DBRS Morningstar Confirms Credit Ratings on All Classes of SG Commercial Mortgage Securities Trust 2020-COVE

DBRS Limited (DBRS Morningstar) confirmed its credit ratings on all classes of the Commercial Mortgage Pass-Through Certificates, Series 2020-COVE issued by SG Commercial Mortgage Securities Trust 2020-COVE as follows:

-- Class A at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class X at BBB (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 DBRS Morningstar’s overall outlook for the transaction, which remains in line with issuance expectations. Although the underlying collateral has experienced some fluctuations in occupancy, there has been positive leasing momentum at the property, as further detailed below. The subject is a high-quality, Class A multifamily development that benefits from a prime waterfront location, superior amenities, and strong submarket fundamentals. In addition, the transaction benefits from experienced sponsorship provided by Maximus Real Estate Partners (Maximus), an established San Francisco Bay Area investor.

Maximus acquired the property in 2013 and has since invested more than $50 million in capital improvements, including extensive exterior and common area renovations as well as high-end renovations of all the apartment units. The 283-unit property is in an irreplaceable waterfront location in Marin County, with many units having unobstructed views of the San Francisco skyline. Amenities include a 52-slip boat marina, three pools, two spas, a playground, a clubhouse, and a fitness center. Tenant services include, but are not limited to, on-site fitness classes, housekeeping, dry-cleaning, and package drop-off and pick-up. Downtown San Francisco is directly across the bay from the property, approximately 14 miles by car or 30 minutes by ferry. The trust debt of $160.0 million is a pari passu participation in a whole loan totaling $210.0 million. The loan is interest only (IO) throughout its five-year loan term with a scheduled maturity in March 2025.

According to the June 2023 rent roll, the property was 80.2% occupied, a decline from 91.9% in June 2022 and 96.0% at issuance. However, this figure does not include an additional 15 signed leases indicated on the rent roll that were scheduled to commence in July 2023 and August 2023, suggesting the current occupancy rate is likely closer to 85.5%. DBRS Morningstar has requested additional information from the servicer to further clarify the drivers behind the recent fluctuation in occupancy. The submarket offers a limited supply of multifamily properties given the lack of vacant land and environmental constraints on further development, resulting in historically low submarket vacancy. Although vacancy rates within the South Marin submarket have increased 30 basis points between YE2022 and Q3 2023, average submarket vacancy remains below the San Francisco average of 4.3% and the national average of 5.1%, according to Reis. Market fundamentals are expected to remain strong through to the loan’s maturity in 2025, with vacancy rates projected to remain below 3.5%. Although average rental rates at the property declined marginally between June 2022 ($5,852/unit) and June 2023 ($5,676/unit), they remain well above the submarket’s average asking rental rate of $3,361/unit for comparable properties.

The YE2022 net cash flow (NCF) was reported to be $11.9 million, up from $11.2 million at YE2021. The most recent financials received to date are for the trailing six months ended June 2023, which indicate an annualized NCF of $9.4 million – reflective of the property’s lower occupancy rate. DBRS Morningstar’s credit ratings are based on a value analysis completed at issuance that considered a capitalization rate of 5.25%, which was applied to the DBRS Morningstar NCF of $10.7 million, resulting in a DBRS Morningstar value of $204.3 million and a whole loan-to-value ratio (LTV) of 102.8%. The DBRS Morningstar value represents a 28.3% haircut to the appraiser’s value of $285.0 million. DBRS Morningstar maintained positive qualitative adjustments to the LTV sizing benchmarks totaling 6.5% to account for low cash flow volatility, strong 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).

Class X is an IO certificate that references 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 the 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 Single-Asset/Single-Borrower Ratings Methodology (October 19, 2023;
https://www.dbrsmorningstar.com/research/422174)

-- 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, 2023;
https://www.dbrsmorningstar.com/research/425081)

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].