DBRS Morningstar Comments on Industry Study Highlighting Leverage Issues for SASB Transactions in CMBS

When assigning and maintaining ratings for single-asset/single-borrower (SASB) transactions backed by office properties, a DBRS Morningstar value for the collateral property is derived based on the DBRS Morningstar net cash flow (NCF) figure and a stressed capitalization rate (cap rate) based on the DBRS Morningstar cap rate ranges. For office loans in particular, the DBRS Morningstar NCF is typically representative of a significant haircut to the issuer’s underwritten figure, usually due to a higher vacancy factor and higher leasing costs assumed by DBRS Morningstar. The DBRS Morningstar cap rate range for office properties is 6.0% to 10.0%; these stressed cap rates are applied to provide additional cushion against market cap rate expansion that could occur over the loan term. As the cash flow and cap rate approaches are typically more conservative than the issuer’s, the resulting DBRS Morningstar value is generally well below the appraised values for the underlying collateral, providing some buffer against the uncertainty of today’s market.