DBRS Morningstar Confirms Ratings on All Classes of Citigroup Commercial Mortgage Trust 2019-C7

DBRS Limited (DBRS Morningstar) confirmed its credit ratings on the following Commercial Mortgage Pass-Through Certificates, Series 2019-C7 issued by Citigroup Commercial Mortgage Trust 2019-C7:

-- 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-AB at AAA (sf)
-- Class A-S at AAA (sf)
-- Class X-A at AAA (sf)
-- Class X-B at AAA (sf)
-- Class B at AAA (sf)
-- Class C at A (high) (sf)
-- Class D at BBB (high) (sf)
-- Class X-D at BBB (sf)
-- Class E at BBB (low) (sf)
-- Class X-F at BBB (low) (sf)
-- Class X-G at BBB (low) (sf)
-- Class F at BB (high) (sf)
-- Class G at BB (high) (sf)
-- Class X-H at BB (low) (sf)
-- Class H at B (high) (sf)
-- Class J-RR at B (low) (sf)

All trends are Stable.

The credit rating confirmations reflect DBRS Morningstar’s outlook for the transaction, which remains relatively unchanged from the last rating action in November 2022. The stable performance of the pool is illustrated by the most recent year-end financials, which reported a weighted-average (WA) debt service coverage ratio (DSCR) for the pool of nearly 2.25 times (x). Per the September 2023 reporting, all of the original 55 loans remain in the pool, with an aggregate principal balance of $1.25 billion, representing a negligible collateral reduction of just 1.3% since issuance as a result of scheduled loan amortization. One loan, representing 1.3% of the pool, is fully defeased. While there are no loans in special servicing, there are 13 loans, representing 25.1% of the pool, on the servicer’s watchlist; however, only nine loans, representing 15.0% of the pool, are being monitored for credit-related reasons.

The pool is concentrated by property type, with loans backed by office or mixed-use properties (with large office components), representing more than 35.0% of the pool. In general, the office sector has been challenged, given the low investor appetite for the property type and high vacancy rates in many submarkets. However, of the 14 loans secured by office or mixed-use properties, only four exhibited performance that suggested increased credit risk since issuance. In its analysis for this review, DBRS Morningstar applied stressed loan-to-value ratios (LTVs) or increased probability of default assumptions for three loans backed by office properties exhibiting declines in performance, resulting in a WA expected loss (EL) that was about 2.5x the pool average. At issuance, DBRS Morningstar shadow-rated two loans backed by office properties as investment grade: 650 Madison Avenue – Trust (Prospectus ID#2, 4.5% of the pool) and 805 Third Avenue – Pooled (Prospectus ID#3, 4.5% of the pool). With this review, DBRS Morningstar has removed the shadow ratings for these loans, as discussed in further detail below.

The 650 Madison Avenue – Trust loan is secured by a Class A office and retail tower at 650 Madison Avenue in the Plaza district of New York City. 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 is pari passu with other pieces of the whole loan secured in several transactions, including four other transactions that are also rated by DBRS Morningstar. While the trust’s reporting indicates the loan is not on the servicer’s watchlist, the lead note secured in the MAD 2019-650M transaction reports that the loan has been on the servicer’s watchlist since March 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 net rentable area (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 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, net cash flow (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, Inc. 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.

The 805 Third Avenue loan is secured by a 596,100-sf office property and a 30,659-sf three-story retail pavilion in the Plaza district in New York. The loan is pari passu with other pieces of the whole loan secured in two transactions, both of which are also rated by DBRS Morningstar. The loan has been on the watchlist since September 2020 because of the challenges faced during the Coronavirus Disease (COVID-19) pandemic, but the borrower received relief where monthly tax and replacement reserve deposits were waived until September 2020 with the expectation that the deferred amounts will be repaid in increments. The loan remains on the watchlist for the low DSCR, primarily driven by a drop in occupancy rate in recent years. Several tenants have vacated the subject, including the former second- and fourth-largest tenants, Toyota Tsusho America, Inc. (6.9% of the NRA; expired in November 2022) and Yes Network, LLC (4.0% of the NRA; expired in May 2022). As of the January 2023 rent roll, the subject was 59.8% occupied. Based on the most recent financials, the loan reported a YE2022 DSCR of 1.05x on the senior debt; however, the whole-loan DSCR is below breakeven. The loan is currently delinquent, with the last payment received in May 2023. However, DBRS Morningstar observed reporting discrepancies between the subject transaction and the other companion transactions and clarification from the servicer was requested.

At issuance, the loan was shadow-rated investment grade primarily because of the building’s quality, granular lease rollover, excellent location, and high-quality sponsor. However, given the substantially low performance of the subject, the generally challenged office submarket in New York, and the loan being delinquent on its payments, DBRS Morningstar removed the shadow rating and increased the probability of default in its analysis. This resulted in a loan-level EL that was more than 3.0x the pool’s average.

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 (July 4, 2023) https://www.dbrsmorningstar.com/research/416784.

Classes X-A, X-B, X-D, X-F, X-G, and X-H are interest-only (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.

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 (March 16, 2023)/North American CMBS Insight Model v 1.1.0.0 (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/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].