DBRS Morningstar Confirms All Ratings on A10 Bridge Asset Financing 2020-C, LLC

DBRS, Inc. (DBRS Morningstar) confirmed its ratings on the following classes of notes issued by A10 Bridge Asset Financing 2020-C, LLC:

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

All trends are Stable.

The rating confirmations reflect the increased credit support to the bonds as a result of successful loan repayment, resulting in a collateral reduction of 63.6% since issuance. The increased credit support to the bonds serves as a mitigant to potential adverse selection in the transaction as eight of the remaining 12 loans are secured by mixed-use and office properties (71.8% of the current trust balance). Because of complications initially arising from the Coronavirus Disease (COVID-19) pandemic and the ongoing challenges with leasing available space, the borrowers of these loans have generally been unable to increase occupancy and rental rates to initially projected levels, resulting in lower-than-expected cash flows. Given the declining demand for office product across tenants, investors, and lenders alike, there is greater uncertainty regarding the borrowers’ exit strategies upon loan maturity. In conjunction with this press release, DBRS Morningstar has published a Surveillance Performance Update report with in-depth analysis and credit metrics for the transaction and with business plan updates on select loans. For access to this report, please click on the link under Related Documents below or contact us at [email protected].

The initial collateral consisted of 58 loans secured by cash-flowing assets, many of which are in a period of transition with plans to stabilize and improve the asset value. Of those 58 loans, 32 were cross-collateralized and cross-defaulted into separate portfolios. At issuance, the pool had an initial trust balance of $398.2 million comprising loan assets and $10.8 million held in a reserve account to fund future funding participations.

As of the May 2023 remittance, 12 of the original 58 loans remained in the trust with an outstanding balance of $142.7 million. Since DBRS Morningstar’s previous rating action in November 2022, four loans totaling $21.1 million have paid in full. The remaining loans in the transaction, beyond the mixed-use and office concentrations noted above, include three loans secured by retail properties (16.2% of the current trust balance) and one loan secured by a student housing property (12.1% of the current trust balance). In comparison with issuance, the transaction’s property type concentration was as follows: 38.2% of the trust balance was secured by retail, 27.0% of the trust balance was secured by office collateral, and 17.5% of the trust balance was secured by mixed-use properties.

The remaining loans are primarily secured by properties in urban and suburban markets. Five loans, representing 34.7% of the pool, are secured by properties with a DBRS Morningstar Market Rank of 3 or 4, which denotes a suburban market. Four loans, representing 43.2% of the pool, are secured by properties in urban markets, as defined by DBRS Morningstar, with a DBRS Morningstar Market Rank of 5, 6, or 7. In comparison with the pool composition at issuance, properties in suburban markets represented 54.9% of the collateral and properties in urban markets represented 18.3% of the collateral.

The Civica Center, 1050 Northwest 14th loan represents the only remaining loan in the trust with available future funding. The loan is secured by a three-story, 83,493-square-foot (sf) mixed-use property in Miami. As of the May 2023 remittance, the lender had advanced $6.0 million to fund capital expenditures to aid in property stabilization efforts. According to the collateral manager, the borrower has completed the capital improvement plan and a certificate of occupancy was issued by the City of Miami in October 2022. An additional $3.0 million of future funding remains available for leasing costs. According to the December 2022 rent roll, the property was 22.5% occupied by eight tenants.

As of the May 2023 remittance, one loan, representing 6.2% of the current trust balance, was in special servicing. The Melrose Crossing SC loan, which is secured by a Class B, 138,214-sf community shopping center in Melrose Park, Illinois, transferred to special servicing in February 2023 because of payment default. The loan has been delinquent since January 2023, following which a demand letter and notice of monetary default was sent to the borrower. According to the collateral manager, the borrower is unwilling to inject additional equity into the asset and requested a deed in lieu of foreclosure. An updated appraisal completed in April 2023 valued the property at $11.6 million, equating to a loan-to-value ratio of 93% on the whole loan. Based on outstanding servicing advances and special servicing fees, DBRS Morningstar is forecasting a loss of up to $500,000 upon liquidation; however, this figure does not include $0.6 million of escrows and reserves, which may ultimately reduce the loan exposure.

The Harbor Landing portfolio, which consists of four cross-collateralized and cross-defaulted loans with an aggregate loan balance of $37.1 million, is secured by four office buildings in Stamford, Connecticut. The loans are being monitored on the servicer’s watchlist after the single tenant at One Harbor Landing, Sema4, did not exercise an extension and expansion option to occupy additional space at Two Harbor Landing. While One Harbor Landing is 100.0% occupied, Two Harbor Landing was 45.2% occupied as of the September 2022 rent roll, down from 52.4% as of YE2020 and 66.4% at issuance. As of September 2022, the property reported negative cash flow.

At closing, the borrower’s strategy for the building was to execute short-term leases with landlord termination options to accommodate the potential expansion of Sema4. The subject loan is at heightened risk as the property reported negative cash flow as of September 2022, and backfilling the vacant space will likely be challenging in a weakened market, highlighted by a submarket vacancy rate of 28.8%, according to Q1 2023 Reis data. In addition to market concerns, the lack of a future funding component or leasing reserves increases the credit risk profile. Mitigating the concerns with Two Harbor Landing is the strength of the remaining properties in the portfolio, as One Harbor Landing was 100% occupied, Three Harbor Landing was 80.4% occupied, and Five Harbor Landing was 88.6% occupied as of the September 2022 rent roll. According to the annualized Q3 2022 financials provided by the collateral manager, the property generated net operating income (NOI) of $2.3 million, which is 33.5% below the DBRS Morningstar Stabilized Net Cash Flow (NCF) derived at issuance of $3.5 million and 16.2% below the DBRS Morningstar As-Is NCF. The Q3 2022 NOI resulted in a debt service coverage ratio of 1.30 times and a debt yield of 6.3%.

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/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (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 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.

DBRS Morningstar notes that a sensitivity analysis was not performed for this review as the transaction is in wind down, with only 12 remaining loans. In these cases, the DBRS Morningstar ratings are typically based on a recoverability analysis for the remaining loans.

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

North American CMBS Multi-Borrower Rating Methodology (March 16, 2023) / North American CMBS Insight Model Version 1.1.0.0,
https://www.dbrsmorningstar.com/research/410913/north-american-cmbs-multi-borrower-rating-methodology

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 12, 2022)
https://www.dbrsmorningstar.com/research/402646/dbrs-morningstar-north-american-commercial-real-estate-property-analysis-criteria

North American Commercial Mortgage Servicer Rankings (September 8, 2022)
https://www.dbrsmorningstar.com/research/402499/north-american-commercial-mortgage-servicer-rankings

Interest Rate Stresses for U.S. Structured Finance Transactions (August 30, 2022)
https://www.dbrsmorningstar.com/research/402153/interest-rate-stresses-for-us-structured-finance-transactions

Legal Criteria for U.S. Structured Finance (December 7, 2022)
https://www.dbrsmorningstar.com/research/407008/legal-criteria-for-us-structured-finance

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