DBRS Morningstar Changes Trends on Four Classes of BBCMS Mortgage Trust 2020-C7 to Negative From Stable, Confirms Ratings on All Classes

DBRS Limited (DBRS Morningstar) confirmed its ratings on the Commercial Mortgage Pass-Through Certificates, Series 2020-C7 issued by BBCMS Mortgage Trust 2020-C7 as follows:

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-5 at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class X-A at AAA (sf)
-- Class X-B at AAA (sf)
-- Class A-S at AAA (sf)
-- Class B at AA (high) (sf)
-- Class C at A (high) (sf)
-- Class D at BBB (low) (sf)
-- Class X-E at BB (high) (sf)
-- Class E at BB (sf)
-- Class X-F at B (high) (sf)
-- Class F at B (sf)

In addition, DBRS Morningstar changed the trends on Classes E, F, X-E, and X-F to Negative from Stable. All other trends remain Stable.

The rating confirmations reflect the overall stable performance of the transaction as exhibited by the weighted-average (WA) debt service coverage ratio (DSCR) that is above 2.0 times (x) based on the most recent year-end financials. However, there are some challenges for the pool considering the concentration of loans secured by office properties, with exposure to more challenged markets in San Francisco and New York. In addition, the Meridian One Colorado loan (Prospectus ID#17, 2.0% of the current pool balance), which is secured by a suburban office property in Englewood, Colorado, was recently transferred to special servicing with the borrower looking to transfer ownership. Considering the loan-specific challenges, the Negative trends on the most junior bonds are supported.

As per the August 2023 remittance, all 49 of the original loans remain in the trust, with an aggregate balance of $800.0 million, representing minimal collateral reduction of 1.0%. Twenty-five loans, representing 64.5% of the pool balance, are interest only (IO). Twelve loans, representing 22.7% of the pool, are structured with partial IO periods, of which seven loans have begun to amortize. There are four loans that are fully defeased, representing 1.7% of the pool. Seven loans, representing 24.8% of the pool, are on the servicer’s watchlist and are being monitored primarily for declines in occupancy rate and/or DSCRs. There is one loan in special servicing, representing 2.0% of the pool.

The Meridian One Colorado loan had a three-year IO period that ended in January 2023. The loan transferred to the special servicer in July 2023 as a result of imminent monetary default as the largest tenant, Burns & McDonnell Engineering (67.5% of the net rentable area (NRA)), vacated the property at its lease expiration in June 2023. Consequently, occupancy dropped to approximately 25.0% as per the servicer’s August 2023 site inspection report. The loan is structured with a cash flow sweep that is triggered 15 months prior to the tenant’s lease expiration. DBRS Morningstar has requested information from the servicer regarding the outstanding balance of the cash management account. The stated workout is foreclosure, and as per the most recent servicer commentary, discussions regarding a consensual transfer of title is ongoing.

As per Reis, office properties in the Southeast Suburban submarket reported a vacancy rate of 20.0% in Q2 2023, compared with a Q2 2022 vacancy rate of 18.4%, indicating continued softening of the submarket. Given the low in-place occupancy coupled with the soft submarket and general challenges affecting the office landscape, the property’s value has likely declined from issuance when it was appraised at $23.6 million. For this review, DBRS Morningstar analyzed this loan with a liquidation scenario based on a stressed haircut to the issuance value, resulting in a loss amount approaching $6.5 million, which is well-contained in the first loss piece of the bond stack.

The largest loan in the pool, Parkmerced (Prospectus ID#1, 7.5% of the current pool balance), is secured by a 3,165-unit apartment complex in San Francisco. The noncontrolling pari passu loan has other pieces of the whole loan secured in several transactions, including four other transactions that are also rated by DBRS Morningstar. It was added to the servicer’s watchlist in March 2021 because of performance declines with the loan reporting below break-even DSCRs in the last several years and is currently cash managed. Occupancy dropped from issuance levels of 94.3% to around the 70.0% range over the last two years but had improved to 81.2% as per the March 2023 rent roll. The transaction closed during the height of the Coronavirus Disease (COVID-19) pandemic in 2020, and DBRS Morningstar had noted declines in rent caused by disruptions related to the pandemic. In addition, a portion of the units are under the Section 8 rent subsidy program.

