chicago, housing all four of the company’s product lines. CB Richard Ellis (CBRE) continues to market the 555 building and is in advanced negotiations with an international tenant to take up a significant amount of space. A short-term lease for an unidentified tenant is also in discussions, and there has been additional interest from two national tenants for portions of the remaining space. At closing, GAP was paying under market rents of $82.02 per square foot (psf), with the space currently being marketed for lease by CBRE at a $100 psf asking rent, per Loopnet. It is difficult to determine if the space can command the targeted rental rate as the vacancy rate along the Magnificent Mile increased to 25.0%, according to an April 2022 article by The Real Deal.

Per the September 30, 2021, trailing 12 month financials, the subject reported a DSCR of 0.43 times (x). Based on the 2022 budget figures, the DSCR is expected to decline even further to 0.01x. The sponsor for the loan is ECA Capital, a centralized family office and investment management business, which focuses on high street retail opportunities in cities such as London, Los Angeles (Beverly Hills), Chicago, and Boston. The loan’s transfer to special servicing and the borrower’s inability or unwillingness to cover its debt service shortfalls is cause for significant concern moving forward. The borrower has been unable to secure any new tenants for the former GAP space since the tenant vacated in early 2021, and the upcoming potential vacancy of the 545 building will impose additional stress on an already distressed asset. The property was appraised at $118.6 million at issuance; however, the property value has likely declined given the decrease in performance and the softening market conditions. As a result, DBRS Morningstar increased the expected loss in its analysis of the loan to reflect the increased credit risk.

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.

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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