DBRS Morningstar Confirms Credit Ratings on All Classes of Morgan Stanley Capital I Trust 2020-HR8

DBRS Limited (DBRS Morningstar) confirmed its credit ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2020-HR8, issued by Morgan Stanley Capital I Trust 2020-HR8 (MSC 2020-HR8):

-- Class A-1 at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class X-A at AAA (sf)
-- Class A-S at AAA (sf)
-- Class A-3-1 at AAA (sf)
-- Class A-3-2 at AAA (sf)
-- Class A-3-X1 at AAA (sf)
-- Class A-3-X2 at AAA (sf)
-- Class A-4-1 at AAA (sf)
-- Class A-4-2 at AAA (sf)
-- Class A-4-X1 at AAA (sf)
-- Class A-4-X2 at AAA (sf)
-- Class A-S-1 at AAA (sf)
-- Class A-S-2 at AAA (sf)
-- Class A-S-X1 at AAA (sf)
-- Class A-S-X2 at AAA (sf)
-- Class B at AAA (sf)
-- Class X-B at AA (low) (sf)
-- Class X-D at AA (low) (sf)
-- Class C at A (high) (sf)
-- Class D at A (high) (sf)
-- Class E-RR at A (low) (sf)
-- Class F-RR at A (low) (sf)
-- Class G-RR at BBB (sf)
-- Class H-RR at BB (high) (sf)
-- Class J-RR at BB (sf)
-- Class K-RR at B (high) (sf)
-- Class L-RR at B (low) (sf)

All trends are Stable.

The credit rating confirmations reflect performance that remains in line with DBRS Morningstar’s expectations in the three years since issuance, with a small concentration of loans on the servicer’s watchlist and no loans in special servicing or delinquent as of the most recent remittance. Credit metrics are overall stable, with the largest 15 loans in the pool generally reporting cash flows in line with issuance figures. The weighted-average (WA) debt service coverage ratio (DSCR) for the 39 loans that reported YE2022 financials was 2.79 times (x).

The trust consists of 43 loans with a current aggregate balance of $685.7 million, representing a 0.8% collateral reduction since issuance. One loan representing 0.6% of the pool has been defeased. As of the September 2023 remittance, three loans representing 12.5% of the pool are on the servicer’s watchlist; only one of which is being monitored for performance-related concerns and is described in further detail below.

The pool is relatively concentrated by loan amount, as the largest 10 loans represent 59.1% of the current pool balance. Additionally, the pool is concentrated by property type, with loans secured by multifamily and office collateral comprising 33.9% and 28.5% of the pool, respectively. Despite the significant office concentration, DBRS Morningstar notes that, overall, the office loans are generally performing in line with issuance expectations. For office loans that DBRS Morningstar identified as exhibiting increased credit risk since issuance, stressed loan-to-value ratios (LTVs) and elevated probabilities of default were applied in the analysis to reflect the elevated risk. Following these adjustments, the WA DBRS Morningstar expected loss for office loans in the pool was approximately 2x greater than the pool average.

The only loan being monitored on the watchlist for credit reasons is UHG Optum Health Campus (Prospectus ID#8, 3.9% of the pool). The loan is secured by a suburban office property in Eden Prairie, Minnesota. The YE2022 DSCR and net cash flow (NCF) were reported to be 3.57x and $3.9 million, respectively, which represents a slight improvement over the DBRS Morningstar DSCR and NCF of 3.34x and $3.1 million, respectively, from issuance. The loan is on the servicer’s watchlist because the sole tenant, United HealthCare Services, has a lease scheduled to expire at the end of 2023, and has not given any indication of whether or not it intends to renew. DBRS Morningstar has inquired about the status of the lease negotiations, and a response is still pending as of the date of this press release. According to online news sources, UnitedHealth Group, the parent company of United HealthCare Services, is planning to consolidate its operations around the Minneapolis area to a single property in Eden Prairie; however, it is unclear whether that will be the subject property. Mitigating some of this uncertainty is a $3.6 million Letter of Credit (LOC) in place, as well as approximately $700 thousand in tenant reserves to offset leasing costs should the tenant vacate. Per Reis, the Southwest/Northeast Scott County submarket has been experiencing rising vacancy as the Q2 2023 vacancy rate increased to 20.5% from 17.6% in Q2 2022. Given the upcoming lease expiry and soft submarket, DBRS Morningstar analyzed this loan using a stressed LTV resulting in an expected loss approximately 3.6x greater than the pool average.

DBRS Morningstar identified two additional loans secured by office properties that have notable upcoming tenant rollover. Bayview Corporate Tower (Prospectus ID#2, 8.4% of the pool) is secured by an office property in Fort Lauderdale. The second largest tenant, Whole Foods Market (8.2% of the NRA) had a lease expiry in August 2023. According to the servicer, Whole Foods Market extended its lease one year to August 2024. The servicer notes that a longer-term lease is currently being negotiated; however, given the short-term lease extension, DBRS Morningstar believes Whole Foods Market’s commitment to the space may not be as strong as initially believed. Per the reported financials for the trailing three-month period ended March 31, 2023, the property was 80.6% occupied, and the annualized DSCR was 1.56x.

Katella Corporate Center (Prospectus ID#15, 2.5% of the pool), backed by an office property in Los Alamitos, California, saw its largest tenant, Discovery Practice Management, Inc. (formerly 22.0% of NRA), give back a significant portion of its space in June 2023. The tenant now occupies 8.6% of NRA on two leases that are set to expire in September 2025. An update from the servicer notes that the property is currently 78.0% occupied with one additional tenant that will take occupancy in November 2023, and is expected to bring occupancy to 82.0%. Following the downsizing of Discovery Practice Management and not accounting for any additional leasing activity, DBRS Morningstar estimates the loan’s DSCR will drop to approximately 1.83x. In its analysis for this review, DBRS Morningstar analyzed both the Bayview Corporate Tower loan and the Katella Corporate Center loan with stressed LTVs resulting in expected losses approximately 3.9x and 1.5x greater than the pool average, respectively.

Two of the 10 largest loans, 525 Market Street (Prospectus ID#5, 5.8% of the pool) and Bellagio Hotel and Casino (Prospectus ID#6, 5.7% of the pool), were assigned investment-grade shadow ratings at issuance. A major tenant at 525 Market Street, Sephora (10.8% of NRA), is expected to vacate at the end of its lease in October 2023. Excluding this tenant and in the absence of any additional significant leasing activity, DBRS Morningstar projects the resulting NCF will remain in line with DBRS Morningstar’s NCF at issuance. With this review, DBRS Morningstar confirmed that the respective performance of each loan remains consistent with the characteristics of an investment-grade loan.

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, and X-D 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
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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 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 22, 2023; https://www.dbrsmorningstar.com/research/420984)

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 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].