DBRS Morningstar Confirms All Ratings on Classes of COMM 2020-SBX Mortgage Trust

DBRS Limited (DBRS Morningstar) confirmed its ratings on the following classes of COMM 2020-SBX Mortgage Trust Commercial Mortgage Pass-Through Certificates issued by COMM 2020-SBX Mortgage Trust:

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

All trends are Stable.

The rating actions reflect the overall stable performance of the transaction, which benefits from investment-grade tenancy in Starbucks Corporation (Starbucks) that occupies 89.0% of the collateral property’s net rentable area (NRA) and is signed to a long-term lease through 2038, nearly 10 years beyond the loan’s maturity date. Given the investment-grade tenancy with no termination options and significant contractual rent escalations, performance is expected to remain stable.

The transaction is collateralized by the borrower's fee-simple interest in the Starbucks Center, a 1.4 million square-foot (sf) Class A LEED Gold office building with retail, storage, and parking components, and the 108,000-sf Home Depot parcel, a single-tenant anchored retail property, in the SODO submarket of Seattle (two miles south of the Seattle central business district). The collateral also includes two seven-story parking structures.

Loan proceeds of $425.0 million were used to refinance existing debt of $140.0 million, fund upfront reserves of $88.3 million, pay closing costs of $26.5 million, and return $170.2 million of equity to the sponsor. The loan is sponsored by SODO Center, Inc. (SODO Center), and the borrower is indirectly wholly owned by SODO Center, which is controlled by Peter P. Nitze and Kevin Daniels.

The full-term interest-only (IO) loan has an anticipated repayment date (ARD) of November 2025 and a final maturity date of November 2028. The ARD structure of the loan, which requires that all net cash flow (NCF) after debt service be applied to the principal during a three-year tail, coupled with Starbucks’ lease term relative to the ARD and stated maturity, serves to reduce maturity default risk.

The office component serves as the global headquarters for Starbucks, benefiting from the long-term, institutional-grade tenancy. Starbucks has been at the property since 1990 and has a lease expiration in September 2038 with three 7.5-year renewal options and no contraction or termination options. Starbucks has invested heavily into the property, having spent approximately $128.0 million of its own capital on build-outs, lobby renovations, and amenities between 2015 and 2020. Starbucks is currently paying below market rent of $11.08 per square foot (psf) as of the March 2023 rent roll; however, the lease is structured with significant rent steps, which will bring its rental rate to $28.17 psf in October 2025.

The collateral’s other major tenant, The Home Depot (7.0% of NRA), another investment-grade tenant, leases the entire retail component of the property. The tenant recently exercised the first of its two five-year extension options, extending its lease through to 2029. The subject serves as the retailer’s only location in downtown Seattle. In addition to The Home Depot, other notable lease expirations prior to the loan’s final maturity in November 2028 include Amazon Services Inc. (3.1% of the NRA), which is scheduled to expire in August 2026; however, the tenant does have four five-year extension options remaining.

Per the Q1 2023 financials, the consolidated annualized NCF was $17.6 million (reflecting a debt coverage service ratio (DSCR) of 1.74 times (x)), which is below the DBRS Morningstar figure of $39.9 million (reflecting a DSCR of 3.95x); however, DBRS Morningstar accounted for Starbucks’ contractual rent step of $28.17 psf, which takes effect in October 2025. While servicer reported financials reflect relatively consistent performance since issuance, the loans coverage has fallen sharply since issuance as a result of the rising interest rates.

According to the March 2023 rent roll, the collateral had an occupancy rate of 99.8% and an average rental rate of $11.91 psf. According to Reis, as of Q2 2023, office properties in the Central Seattle submarket reported an average vacancy rate of 19.0%, an average effective rental rate of $35.15, and an average asking rental rate of $45.81, compared with the Q2 2022 figures of 16.8%, $35.63, and $45.25 psf, respectively. At issuance, DBRS Morningstar noted Starbucks’ below-market rental rate of $8.52 psf, which was a key variable of Starbucks’ early expansion plan in 1995 and allowed Starbucks to lease the warehouse space at a low rental rate with the requirement that it would fund any building system and tenant improvements.

At issuance, DBRS Morningstar derived a value of $591.0 million based on a DBRS Morningstar NCF of $39.9 million and a capitalization rate of 6.75%, resulting in a DBRS Morningstar loan-to-value ratio (LTV) of 71.9% compared with the LTV of 51.8% based on the appraised value at issuance. DBRS Morningstar made positive qualitative adjustments to the final LTV sizing benchmarks, totaling 6.0% to account for the cash flow volatility, property quality, and market fundamentals. As a result of this amortization during the tail period, DBRS Morningstar also elected to increase its LTV thresholds by 2.0% to account for the amortization benefit.
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 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 (August 23, 2023); https://www.dbrsmorningstar.com/research/419593

-- 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].