DBRS Morningstar Confirms Ratings on All Classes of Natixis Commercial Mortgage Securities Trust 2018-SOX

DBRS Limited (DBRS Morningstar) confirmed its ratings on the Commercial Mortgage Pass-Through Certificates, Series 2018-SOX issued by Natixis Commercial Mortgage Securities Trust 2018-SOX as follows:

-- Class A at AAA (sf)
-- Class B at AAA (sf)
-- Class X at AA (sf)
-- Class C at AA (low) (sf)
-- Class V-ABC at AA (low) (sf)
-- Class D at A (low) (sf)
-- Class V-D at A (low) (sf)
-- Class E at BBB (low) (sf)
-- Class V-E at BBB (low) (sf)
-- Class V2 at BBB (low) (sf)

All trends are Stable.

The transaction is secured by the $110.0 million fee-simple interest in the first 12 floors of the 20-story building, which offers 32,000 square feet (sf) of meeting space; three restaurants; and a spa, health, and fitness centre at the InterContinental Boston hotel. The property is master leased by the sponsor to InterContinental Hotels Group Resources, Inc. (IHG), under a triple net lease on a 99-year initial term with two 20-year extension options, and a fully extended maturity date stretching to July 2145. The lease is guaranteed by Six Continents, PLC, which is a wholly owned subsidiary of InterContinental Hotels Group, with an expiration of the guarantee in July 2032, four years after the loan’s maturity date. The luxury residential condominiums (The Residences at the InterContinental), contained to the top eight floors, and the parking garage are not part of the loan collateral. Additional financing includes a subordinate B note with an issuance balance of $65.0 million subordinate and two mezzanine loans with issuance balances of $60.0 million and $30.0 million, respectively, held outside of the trust.

The 424-room, full-service, Four Diamond AAA-rated hotel is in downtown Boston, adjacent to the Financial and Seaport districts, and is self-managed by IHG. The property benefits from proximity to the Boston Convention and Exhibition Center (BCEC), New England Aquarium, and the Boston Tea Party Ships & Museum in addition to various shops and restaurants. In addition to the property’s proximity to various convention centers and tourist attractions, the property is also a short walk to the South Station rail line, allowing the property to capture demand from multiple travel segments. The hotel completed a $20.0 million renovation in June 2020, which included a renovation of all guest rooms and corridors as well as meeting spaces and the two main restaurants. The loan is sponsored by Extell Boston Atlantic LLC (Extell), a subsidiary of Extell Development. Since Extell was founded in 1989, the company has developed more than 25.0 million sf of luxury residential, commercial, hospitality, and mixed-use properties throughout major markets in the U.S. with a concentration in New York.

As a result of the borrower having entered into a master lease of the property, the rent from the master lease represents the primary income source for the repayment of the loan. The lease rent stepped up to $21.1 million in August 2022 (the 17th year of the lease agreement) from $16.0 million. The current lease rent is scheduled to be fixed until 2042 (the 36th year of the lease agreement). According to the terms of the loan, the borrower is not required to report information on the performance of the tenant unless the IHG lease is terminated. As a result, no occupancy or financial information was provided for the hotel operations. The borrower has remained current on its debt service obligations, and based on the trailing-12 month financial reporting for the period ended March 30, 2023, the loan reported a net cash flow of $19.4 million compared with $15.9 million at issuance, and a debt service coverage ratio of 3.62 times (x) (2.25x when including the non-trust B-note), compared with 2.97x (1.84x when including the non-trust B-note) since issuance.

At issuance, DBRS Morningstar noted in its analysis that the DBRS Morningstar derived net cash flow of $14.0 million did not support the $16.0 million master lease at that time, and the shortfall would be further exacerbated following the master lease rent step up to $21.1 million in August 2022. While DBRS Morningstar doesn’t view the cash flow discrepancy as an issue during the loan term, a heightened level of balloon risk exists. According to the BCEC’s event calendar, the convention centre is hosting multiple conventions and events each month throughout the end of the year, with the busiest months being July, October, and November. As a result of upcoming conventions and events, DBRS Morningstar anticipates the subject will benefit from the increased demand. A report released by Pinnacle Advisory Group forecasts that corporate demand in Boston and Cambridge will reach approximately 70% of 2019 levels, and group demand has seen a robust increase, with demand reaching approximately 85% of 2019 levels as many events have been rescheduled since the onset of the pandemic.

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 (July 4, 2023) at DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings https://www.dbrsmorningstar.com/research/416784.

Class X is an interest-only (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; 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 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 Limited
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Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577

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)

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/417279.

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