DBRS Morningstar Confirms Credit Ratings on All Classes of CSMC 2021-GATE

DBRS Limited (DBRS Morningstar) confirmed its credit ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2021-GATE issued by CSMC 2021-GATE:

Class A at AAA (sf)
Class B at AA (low) (sf)
Class C at A (low) (sf)
Class D at BBB (low) (sf)
Class E at BB (low) (sf)
Class F at B (low) (sf)

All trends are Stable.

The credit rating confirmations reflect the overall stable performance of the transaction, which is backed by a mixed-use property which has exhibited performance improvements in the last year, with occupancy and cash flows anticipated to increase over the next several years.

The transaction is secured by three Class A office buildings totaling 1.7 million square feet (sf), including Gateway Center I, Gateway Center II, and Gateway Center IV; an 86,400-sf retail concourse; and two parking garages and a surface lot in downtown Newark, New Jersey. The properties are part of a larger complex known as the Gateway Center with proximity to the Prudential Center arena and the New Jersey Performing Arts Center, and access to Newark Penn Station, which serves as a hub for Amtrak, NJ Transit, and the PATH trains to Manhattan. The sponsors, Onyx, Garrison, Taconic, and Axonic, all of which are real estate investment companies, began acquiring the assets in 2019 with the aim of unifying the ownership and renovating the buildings and concourse.

Whole loan proceeds of $325.0 million consist of a $285.0 million mortgage loan and a $40.0 million mezzanine loan that is not part of the trust. Loan proceeds went toward paying off existing debt of $235.6 million and funding upfront reserves totaling $77.3 million. At issuance, the sponsors reserved $28.8 million for capital improvements to upgrade the common areas, retail concourse, and lobby area, which the borrowers intended to complete in 2022. The borrower also reserved $25.8 million for unfunded tenant improvement/leasing commission (TI/LC) obligations for existing tenants and $22.7 million for accretive TIs/LCs over the loan term. According to the November 2023 loan-level reserve report, the capital improvement reserve had $1.0 million remaining, indicating that most of the renovations have likely been completed, with $5.2 million remaining in unfunded TI/LC obligations for existing tenants and $21.7 million remaining in accretive TI/LC funds.

The interest-only loan has an initial two-year term with three one-year extension options for a fully extended maturity date in December 2026. The loan is currently scheduled to mature in December 2023; however, the servicer reports the borrower intends to exercise the first extension option, which will extend the loan maturity to December 2024. Each extension option will be conditional upon, among other things, no events of default and the purchase of a cap rate agreement for each extension term providing a minimum debt service coverage ratio (DSCR) of 1.15 times (x) and a minimum debt yield of 7.5% on the second extension and 8.0% on the third extension. DBRS Morningstar notes the cost to purchase a rate cap has significantly increased since issuance, given the increase in interest rates since 2021.

As of June 2023, the portfolio reported an occupancy rate of 62.9%, falling from 67.0% in December 2022 following the lease expiration of a number of smaller tenants; however, occupancy is likely to increase drastically over the near term. The borrower has inked a new 25-year lease with New Jersey Transit Corporation (NJTC) for approximately 407,000 sf (23.9% of the net rentable area (NRA)) with staggered commencement dates beginning no later than January 2024 without a delivery extension date. The tenant will use the space for its headquarters and will receive a 12 month rent abatement from the date of delivery on each of the five spaces (ranging from 9,000 sf to 180,000 sf). NJTC will pay an initial base rent of $39.00 per square foot (psf) through the first 36 months, at which point the rental rate will increase 2.0% each year through lease expiration in 2049. According to the July 2023 lease agreement, the sponsors have agreed to provide approximately $135 psf in TI allowances for the NJTC space and a new HVAC system, representing the equivalent of nearly $70 million in concessions to the tenant, which will occupy the space with limited capital investment.

As of November 2023, the largest tenants include Broadridge Securities (9.4% of NRA; with a lease expiration in September 2032), Prudential Insurance (Prudential; 9.3% of NRA; with a lease expiration in December 2025), and McCarter & English, LLP (6.8% of NRA; with a lease expiration in December 2034). While Prudential has an upcoming lease expiration prior to the loan’s fully extended maturity, the tenant has two five-year renewal options and the terms of the loan includes a cash sweep trigger tied to the 2025 lease expiry, with swept funds to be allocated to the capital expenditure and TI reserves. Prudential has been in place since 1998 and is affiliated with one of the sponsors, which may incentivize the tenant to renew the lease at expiration.

The annualized net cash flow (NCF) for the period ended June 30, 2023, was $9.1 million (a DSCR of 0.37x), below the $10.8 million figure at YE2022 (a DSCR of 0.69x), largely a result of increased expenses. The decline in the DSCR was primarily driven by a significant increase in debt service obligations, given the loan’s floating-rate structure; however, NCF and the DSCR should improve drastically once NJTC has taken occupancy.

For this review, DBRS Morningstar maintained its NCF derived at issuance of $17.2 million, which gave no credit to additional cash flow upside. While DBRS Morningstar maintains a positive outlook on this transaction given the recent leasing momentum, the tenant may not begin paying rent until 2025. Utilizing a capitalization rate of 7.5%, DBRS Morningstar determined an as-is value of approximately $229.8 million, reflecting a 49.5% haircut to the appraiser’s as-is value of $455.2 million. This resulted in a DBRS Morningstar loan-to-value (LTV) ratio of 124.0% based on the $285.0 million mortgage loan, which increases substantially to an all-in DBRS Morningstar LTV of 141.4% when factoring in the mezzanine debt. DBRS Morningstar maintained positive qualitative adjustments to the final LTV sizing benchmarks used for this credit rating analysis, totaling 2.0%, to account for cash flow volatility and property quality.

ENVIRONMENTAL, SOCIAL, AND 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.

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 Single-Asset/Single-Borrower Ratings Methodology (October 19, 2023; https://www.dbrsmorningstar.com/research/422174)

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].