DBRS Morningstar Confirms Ratings on All Classes of SOHO Trust 2021-SOHO

DBRS Limited (DBRS Morningstar) confirmed its ratings on the Commercial Mortgage Pass-Through Certificates, Series 2021-SOHO issued by SOHO Trust 2021-SOHO as follows:

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

All trends are Stable.

The rating confirmations reflect the stable performance of the transaction since the last rating action, which remains in line with DBRS Morningstar’s expectations from issuance.

The collateral consists of the borrower’s fee-simple interest in a 786,891-square-foot (sf), Class A office/retail property known as One SoHo Square, comprising two adjacent mid-rise office buildings separated by an adjoined 19-story glass tower on the northwest corner of Sixth Avenue and Spring Street in Manhattan’s SoHo neighborhood. The submarket has seen an increased demand in leasing over the past few years, most notably from technology companies, with Google, Facebook, and Amazon taking space in the vicinity. The sponsor, Stellar Management (Stellar), purchased the assets in 2012 and subsequently invested approximately $268.0 million in base building upgrades to reposition the asset. Stellar has more than 35 years of ownership and management experience in New York City and currently owns more than 2.0 million sf of office space, and more than 12,000 residential units across 100 buildings in New York City and Miami.

Whole loan proceeds of $785.0 million comprise 23 promissory notes: 20 senior A notes totaling $470.0 million and three junior B notes totaling $315.0 million. The subject transaction totals $316.0 million and consists of three senior A notes with an aggregate principal balance of $1.0 million and the three junior B notes. The remaining companion senior A notes are securitized in other transactions not rated by DBRS Morningstar. Additionally, the mortgage lenders provided a $120.0 million mezzanine loan for a total debt of $905.0 million. The all-in DBRS Morningstar loan-to-value ratio, inclusive of the mezzanine debt, is high at 109.9%.

The property benefits from its investment-grade tenancy, which includes the three largest tenants at the property: Flatiron Health (Flatiron) (28.0% of the net rentable area (NRA), expiring February 2031), Aetna Inc. (13.3% of the NRA, expiring July 2029), and MAC Cosmetics (11.1% of the NRA, expiring March 2034). In addition, five tenants, collectively representing 59.8% of the NRA, are headquartered at the property and have long-term leases. There is minimal rollover risk with only 22.3% of the NRA scheduled to roll throughout the loan term. The earliest lease expiration, Warby Parker, is scheduled to expire in January 2025. Tenants at the property pay an average rental rate of $40.50 per square foot (psf), which, according to Reis, is below the South Broadway submarket average rental rate of $57.00 psf as of YE2022. The YE2022 vacancy rate of 8.4% remains in line with the submarket vacancy of 11.5%.

Two tenants, Flatiron and Juul Labs (Juul; 6.9% of the NRA), have space marketed for sublease. Juul listed its entire 55,000-sf space for sublease, with Flatiron initially putting all of its space in the West building (48.7% of its space, 13.6% of the NRA) up for sublease, but later reduced the square footage listed for sublease to less than 15.0% of the NRA. According to a September 23, 2022, article by The Real Deal, Flatiron had successfully subleased 30,700 sf (13.7% of its space, 3.8% of the NRA) to Yotpo Ltd. (Yotpo), which took effect on October 1, 2022. The overall space available for sublease at the property decreased to 8.0% of total NRA after Yotpo took occupancy.

For the trailing nine months ended September 30, 2022, the annualized net cash flow (NCF) was reported at $56.9 million (reflecting a debt service coverage ratio (DSCR) of 2.04 times (x)), in line with the YE2021 figure of $56.7 million (a DSCR of 2.05x) and the DBRS Morningstar NCF of $54.7 million at issuance. Although there is some subleasing activity and the loan’s leverage point is considered high, these downside risks are mitigated by the property’s strong tenancy, minimal tenant rollover, and desirable location. DBRS Morningstar expects that the asset will continue to perform in line with its original projections.

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).

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
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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)

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].