DBRS Morningstar Confirms Ratings on All Classes of Citigroup Commercial Mortgage Trust 2020-420K

DBRS Limited (DBRS Morningstar) confirmed its ratings on the Commercial Mortgage Pass-Through Certificates Series 2020-420K issued by Citigroup Commercial Mortgage Trust 2020-420K as follows:

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

All trends are Stable.

The rating confirmations reflect the overall stable performance of the transaction which remains in line with DBRS Morningstar’s expectations. Although there has been relatively limited seasoning with minimal updates to the financial reporting since the transaction closed in November 2020, the loan continues to exhibit healthy credit metrics, with the servicer reported financials for YE2021 and YE2022 reflecting consistent year-over-year growth in revenue and net cash flow (NCF).

The loan is secured by the borrower’s fee-simple interest in two 22-story luxury residential towers, 416 Kent and 420 Kent, located along the waterfront in the Williamsburg neighbourhood of Brooklyn, New York. The high-rise buildings consist of 857 residential units and 18,827 square feet (sf) of commercial space, with extensive amenities including two parking garages consisting of 429 parking spaces, rooftop pools, resident lounges, a fitness centre, yoga studios, and co-working spaces. The sponsor and guarantor for the mortgage loan is Eliot Spitzer, the former governor of New York and the head of Spitzer Enterprises. Spitzer Enterprises has a 60-plus year history of developing, owning, and managing real estate in New York City and Washington, D.C.

The residential portion of the development benefits from significant 421-a tax exemptions during the loan term and, in return, the developer has designated between 20% and 25% of the units at each address as affordable housing (65 units at 416 Kent and 121 units at 420 Kent). The market-rate units at 416 Kent are generally not subject to any restrictions on rental rates, while the market-rate component at 420 Kent is subject to limitations on rental rate increases set by the New York City Rent Guidelines Board during the 25-year exemption period. The tax abatements exempt each of the properties from 100.0% of the taxes on the improvements and will extend beyond loan maturity.

The $388.0 million total debt package consists of a mortgage loan of $298.0 million and a mezzanine loan of $90.0 million. The mortgage loan comprises $216.9 million in senior notes and $81.1 million in junior notes. The trust is made up of the $156.9 million senior A-1 note and the $81.1 million junior B-1 note (totalling $238.0 million). The $60.0 million A-2 note is pari passu with the senior note but is held outside the trust (contributed to the BMARK 2020-B21 transaction, which is not rated by DBRS Morningstar). The mezzanine loan is not an asset of the trust. The notes evidence a 10-year, fixed-rate, interest-only (IO) loan, maturing in November 2030, with no extension options. Loan proceeds were used to refinance $381.5 million of existing debt, pay closing costs, fund upfront reserves, and return equity to the sponsor.

According to the trailing 12-month (T-12) ended March 31, 2023, financials the property was 97.1% occupied, an increase over the YE2022 occupancy rate of 94.5% and in line with the YE2021 occupancy rate of 97.4%. Likewise, reported NCF has trended upward with the T-12 ended March 31, 2023, figure of $25.7 million (debt service coverage ratio (DSCR) of 1.74 times (x)), greater than the YE2022, YE2021, and DBRS Morningstar figures of $24.4 million (DSCR of 1.66x), $16.8 million (DSCR of 1.14x) and $21.8 million (DSCR of 2.15x), respectively.

According to Reis, the Kings County submarket had an average effective rent of $2,569 per unit and an average vacancy rate of 4.2% as of Q2 2023. At issuance, DBRS Morningstar noted the property was outperforming the submarket given its above-average property quality and finishes with in-place rent for market units averaging $4,504 and $4,124 for 416 Kent and 420 Kent, respectively; the in-place rent for the smaller subset of affordable units averaging $1,084 and $932, respectively. An up-to-date rent roll was requested but not received.

At issuance, DBRS Morningstar derived a value of $348.6 million based on a capitalization rate of 6.25% and DBRS Morningstar NCF of $21.8 million, resulting in a DBRS Morningstar loan-to-value ratio (LTV) of 85.5% compared with the LTV of 51.0% based on the appraised value at issuance. The property benefits from its 421a tax abatements, high-end amenity package, and desirable location along the East River. DBRS Morningstar made positive qualitative adjustments to the final LTV sizing benchmarks, totalling 10.0% to account for the cash flow volatility, property quality, and market fundamentals.

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 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; 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
DBRS Tower, 181 University Avenue, Suite 700
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].