DBRS Morningstar Confirms Ratings on All Classes of Natixis Commercial Mortgage Securities Trust 2019-NEMA

DBRS Limited (DBRS Morningstar) confirmed its ratings on the Commercial Mortgage Pass-Through Certificates, Series 2019-NEMA issued by Natixis Commercial Mortgage Securities Trust 2019-NEMA as follows:

-- Class A at AAA (sf)
-- Class B at AAA (sf)
-- Class X at AA (high) (sf)
-- Class C at AA (sf)
-- Class V-ABC at AA (sf)
-- Class D at BBB (sf)
-- Class V2 at BBB (sf)
-- Class V-D at BBB (sf)

DBRS Morningstar changed the trends on Classes D, V2, and V-D to Negative from Stable given the property’s most recent net cash flows (NCF), which remain depressed in comparison with the DBRS Morningstar NCF derived in 2020. The depressed performance is partly due to the overall decrease in business activity in the downtown core of San Francisco, which has struggled to recover since the Coronavirus Disease (COVID-19) pandemic. All other trends are Stable. The rating confirmations otherwise reflect the collateral’s improved performance since DBRS Morningstar’s last review in May 2022. Although cash flows remain below expectations, the property does benefit from its proximity to various technology headquarters, its luxurious property amenities, and the above-market rental rates of recently signed leases.

The transaction consists of a $199.0 million nonrecourse, first-lien mortgage loan secured by NEMA San Francisco, a 754-unit Class A luxury apartment complex with 11,184 square feet of commercial retail space in the South of Market (SoMa) submarket.

The trust loan is part of a $384.0 million whole loan and consists of a $130.0 million senior A-1 note and a $69.0 million senior-subordinate A-B note. There is $75.0 million of additional debt that is pari passu to the A-1 note and is held outside the trust. The trust loan has a 10-year term and pays interest only (IO) for the full term until its maturity on February 10, 2029.

The loan has been on the servicer’s watchlist since November 2020 for a low debt service coverage ratio (DSCR) and declining occupancy stemming from the pandemic, which caused residential exits as work-at-home options encouraged tenants to seek more affordable housing elsewhere. However, demand is expected to increase as restrictions have been lifted and companies and their employees gradually return to in-office working. In order to attract prospective tenants, the borrower has implemented an average concession of $3,890, approximately one month’s rent, on newly signed 12-month leases. The servicer has confirmed that these concessions will continue through 2023. Concessions have become common as a result of the pandemic and, according to Reis, multifamily properties in the SoMa submarket offered an average of 0.44 months in concessions as of YE2022.

According to the September 2022 financials, trailing-nine-month annualized NCF were reported at $13.1 million (reflecting a DSCR of 0.72 times(x)), up 20.4% from the YE2021 figure of $10.9 million (a DSCR of 0.60x) but remaining below the DBRS Morningstar NCF of $20.1 million. The increase in cash flows from YE2021 was derived primarily from an increase in gross potential rent (GPR), which remained below pre-pandemic levels as of September 2022.

Per the September 2022 rent roll, 711 of the 754 units were occupied, reflecting an occupancy rate of 94.3%. Occupancy has been increasing and has experienced a gradual recovery to pre-pandemic levels, as can been seen when compared with the YE2021 and YE2020 figures of 89.8% and 72.2%, respectively. The in-place average rent per unit is $3,183, which remains below the quoted market rent for the property of $3,995 per unit. Of the vacant units, 13 have been leased to future tenants as of September 2022, with an average rental rate of $4,385 per unit. As concessions burn off and occupancy continues to improve, these new leases are expected to increase the property’s average rental rate and GPR figures. Additionally, the retail portion of the property was 45.6% occupied as of Q3 2022, which remained unchanged since March 2021.

The SoMa submarket, according to Reis, saw an increase in asking rent to $3,932 per unit at YE2022 from $3,717 per unit at YE2021, and effective rent increased to $3,779 per unit at YE2022 from $3,558 per unit at YE2021. During the same period, vacancy tightened to 4.9% from 5.7%. Within a one-mile radius of the property, average asking rent was lower at $2,910 per unit with 5.0% vacancy.

ENVIRONMENTAL, SOCIAL, AND 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 (May 17, 2022) https://www.dbrsmorningstar.com/research/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

Class X is an 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 (March 16, 2023; https://www.dbrsmorningstar.com/research/410912).

Other methodologies referenced in this transaction are listed at the end of this press release.

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 rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process for this rating action.

DBRS Morningstar had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This is a solicited credit rating.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577

The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

North American Single-Asset/Single-Borrower Ratings Methodology (February 23, 2023)
https://www.dbrsmorningstar.com/research/410191/north-american-single-assetsingle-borrower-ratings-methodology

Rating North American CMBS Interest-Only Certificates (December 19, 2022)
https://www.dbrsmorningstar.com/research/407577/rating-north-american-cmbs-interest-only-certificates

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 12, 2022) https://www.dbrsmorningstar.com/research/402646

North American Commercial Mortgage Servicer Rankings (September 8, 2022) https://www.dbrsmorningstar.com/research/402499

Interest Rate Stresses for U.S. Structured Finance Transactions (August 30, 2022) https://www.dbrsmorningstar.com/research/402153

Legal Criteria for U.S. Structured Finance (December 7, 2022)
https://www.dbrsmorningstar.com/research/407008

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected]