DBRS Morningstar Downgrades Two Classes of CD 2019-CD8, Changes Trends on Five Classes to Negative from Stable

DBRS Limited (DBRS Morningstar) downgraded two classes of Commercial Mortgage Pass-Through Certificates, Series 2019-CD8 issued by CD 2019-CD8 Mortgage Trust as follows:

-- Class G-RR to B (high) (sf) from BB (sf)
-- Class H-RR to CCC (sf) from B (low) (sf)

DBRS Morningstar also confirmed the ratings on the following classes:

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

DBRS Morningstar changed the trends on Classes E, F, GRR, X-D, and X-F to Negative from Stable. All other trends are Stable, with the exception of Class H-RR, which has a rating that does not typically carry a trend in commercial mortgage backed securities (CMBS) ratings.

The rating downgrades and Negative trend are reflective of DBRS Morningstar’s loss projections for the loan in the special servicing, 63 Spring Street (Prospectus ID#17, 2.3% of the pool balance), based on the value decline since issuance as of the March 2023 appraisal obtained by the special servicer. At DBRS Morningstar’s review of this transaction in November 2022, all credit ratings were confirmed with Stable trends, noting contributing factors in the transfer back to the master servicer for the pool’s third largest loan, Hilton Penn’s Landing (Prospectus ID#3, 8.7% of the pool balance), as well as the lack of significant concerns for the other loans in the pool at that time. However, in the last year, there have been developments which have signaled increased risks from issuance, including the value decline from the previous appraisal obtained by the special servicer for the 63 Spring Street loan collateral and performance declines for other office loans in the pool. The office concentration in this pool is relatively high, at 29.3% of the current pool balance. For seven loans exhibiting increased risks, DBRS Morningstar applied probability of default (POD) and/or loss given default (LGD) stresses, to increase the expected losses (ELs). Four underperforming loans backed by office properties were adjusted, resulting in ELs that averaged nearly three times the pool’s weighted average EL.

As of the October 2023 remittance, all 33 of the original loans remain in the pool, with an aggregate trust balance of $802.8 million, representing a minimal collateral reduction of 1.0% since issuance. Two loans, representing 1.9% of the pool balance, are fully defeased. Fourteen loans, representing 42.6% of the pool balance, are on servicer’s watchlist for various reasons, including servicing trigger events, delinquent payment in servicing advances, low debt service coverage ratios (DSCRs) and deferred maintenance issues. One loan, representing 2.3% of the pool balance, is in special servicing with the loan payments delinquent since May 2020.

The 63 Spring Street loan is secured by a 5,540-square-foot (sf) mixed-use building consisting of four high-end residential units (4,400 sf) and 1,100 sf of ground-floor retail space in New York’s Soho neighborhood. The loan transferred to special servicing in June 2020 as a result of payment default and the special servicer initiated foreclosure proceedings, and after a Court process to address the borrower’s objections, a receiver was appointed in June. The borrower continues to contest the foreclosure, and litigation remains ongoing. According to the July 2023 rent roll, the subject is now 100% occupied with all four residential units and all three retail spaces leased and occupied. The building was re-appraised in March 2023 for $12.0 million, down from the May 2022 appraised value of $13.2 million and the $29.8 million appraised value at issuance. Based on this significant value decline, DBRS Morningstar analyzed the loan with a liquidation scenario that results in a loss severity in excess of 60.0%.

The 171 N Aberdeen loan (Prospectus ID#5, 5.1% of the pool balance), is secured by the borrower’s fee-simple interest in a 120,020-sf mixed-use property (53% residential, 35% office, and 12% retail) in the Fulton Market district in Chicago. The loan was added to the servicer’s watchlist in March 2021 when a decline in the DSCR triggered cash management. In October 2022, a conversion plan was initiated to repurpose the property’s co-living units to standard apartment units, and the servicer confirmed as of April 2023 that the project had been largely completed. According to the June 2023 rent roll, the occupancy rate has rebounded to 97.3%, up from a low of 41.0% at YE2022, and in line with the issuance occupancy rate of 100%. The largest tenant, Medici Living Group (Medici; 53.2% of the net rentable area (NRA), August 2028), a co-living service company, master leased the entire residential component. The second-largest tenant, Industrious (34.7% of the NRA, lease expiry in December 2027), is a provider of coworking office space. That tenant leases the entirety of the property’s office component and has a termination option available in April 2026 that requires a termination fee of $1.2 million. According to LoopNet, the entirety of the coworking space is available for lease, suggesting the company is either looking to sublease its space or is not currently hosting any clients using the space. The YE2022 DSCR was reported at 1.43 times (x), improving from the YE2021 DSCR of 0.88x, but still below the DBRS Morningstar DSCR of 1.64x. While the conversion plan to traditional multifamily and full occupancy of the residential component is encouraging, the availability of the coworking space is indicative of increased risks from issuance for this loan, supporting the POD adjustment in DBRS Morningstar’s analysis for this review.

At issuance, DBRS Morningstar assigned investment-grade shadow ratings to three loans, representing a combined 16.3% of the pool, including Woodlands Mall (Prospectus ID#2, 8.7% of the pool), Moffett Towers II Buildings 3 & 4 (Prospectus ID#10, 4.3% of the pool), and Crescent Club (Prospectus ID#12, 3.4% of the pool). With this review, DBRS Morningstar maintains that the performance of these loans remain consistent with investment-grade loan characteristics.

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).

Classes X-A, X-B, X-D, and X-F 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. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The DBRS Morningstar Long-Term Obligation Rating Scale definition indicates that credit ratings of CCC or lower are assigned when the bond is highly likely to default or default is imminent, thereby prevailing over a sensitivity analysis.

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
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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/North American CMBS Insight Model Version 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 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].