DBRS Morningstar Confirms Ratings on All Classes of BBCMS 2020-BID Mortgage Trust

DBRS, Inc. (DBRS Morningstar) confirmed the following ratings of the Commercial Mortgage Pass-Through Certificates, Series 2020-BID issued by BBCMS 2020-BID Mortgage Trust:

-- Class A at AAA (sf)
-- Class B at AA (high) (sf)
-- Class C at A (high) (sf)
-- Class X-EXT at A (low) (sf)
-- Class D at BBB (high) (sf)
-- Class E at BB (high) (sf)
-- Class HRR at BB (sf)

All trends are Stable.

The rating confirmations reflect the stable performance of the transaction, which has remained in line with DBRS Morningstar’s expectations since issuance.

The transaction is collateralized by a 506,000-square-foot, Class A office building in the Upper East Side submarket of Manhattan. The building is fully leased to Sotheby’s, one of the world’s largest auction houses, and has served as the company’s global headquarters since 1980. The tenant is an affiliate of the borrower, which is indirectly owned by BidFair USA, Inc. Sotheby's executed a new 15-year triple net lease with three 10-year extension options in concurrence with the closing of the mortgage loan in September 2020. After being taken private in 2019, updated information on Sotheby’s revenues has been limited but news reports in late 2022 suggested the company would close the year with record-breaking sales of $8.0 billion, an increase over the $7.3 billion figure reported for YE2021 and far surpassing the pre-Coronavirus Disease (COVID-19) pandemic sales of $4.8 billion reported for YE2019, when the company reported a loss of $71.2 million and raised significant doubt regarding its ability to operate as a going concern in its 2019 annual report.

The trust loan of $423.5 million along with $60.0 million of mezzanine debt (held outside of the trust) and $10.7 million of borrower equity, refinanced existing debt, and funded reserves at issuance. The interest-only (IO) loan has a floating interest rate and is structured with an initial two-year term and three one-year extension options. The borrower has exercised one of the three extension options and is evaluating options ahead of its upcoming maturity in October 2023. The transaction benefits from a borrower-funded interest reserve of approximately $16.7 million contributed at issuance.

Based on the YE2022 financials, the loan reported a net cash flow (NCF) of $41.5 million, which is unchanged from the YE2021 NCF of $41.5 million; however, because of the increased interest rates, the loan’s debt service coverage ratio fell to 1.43 times (x) as of YE2022, down from 1.80x at YE2021. According to the most recent roll provided by the servicer, the single-tenant lease is structured with rental increases at Year 6 and Year 11.

Despite investing more than $50 million in its space in 2018 and 2019 alone, in June 2023, Sotheby’s announced plans to relocate its New York headquarters along with its gallery spaces, auction room, and offices from its current location at the subject property into the Bruer Building, situated near Manhattan’s Museum Mile, in phases beginning with the relocation of the New York sales room and galleries in 2024 and opening to the public the following year in 2025, which coincides with the fully extended maturity date. DBRS Morningstar has questions out to the servicer regarding whether the tenant has plans to continue to operate at the subject property in any capacity, sub-leasing momentum, and/or the possibility of an early lease termination.

At closing, DBRS Morningstar noted the subject property is also well positioned to capture space demands in the area coined as Hospital Row that is home to a number of hospital and biomedical research institutions. In the event that the Sotheby’s space needs change, the subject’s proximity to a cluster of major medical office space users, including New York-Presbyterian/Weill Cornell Medical Center and the Hospital for Special Surgery, combined with its large floorplates and freight elevator infrastructure lend itself to being a logical choice for conversion to a medical office. Discussions around subleasing a portion of the property to a healthcare tenant began prior to the coronavirus pandemic with a letter of intent that was put on hold just before securitization but continues to persist with proposed terms that are viewed as credit positive including long-term, investment-grade tenancy with a nonborrower affiliate at a rental rate that is at or above the market rate.

The loan has a relatively low loan-to-value (LTV) ratio of 51.0% on the senior debt and 58.3% on the whole loan based on the appraiser’s value of $830.0 million at issuance. This compares with the DBRS Morningstar LTV ratio of 81.5% on the senior debt and 93.0% on the whole loan based on the DBRS Morningstar value of $519.7 million. The DBRS Morningstar value is derived using a NCF of $33.7 million and a cap rate of 6.50%. The property benefits from a substantial floor value based on its desirable location demonstrated by the appraiser’s concluded land value at issuance of approximately $485.0 million, which covers the entire whole-loan balance, including the $60 million mezzanine loan, and provides additional downside protection. As further support, the appraiser determined a hypothetical go-dark value for the subject property of $575.0 million at issuance, which also covers the entire loan balance, and would result in a hypothetical go-dark LTV of 73.7% on the senior debt and 84.1% on the whole loan.

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/416784 (July 4, 2023).

Class X-EXT 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 credit ratings are subject to surveillance, which could result in credit 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), which can be found on 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 credit rating was initiated at the request of the rated entity.

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

This is a solicited credit rating.

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

DBRS, Inc.
22 West Washington Street
Chicago, IL 60602 USA
Tel. +1 312 332-3429

The credit 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 (June 9, 2023;
https://www.dbrsmorningstar.com/research/415687)

-- 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].