DBRS Morningstar Confirms Ratings on All Classes of Natixis Commercial Mortgage Securities Trust 2018-TECH

DBRS Limited (DBRS Morningstar) confirmed its ratings on all classes of the Commercial Mortgage Pass-Through Certificates, Series 2018-TECH issued by Natixis Commercial Mortgage Securities Trust 2018-TECH as follows:

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

The loan is secured by the borrower’s fee-simple interest in a portfolio of seven Class B office and light industrial research and development (R&D) buildings in the Golden Triangle area of Santa Clara, California. Built between 1970 and 1999, the collateral properties are all adjacent to one another, within the Scott Boulevard Corridor submarket, across the San Tomas Expressway from NVIDIA Corporation’s (NIVIDIA) corporate headquarters. According to the servicer’s reporting, roughly 67% of the total net rentable area (NRA) is configured as office space, while the remainder is configured as lab (R&D) space.

As of the December 2022 rent roll, the portfolio properties were 100% leased to two tenants, NVIDIA (60.7% of NRA) and Futurewei Technologies, Inc. (Futurewei) (39.3% of NRA) with average base rental rates of $29.43 per square foot (psf) and $33.18 psf, respectively, and a weighted-average consolidated rental rate of $30.82 psf. NVIDIA is a multinational technology company primarily recognized for its work designing and manufacturing graphics cards for computer gaming and professional markets. NVIDIA leases three buildings totaling 379,851 square feet (sf) of space across the portfolio, most recently extending one of its leases for 200,000 sf of NRA from February 2023 to September 2030. The remaining two leases are scheduled to expire in 2028 and 2029.

Futurewei is a U.S. subsidiary of the Chinese multinational technology company, Huawei Technologies Co. Ltd. (Huawei), which is the world’s largest telecommunications equipment manufacturer. Concurrent with execution of the lease extension that commenced in August 2017, Huawei delivered to the landlord letters of credit (LOCs) in the total amount of $5.5 million, subject to scheduled annual reductions and a final expiration date in July 2023. Futurewei leases 246,382 sf of space through four leases that are scheduled to expire in July 2027, with a one-time right to terminate option on July 31, 2024, four months before the fully extended maturity date of the loan. It has been previously reported that Futurewei cut 600 jobs at the subject properties in June 2019 and, as such, at least one space consisting of 46,300 sf (7.4% of the property NRA) was dark and available for sublease, with Futurewei continuing to pay its contractual rent obligations. The servicer has since confirmed that Futurewei has subleased all of its space to NVIDIA, with the sublease at one property not going into effect until Futurewei vacates the property in June 2024.

The servicer reported net cash flow (NCF) for YE2022 was $17.7 million, representing an 8.3% increase from YE2021 when NCF was reported at $16.3 million. This is also 30.4% higher than the DBRS Morningstar NCF of $12.3 million, which was derived when the ratings were assigned in July 2020. Despite cash flow growth, the debt service coverage ratio (DSCR) declined from 3.32 times (x) to 2.86x between YE2021 and YE2022, primarily because of an increase in interest rates. The DBRS Morningstar value of $164.4 million is based on a 7.5% cap rate and implies a loan-to-value ratio (LTV) of 91.2%, compared with a LTV of 57.4% when based on the appraised value at issuance. The DBRS Morningstar value implies durability already built into the current ratings which mitigates concerns surrounding the Futurewei space. The March 2023 reporting for the transaction showed $11.6 million in total reserves, including a $4.9 million LOC and $6.3 million in a tenant reserve account.

Loan proceeds of $195.0 million ($311 psf) and sponsor equity of $58.5 million financed the asset’s acquisition, which was priced at $240.4 million in 2018. Loan proceeds comprised a $150.0 million senior mortgage note and $45.0 million of mezzanine debt. The $150 million floating-rate interest-only (IO) senior note was structured with an initial maturity date in November 2022, with two one-year extension options. The borrower exercised its first extension option, pushing the current maturity date to November 2023. The sponsor, Preylock Real Estate Holdings, is a Los Angeles-based real estate acquisition and management firm, founded in 2016, with over $2 billion of assets under management (including at least four other Silicon Valley properties).

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).

Classes X-EXT and X-F are IO certificates that reference 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 the North American CMBS Surveillance Methodology (March 16, 2023), 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 info@dbrsmorningstar.com.

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 info@dbrsmorningstar.com.

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