DBRS Morningstar Confirms Ratings on All Classes of MOFT Trust 2020-ABC

DBRS Limited (DBRS Morningstar) confirmed its ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2020-ABC issued by MOFT Trust 2020-ABC:

-- Class X-A at A (sf)
-- Class A at A (low) (sf)
-- Class B at BBB (low) (sf)
-- Class C at BB (low) (sf)
-- Class D at B (low) (sf)

All trends are Stable.

The rating confirmations reflect the overall stable performance of the transaction, which remains consistent with DBRS Morningstar’s expectations at issuance.

The 10-year, fixed-rate, interest-only (IO) loan is secured by the fee-simple interest in three Class A office buildings totaling more than 950,000 square feet (sf) in Sunnyvale, California. The properties, referred to as the A, B, and C buildings, were built in 2008 by the Jay Paul Company, an affiliate of the loan sponsor, and are a component of the larger Moffett Towers technology office campus. The three buildings are 100% leased to five tenants, including two investment-grade tenants, Google LLC (Google; a subsidiary of Alphabet Inc.) and Comcast Cable Communications (Comcast), accounting for 97.4% of the net rentable area (NRA).

The transaction consists of a $328.0 million participation in a $770.0 million whole mortgage loan. The components of the whole mortgage loan securitized in this transaction include $1.0 million of the senior trust notes and all of the $327.0 million in junior trust notes. The remaining $442.0 million of senior trust notes are securitized across seven commercial mortgage-backed securities (CMBS) transactions, including two DBRS Morningstar-rated transactions (BMARK 2020-IG2 and BMARK 2020-IG3). Loan proceeds paid off existing debt totaling $364.0 million, returned $314.1 million of cash equity to the sponsor, covered unfunded sponsor obligations totaling $89.2 million, and paid closing costs of $2.7 million.

According to the November 2022 rent roll, the property remains 100% occupied, with minimal rollover risk in the next 12 months. Google occupies 85.7% of NRA, and the tenant’s parent company, Alphabet Inc., is rated investment grade. The three Google leases feature staggered lease expiration dates between 2026 and 2031, which reduces rollover risk. The second-largest tenant is Comcast, representing 11.7% of the NRA with a lease expiration in October 2027.

At issuance, Google received rental abatements upon taking possession of Building C in March 2020 and Building B in January 2021, with those abatements fully burning off in October 2021. As a result, the YE2022 net cash flow (NCF) and debt service coverage ratio of $59.8 million and 2.19 times, compares favorably with the YE2021 and DBRS Morningstar NCFs of $35.9 million and $47.9 million, respectively. The Google leases have no termination options and have seven-year extension options.

In January 2023, Google announced it was reducing its global workforce by approximately 12,000 roles, terminating nearly 3,000 employees in California and New York. This decision was tied to cost-cutting measures from the company because off the slowdown in the current economic environment, with layoffs spanning across product areas, levels, and functions. It is uncertain whether this will affect the subject; however, DBRS Morningstar will continue to closely monitor for developments.

According to Reis, Class A properties within the Sunnyvale submarket reported a vacancy rate of 22.1% as of February 2023, compared with the average vacancy rate of 16.5% in 2022, suggesting weakening submarket fundamentals given the post-pandemic adoption of remote work by technology companies, which predominantly occupy the area.

The loan benefits from a strong sponsor, which is an affiliate of Jay Paul Company, a well-known San Francisco real estate owner and developer with an extensive portfolio of build-to-suit Class A office assets. The firm has expertise in building and leasing office space in Silicon Valley for technology firms including Amazon, Facebook, Microsoft, and HP, among others. Jay Paul Company has developed and/or acquired at least 13 million sf of office space and closed more than $10 billion in debt and equity financing since its inception.

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

Class X-A 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.

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.

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

North American Single-Asset/Single-Borrower Ratings Methodology (February 23, 2023; https://www.dbrsmorningstar.com/research/410191)

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].