DBRS Morningstar Confirms Ratings on All Classes of SUMIT 2022-BVUE

DBRS Limited (DBRS Morningstar) confirmed its ratings on the following classes of SUMIT 2022-BVUE Mortgage Trust, Commercial Mortgage Pass-Through Certificates, Series 2022-BVUE:

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

All trends are Stable.

The rating confirmations and Stable trends reflect the overall stable performance of the transaction, which remains in line with issuance expectations. The collateral remains 98.6% occupied as of the September 2022 reporting, with over 90.0% of the property’s gross rent derived from investment grade tenants.

The transaction is secured by the borrower’s fee-simple interest in The Summit, a 907,306 square foot (sf), LEED Gold and Platinum certified, Class A, three-property office campus in the Bellevue, Washington, CBD. The property is situated on a 3.5-acre site, offering a unique urban campus environment that has helped attract and retain some of the region’s most prominent tenants. The Summit is strategically located two blocks from I-405, the Eastside’s primary interstate, and one block from both the Bellevue Transit Center and the Bellevue Downtown Light Rail Station. The loan is sponsored by a 99%/1% joint venture between KKR Property Partners Americas (KPPA), a leading global invest firm, and prominent commercial property manager and operator, Urban Renaissance Group (URG).

Whole loan proceeds of $525 million were used to refinance $382.7 million of existing debt, return $129.3 million of borrower equity and fund upfront reserves of $9.9 million, which were used to cover outstanding landlord obligations and cover closing costs. The $525 million whole loan is composed of 10 promissory notes: eight senior A notes totaling $327 million and two junior B notes totaling $198 million. The $305 million subject transaction consists of two senior A notes with an aggregate principal balance of $107 million and the two junior B notes totaling $198 million. The remaining $220 million of the whole loan is composed of pari passu A notes (companion notes); of those companion notes, 5% are held in BBCMS 2022-C16 (DBRS Morningstar rated) and the remaining 62% are between BMARK 2022-B32, BBCMS 2022-C15, BBCMS 2022-C14 and BMARK 2022-B33 (not rated by DBRS Morningstar). The underlying loan is interest-only throughout its seven year term with a scheduled maturity in February 2029.

As of the September 2022 rent roll, the property was 98.6% occupied, unchanged from issuance. Overall, the property’s tenant roster comprises approximately 78.5% investment-grade tenancy by square footage, including Amazon.com Services, Inc. (Amazon) (41.2% of net rentable area (NRA), lease expiring August 2036), Puget Sound Energy Inc. (Puget) (24.7% of NRA, lease expiring October 2028), and First Republic Bank (8.1% of NRA, lease expiring March 2032). An additional 133,059 sf or 14.7% of NRA is leased to WeWork and is 100% subleased by Amazon.

There is a substantial rollover concentration in 2028 when leases representing 25.9% of NRA will expire, which is primarily attributable to the Puget lease (24.7% of NRA) which expires in October 2028. Otherwise, rollover risk is relatively minor, with tenants representing only 3.0% of the NRA scheduled to expire within the next 12 months. The borrower has the right to amend the Puget lease to reduce the leased space by up to 223,820 sf in aggregate, and to make corresponding reductions to the rent and tenant obligations, provided that the debt yield is equal to or greater than the debt yield at closing, with certain leasing conditions structured into the agreement.

According to Reis, the Bellevue CBD submarket reported a vacancy and average rental rate of 9.2% and $54 psf, respectively. The subject reported vacancy and average rental rates of 1.7% and $38 psf, respectively. Current in-place rents at the property are more than 30% below market rents with Amazon, AvalonBay, and First Republic Bank having average rental rates of $36 psf (including the subleased space), $45 psf, and $39 psf, respectively. The Bellevue submarket has experienced strong demand from high-profile technology tenants, which have driven Class A vacancy down and generated significant rent growth over the past several years. While limited lease rollover provides for minimal opportunity to capture additional upside during the seven-year loan term, the property will likely benefit in the long run from increased rental revenue as tenants’ leases expire and roll to market.

Based on the September 2022 financial reporting, the trailing-12 month (T-12) ended September 2022 net cash flow (NCF) of $25.1 million ($33.4 million when annualized) was marginally above the NCF reported at YE2021 of $32.0 million, but below the DBRS Morningstar NCF of $36.7 million derived at issuance. The loans Q3 2022 debt service coverage ratio was reported at 2.13 times (x), compared to the YE2021 figure of 2.04x and the DBRS Morningstar DSCR of 2.34x. DBRS Morningstar provided LTCT credit to investment-grade rated tenants Amazon, AvalonBay Communities, Inc. (AvalonBay), and First Republic Bank, which collectively represent 64.8% of NRA, as their leases expire more than three years beyond loan maturity.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022).

Class X-A 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.

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

The principal methodology is North American CMBS Surveillance Methodology (October 3, 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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