DBRS Morningstar Confirms Credit Ratings and Changes Trends on Two Classes of AOA 2021-1177 Mortgage Trust Commercial Mortgage Pass-Through Certificates to Negative from Stable

DBRS Limited (DBRS Morningstar) confirmed its credit ratings on the Commercial Mortgage Pass-Through Certificates, issued by AOA 2021-1177 Mortgage Trust as follows:

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

In addition, DBRS Morningstar changed the trends on classes E and HRR to Negative from Stable. All other trends are Stable.

The Negative trends reflect the increased risks for the transaction as a result of the underlying collateral’s decline in performance, as further detailed below. In addition, the office sector continues to face challenges, driven by shifts in workplace dynamics and end-user demand, which may impair the sponsor’s efforts in releasing vacant space and/or recapturing issuance-level cash flows. Mitigating factors include the property’s high-quality and prime location in one of Manhattan’s high-rise office corridors, experienced sponsorship, a granular tenant roster, and considerable land value, which was appraised at $430 million at issuance. While the property’s performance trends and other recent developments suggest an increased level of credit risk, DBRS Morningstar’s analysis conducted at issuance continues to imply that the higher-rated certificates in the pool are generally well insulated against loss.

The loan is secured by the borrower’s fee-simple interest in 1177 Avenue of the Americas, a 47-story, 1.0 million square-foot (sf) office tower. The building is located between 45th Street and 46th Street on 6th Avenue (Avenue of the Americas) in the Grand Central submarket of Manhattan. Built in 1992, the building was acquired in 2007 by the California State Teachers’ Retirement System (CalSTRS), Silverstein Properties (Silverstein), and UBS. In June 2021, CalSTRS acquired UBS’ 50.0% equity position in the property, in a deal that valued the asset at $865.0 million.

The interest-only floating-rate loan had an initial two-year term with three one-year extension options. The loan was scheduled to mature in October 2023; however, the servicer has confirmed that the borrower intends on exercising its first extension option, pushing the maturity date to October 2024. There are no performance triggers, financial covenants, or fees required for the borrower to exercise any of the three one-year extension options. However, execution of each option is conditional upon, among other things, no events of default and the borrower’s purchase of an interest rate cap agreement for each extension term. DBRS Morningstar notes that the cost to purchase a rate cap has likely increased given the current interest rate environment.

Signature Bank (Signature), a private client bank, is the second-largest tenant occupying 8.4% of the net rentable area (NRA). The bank, which operates its Signature Securities Group arm out of the property, signed a lease in 2017 that expires in 2033. In March 2023, a subsidiary of New York Community Bancorp Inc. (NYCB) entered into an agreement with U.S. regulators to acquire certain assets and assume certain liabilities from the New York-based bank, following its collapse. Although DBRS Morningstar has not received confirmation regarding the status of Signature’s lease, it seems likely that NYCB has assumed Signature’s lease at the collateral property. Signature Bank has a termination option in 2028, two years beyond the fully extended loan term. As of the date of this press release, none of Signature’s space has been subleased or is listed as available for sublease.

The property was 87.0% occupied at issuance. As of June 2023, occupancy at the property declined to 82.3%. The tenant roster is relatively granular; outside of the largest tenant, Kramer Levin Naftalis & Frankel (27.0% of NRA, lease expiry in 2035), no other tenant accounts for more than 7.0% of NRA. Lease rollover risk is moderate, with tenant leases representing approximately 13.0% of the NRA scheduled to roll within the next 12 months. There are concerns regarding the future of return to office across the Manhattan office market. Sublease space in Midtown Manhattan remains elevated, and vacancy rates continue to trend upwards, most recently reported at 12.3% as of Q2 2023, according to Reis. While uncertainty remains, DBRS Morningstar believes that the ultimate beneficiaries will be higher quality assets with well-capitalized sponsors who can weather short-to-medium term disruptions.

Based on the June 2023 financial reporting, the property’s annualized net cash flow (NCF) was $32.1 million, down from the YE2022 figure of $36.7 million, and the DBRS Morningstar NCF at issuance of $35.5 million. Despite the slight declines in occupancy and cash flow, the loan continues to comfortably cover debt service obligations, with a debt service coverage ratio of 5.22 times (x) as of June 2023. At issuance, DBRS Morningstar derived a value of $545.3 million based on a capitalization rate of 6.5% and the DBRS Morningstar NCF of $35.5 million, resulting in a DBRS Morningstar loan-to-value ratio (LTV) of 82.5% compared with the LTV of 52.3% based on the appraised value at issuance. DBRS Morningstar made positive qualitative adjustments to the final LTV sizing benchmarks, totalling 7.5% 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).

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 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 22, 2023; https://www.dbrsmorningstar.com/research/420982)

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].