The subject is well located, adjacent to San Francisco University’s campus and directly east of Lake Merced and Lake Merced Park. According to Reis, multifamily properties in the West San Francisco submarket reported a Q2 2023 vacancy rate of 1.2%, same as the Q2 2022 vacancy rate. The property benefits from an experienced sponsor, Maximus Real Estate Partners, and a low loan-to-value ratio (LTV) of 25.9% at issuance. The sponsor’s long-term development plan is scheduled for after the loan term ending in December 2024, when all the townhomes will be demolished and replaced by apartment towers. Although stabilization efforts are taking longer than expected following the impacts of the pandemic and the general challenges within the San Francisco market, occupancy at the subject has improved from prior years and the loan has remained current despite reporting low DSCRs, suggesting that the sponsor continues to be committed to the property. In addition, the low issuance LTV provides cushion for any declines in value. At issuance, the loan was shadow-rated investment grade primarily because of the low LTV, sponsorship strength, and desirable location. The shadow rating was maintained with this review with the expectation that the net cash flow (NCF) should stabilize in the near term given the uptick in occupancy, but DBRS Morningstar will continue to closely monitor the loan for developments.

The 650 Madison Avenue is a pari passu loan with other pieces of the whole loan secured in several transactions, including Citigroup Commercial Mortgage Trust 2020-GC46 and three other transactions rated by DBRS Morningstar. The loan is secured by secured by a Class A office and retail tower at 650 Madison Avenue in the Plaza district of New York. The property consists of approximately 544,000 square feet (sf) of office space, 22,000 sf of ground-floor retail space, and 34,000 sf of storage and flex space. The loan was added to the servicer’s watchlist in April 2023 because of a drop in DSCR, which was mainly driven by the departure of the former second-largest tenant, Memorial Sloan Kettering Cancer Center, upon its lease expiration in June 2022. As a result, the occupancy rate dropped to 77.6%, according to the January 2023 rent roll, compared with 90.2% at YE2021 and 97.0% at issuance. In addition, the lease for the current second-largest tenant, BC Partners Inc. (11.7% of the NRA) was set to expire in June 2023, but the company appears to have remained at the subject property as the location is still listed on its website. While there is minimal rollover risk through the next 12 months, the lease of the largest tenant, Ralph Lauren (40.7% of the NRA), is scheduled to expire in December 2024. The loan is structured with a cash flow sweep in the event that the tenant does not provide written notice of renewing its lease 18 months prior to expiration. The amount to be swept is $80 per square foot (psf) or approximately $20.0 million. According to a June 2023 article posted on The Real Deal, Ralph Lauren is planning to reduce its North American footprint by 30% in the coming years, and may downsize or vacate the subject property. DBRS Morningstar has requested an update from the servicer, and a response is pending as of the date of this press release.

According to the most recent financials for the trailing 12 months ended March 31, 2023, NCF was $37.8 million (reflecting a DSCR of 1.77x on the senior debt; 1.39x on the whole loan), compared with the YE2021 NCF of $63.2 million (DSCR of 2.82x on the senior debt; 2.23x on the whole loan), and the DBRS Morningstar NCF of $50.8 million (DSCR of 2.45x on the senior debt). Reis reports the property’s average base rent of $89.36 psf for office space as of January 2023 is below the current average rental rate of $95.31 psf for Class A office space within a one-mile radius. However, leases that were executed at the subject in 2022 have rates that are well above $100 psf, with rental abatements provided and contributing to the lower YE2022 NCF. At issuance, the loan was shadow-rated investment grade primarily because of the low A note LTV of 32.1% and high DBRS Morningstar Term DSCR; however, given the declines in occupancy rate and NCF and the increased rollover risk, DBRS Morningstar removed the shadow rating for this review. DBRS Morningstar will continue to closely monitor this loan.

At issuance, four other loans in the pool were shadow rated investment grade. This includes 525 Market Street (Prospectus ID#2, 7.5% of the pool), The Cove at Tiburon (Prospectus ID#3, 6.2% of the pool), Acuity Portfolio (Prospectus ID#8, 5.0% of the pool), and F5 Tower (Prospectus ID#9, 4.9% of the pool). With this review, DBRS Morningstar confirmed that the loan performance trends remain consistent with investment-grade loan characteristics.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) 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 (July 4, 2023) https://www.dbrsmorningstar.com/research/416784.

Classes X-A, X-B, X-E, and X-F are IO certificates that reference 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.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and credit ratings are monitored.

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 CMBS Multi-Borrower Rating Methodology/North American CMBS Insight Model v 1.1.0.0 (March 16, 2023), https://www.dbrsmorningstar.com/research/410913

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/419592

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 analyzes 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].