DBRS Morningstar Finalizes Provisional Ratings on A10 Single Asset Commercial Mortgage 2023-GTWY

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2023-GTWY (the Certificates) issued by A10 Single Asset Commercial Mortgage 2023-GTWY (A10 SACM 2023-GTWY):

-- 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 (low)(sf)
-- Class F at B (low)(sf)

All trends are Stable.

The A10 SACM 2022-GTWY single-asset/single-borrower transaction is collateralized by the borrower’s fee simple interest in The Gateway at Wynwood (Gateway), a 219,532-sf office building, and an adjacent 5,348-sf retail building (2830 N Miami) in the Miami neighborhood of Wynwood. The Gateway was developed by the sponsor, R&B Realty, and delivered in December 2021 while the 2830 N Miami building was built in 1936 and acquired by the sponsor in 2015. As of loan closing, the collateral was 66.1% leased. Of the $92.0 million A-note, $80.5 million will be contributed to the trust; the remaining $11.5 million represents future funding for accretive leasing. The loan is structured with a three-year initial term and two one-year extension options that are exercisable subject to the lender’s discretion with no performance metric thresholds stated within the loan documents. As a result, this allows for ambiguity on expectations on loan performance and metrics throughout the fully extended loan term; however, for the extension options to be granted, the lender needs approval from 100% of the bondholders, per the transaction documents. The floating-rate loan is IO throughout the fully extended term and includes a step-up spread mechanism where once the loan is fully-funded the spread increases from 5.765% to 5.91%.

The Gateway at Wynwood comprises 24,078 sf of ground-floor retail, 195,454 sf of Class A office space, and a rooftop. The rooftop is leased to a restaurant tenant that will also have operations in a portion of the ground-floor retail. As of loan closing, 19.4% of the space was physically occupied and the remaining 106,007-sf of leased space is in varying stages of construction. The largest tenant is OpenStore, an e-commerce company focused on acquiring and managing Shopify stores. The tenant currently occupies 14,914 sf (6.6% of the NRA), and its expansion space is under construction, which will increase its footprint to 41,896 sf (18.6% of the NRA). Mindspace, a coworking space, is the second largest tenant, accounting for 30,272 sf (13.5% of NRA). The third-largest tenant, Thoma Bravo, a software private equity firm, recently signed a short-term 18 month lease for 20,930 sf (9.3% of NRA). The firm has a long-term lease signed at a neighboring property in Miami, but construction for that space is delayed and they are in need of office space in the area. The other office tenants include a commercial real estate company, a biotechnology company, and a cryptocurrency company, and no other tenant represents more than 5.4% of the NRA. The collective collateral is 19.4% physically occupied and 66.1 % leased; however, the sponsor has been unable to execute a new long-term lease since July 2022, which is partially due to the sponsor having insufficient funds for tenant improvements. Thoma Bravo is taking over the previously vacant spec-suites and the sponsor plans to build-out the eighth floor to a spec level. The diversity of industry at the property is seen as a positive, as it insulates the collateral from industry-specific downturns; however, the general lack of occupancy and the inability to execute a lease over the past six months are concerns, particularly given the rejuvenation and interest in the Wynwood submarket in addition to the current economic environment.

The Wynwood neighborhood is an up-and-coming office market and emerging tech hub that was previously known as an industrial district. Per the appraisal, office inventory has nearly doubled over the past 10 years, and four new construction projects, totaling 223,729 sf of office space or 10.3% of current inventory, will be added in the near term. While The Gateway at Wynwood is a recently delivered property, the neighborhood is experiencing a significant increase in inventory, which could limit the upside typically associated with a newly constructed building. The subject is claiming competitive rents, with a WA rental rate of $66.18 psf compared with the appraiser’s competitive set adjusted rent of $71.38. However, the property could struggle to be attractive and retain tenants as new product continues to enter the market unless above market concessions are granted. The substantial impact of inventory on vacancy has already been observed as seen by the 10-year average vacancy rate of 11.5% compared with 24.4% in Q2 2022, per the appraisal, or 31.2% in Q3 2022, per Reis. The sponsor’s primary goal is to increase occupancy at the property and $14.8 million ($11.5 million of future funding for future leases and $3.3 million from the sponsor for spec suite build-out) will be collected at closing.

The sponsor for this transaction is a family-owned, fully integrated real estate management firm based in New York. The sponsor’s real estate portfolio comprises over one million sf of commercial real estate and includes three office buildings in New York, four commercial buildings in varying locations, and the subject collateral. The sponsor is inexperienced in the Miami office market as the only other commercial building the sponsor owns in Miami was fully leased to a restaurant that closed per the restaurant’s website. The loan collateral represents the sponsor’s largest project to-date and represents 45.5% of the sponsor’s total portfolio value of $290.9 million. The principal was involved in family-centered lawsuits regarding the family’s real estate assets. The cases were settled in September 2022 and include a general release of all claims known and unknown between the named family members. Additionally, the sponsor is in litigation that started in September 2021 with a subcontractor who alleged nonpayment in relation to the construction of the asset. The subcontractor’s original claim was settled when the contractor paid such amount to the subcontractor; however, the contractor’s cross-claim against the sponsor of $1.2 million in relation to design revisions, traffic issues, and adverse weather conditions remains unsettled. The sponsor is considering making a claim against the contractor in a separate incident related to a $3.2 million construction payment made by the sponsor in 2020. The sponsor received a email with wire instructions to an account that was not the contractor's. It has been alleged that the contractor’s system had been hacked and when the theft was discovered the contractor demanded a second $3.2 million payment or construction would be stopped. In order to mitigate damages and complete construction, the sponsor paid under protest and is now seeking to recover the duplicate payment.

The sponsor’s net worth and liquidity are lower than the metrics DBRS Morningstar typically sees for a transaction of this size. The sponsor’s inexperience and low net worth and liquidity ratios resulted in a downward adjustment of the LTV thresholds. DBRS Morningstar applied an additional downward adjustment to the LTV thresholds in relation to the lack of disclosure of the aforementioned litigation by the sponsor during initial due diligence.

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. (May 17, 2022)

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.

Consistent with the A10 BAF 2021-D, A10 BAF 2020-C, and A10 BAF 2019-B transactions, there was no15E filing with respect to this transaction. DBRS Morningstar reviewed historical financial data (where available), borrower cash flow projections, Issuer cash flow estimates, internal credit memos from the Issuer, third-party reports, and other diligence items as part of its analysis in the determination of ratings.

The principal methodology is the North American Single-Asset/Single-Borrower Ratings Methodology, 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 rated entity or its related entities did not 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].

DBRS, Inc.
22 West Washington Street
Chicago, IL 60602 USA
Tel. +1 312 332-3429