DBRS Morningstar Confirms Ratings on All Classes of BBCMS 2021-AGW Mortgage Trust, Series 2021-AGW

DBRS Limited (DBRS Morningstar) confirmed its ratings on the following classes of Commercial Pass-Through Certificates issued by BBCMS 2021-AGW Mortgage Trust, Series 2021-AGW:

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

All trends are Stable.

The rating confirmations reflect the overall stable performance of the transaction since issuance. Despite slowdowns in the broader office market, the collateral continues to perform in line with issuance expectations. The collateral is expected to continue to benefit from its high proportion of medical tenants, which comprised 53.8% of the DBRS Morningstar base rent and had a weighted-average lease term of 16.3 years at issuance. Additionally, approximately 50.6% of the DBRS Morningstar base rent is derived from investment-grade tenants and/or tenants with investment-grade parent entities.

The loan is secured by the leasehold interest in 16 cross-collateralized suburban office buildings totaling approximately 2.0 million square feet on the North Shore of Long Island, New York. Sponsorship is provided through a joint venture between Angelo Gordon and the WE’RE Group. Angelo Gordon purchased a 95.5% leasehold interest in the portfolio from the WE’RE Group, which retained the remaining 4.5% leasehold interest and 100% of the leased fee interest.

Loan proceeds of $350.0 million were primarily used to refinance $234.6 million of existing debt, return $98.1 million of borrower equity, cover closing costs, and fund approximately $5.3 million in upfront reserves to be used for certain outstanding free rent, unfunded tenant improvement allowances, landlord work, and/or leasing commissions, as well as required repairs as identified in the mortgage loan agreement. Based on the appraiser’s as-is valuation of $458.7 million, the sponsor has approximately $108.7 million of unencumbered market equity remaining in the transaction. The interest-only (IO) loan has an initial two-year term, with an upcoming maturity in June 2023. The loan is structured with three one-year extension options available and a fully extended loan maturity in June 2026. The extension options do not have any performance triggers or financial covenant conditions, however, the options must be exercised at least 10 days prior to the loan’s maturity date and the borrower must purchase a replacement interest rate cap. Given the current environment, DBRS Morningstar has inquired about whether an interest rate cap has been purchased, but notes the minimal upcoming tenant roll, stable performance expectations, and investment-grade tenancy as factors mitigating the uncertainty surrounding the loan’s upcoming maturity.

The proximity of the properties to the major hospitals on Long Island’s North Shore makes the portfolio a highly desirable location for medical tenants, which comprise 53.8% of the DBRS Morningstar base rent. Medical tenants tend to receive above-market allocations for tenant improvements but will often spend additional capital on the build-out of their spaces. This larger upfront investment substantially increases potential relocation costs upon lease expiration and increases probability of renewal. Rollover is also limited through the fully extended term, with tenants representing no more than 12.0% of net rentable area (NRA) expected to roll in any single year. According to servicer commentary, tenants representing 6.6% of NRA are scheduled to roll in the next 12 months.

Individual properties are permitted to be released at 105% of the allocated loan amount (ALA) for the applicable property up to 10% of the original principal balance, 110% of the ALA for the applicable property up to 20%, and 115% thereafter. With regard to the individual assets located within the Lake Success Quadrangle, the release price shall equal 115% at any given time for seven properties, representing approximately 35.5% of the current pool balance, and 120% at any given time for four properties, representing approximately 19.1% of the current pool balance. DBRS Morningstar elected not to apply a penalty to the transaction’s capital structure as 63.5% of the portfolio by ALA is subject to a release price of 115% or greater, which DBRS Morningstar considers to be credit neutral. The loan allows for pro rata paydowns associated with property releases for the first 20% of the unpaid principal balance, and DBRS Morningstar applied a penalty to the capital stack as the deleveraging of the senior notes through the release of individual properties occurs at a slower pace compared with a sequential-pay structure. As of the March 2023 remittance, no properties have been released from the collateral.

As of the February 2023 rent roll, the portfolio was 84.5% occupied compared with the issuance rate of 86.8%. At issuance, the portfolio featured a diverse and granular roster of tenants in the medical, finance, and law industries. According to the February 2023 rent roll, the largest tenants are ProHealth Corp. (18.2% of the NRA; various lease expiries), Newsday (6.4% of the NRA; lease expiring in June 2035), and GEICO (3.7% of the NRA; lease expiring in October 2027). Leases of tenants representing 50.9% of base rent and 40.3% of leased area expire during the fully extended loan term. The YE2022 net cash flow (NCF) was reported at $30.3 million, in line with the DBRS Morningstar NCF of $30.0 million.

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 (May 17, 2022) at https://www.dbrsmorningstar.com/research/396929.

Class X-NCP 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 the 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.

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

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.

Rating North American CMBS Interest-Only Certificates (December 19, 2022) https://www.dbrsmorningstar.com/research/407577).

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].