DBRS Morningstar Confirms All Classes of 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.

The rating confirmations reflect the overall stable performance of the transaction, which remains in line with DBRS Morningstar’s expectations since the last rating action. The collateral continues to report occupancy figures greater than 97.0% and, as of the trailing 12 months (T-12) ended June 30, 2022, financials, reported a net cash flow (NCF) greater than the DBRS Morningstar NCF derived at issuance.

The collateral for the trust consists of a $628.0 million first-lien mortgage loan secured by Kendall Square, which comprises three Class A office/laboratory properties totaling 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 second of which was exercised in April 2022. Individual properties are permitted to be released with customary requirements upon a prepayment premium of 110% of the allocated loan amount.

The loan reported a consolidated NCF of $53.4 million for the T-12 ended June 30, 2022, financials, which compares favorably with the YE2021 NCF of $47.5 million, the Issuer’s NCF of $52.0 million, and the DBRS Morningstar NCF of $45.7 million. The increase in cash flow from YE2021 is primarily attributed to a 10.0% increase in base rent. According to the September 2022 rent roll, the collateral reported an average rental rate of $70.68 per square foot (psf), an increase from $67.52 psf as of September 2021 and $66.19 psf at issuance. Parking income remains 10.0% (approximately $1.5 million) below issuance levels likely due to residual effects from the Coronavirus Disease (COVID-19) pandemic. Prior to the pandemic, the parking garage benefited 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 aforementioned declines in parking income have been more than recovered through the higher base rents being achieved.

The September 2022 rent roll showed the collateral was 97.8% occupied with an average base rent of $70.68 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). No tenants are scheduled to roll in 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. BioMed was founded in 2004 and focuses on acquiring, developing, leasing, owning, and managing laboratory and office space for the life sciences industry.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no environmental, social, and 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-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.

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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