DBRS Morningstar Downgrades All Classes of Natixis Commercial Mortgage Securities Trust 2019-NEMA

DBRS Limited (DBRS Morningstar) downgraded its credit ratings on the Commercial Mortgage Pass-Through Certificates, Series 2019-NEMA issued by Natixis Commercial Mortgage Securities Trust 2019-NEMA as follows:

-- Class A to A (sf) from AAA (sf)
-- Class B to BBB (low) (sf) from AAA (sf)
-- Class X to BB (sf) from AA (high) (sf)
-- Class C to BB (low) (sf) from AA (sf)
-- Class V-ABC to BB (low) from AA (sf)
-- Class V2 to CCC (sf) from BBB (sf)
-- Class D to CCC (sf) from BBB (sf)
-- Class V-D to CCC (sf) from BBB (sf)

The trends on Classes A, B, C, X, and V-ABC are Stable. Classes D, V2, and V-D have credit ratings that typically do not carry trends in commercial mortgage-backed securities (CMBS) credit ratings.

The credit rating downgrades reflect the current credit outlook for the underlying loan, which transferred to special servicing in August 2023 and became delinquent on payments in September 2023. The special servicer has provided an updated appraisal for the collateral property that reflected an as-is value that was approximately 50.0% lower than at the appraised value at issuance and suggests the whole loan is underwater with a loan-to-value ratio (LTV) of well more than 100%.

The transaction consists of a $199.0 million first-lien mortgage loan secured by NEMA San Francisco, a 754-unit Class A luxury apartment complex with 11,184 square feet of commercial retail space, located in the South of Market (SoMa) submarket. The trust loan is part of a $384.0 million whole loan and consists of a $130.0 million senior A-1 note and a $69.0 million senior-subordinate A-B note. Outside of the trust, there is $75.0 million of additional debt that is pari passu to the A-1 note, as well as $110 million in subordinate B notes. The trust loan has a 10-year term and pays interest only (IO) for the full term until its maturity on February 10, 2029.

In August 2023, the loan transferred to special servicing following imminent monetary default when the borrower was unable to pay operating expenses after the payment of debt service. The borrower and lender are in discussions regarding a loan modification that includes reduced interest rates for the junior B notes and additional equity contributions from the borrower to fund capital expenditures. The borrower previously invested $20.0 million in order to pay B note debt service; however, the servicer noted that the borrower will not contribute additional funding unless a loan modification is executed. As of the November 2023 remittance, $3.0 million was being held in reserves. The special servicer noted that the workout strategy will involve dual-tracking the appointment of a receiver and continuing discussions with the borrower for a loan modification. The loan first became delinquent in September 2023 and remains due for that payment and all due thereafter; as of the November 2023 remittance, the Class D certificate has accrued approximately $90,000 in interest shortfalls.

An updated appraisal dated September 26, 2023, valued the collateral at $279.0 million, a 48.9% decline from the issuance appraised value of $543.6 million and below the current whole-loan balance of $384.0 million. The appraiser attributed the collateral property’s underperformance to various factors including the increase in crime and homelessness in downtown San Francisco, changes in in-person workplace dynamics, and the disruption of the technology sector driven by mass layoffs and higher interest rates. In its analysis, DBRS Morningstar applied a conservative 15.0% haircut to the appraised value to reflect the potential for further value declines and underperformance, resulting in a stressed value of $237.2 million. The implied value of of $314,589 per unit compares with sales of five Class A multifamily establishments in the San Francisco area, which reported an average per unit sale price of $382,565, according to the appraisal report. When the LTV Sizing was updated with the $237.2 million value, the resulting benchmarks suggested downgrade pressure across the capital stack, supporting the credit rating downgrade actions taken with this review. As the borrower appears committed to injecting additional capital as part of a resolution strategy, the Stable trends are warranted but DBRS Morningstar will closely monitor progress on the workout and notes the trends could be changed if negotiations deteriorate and a foreclosure action is anticipated.

The appraised value decline is also a reflection of the performance declines for the property since issuance, a factor that previously contributed to Negative trends being placed on Classes D, V2, and V-D by DBRS Morningstar in April 2023. According to the September 2023 financials, the annualized net cash flow (NCF) remained in line with the YE2022 NCF at $13.2 million (reflecting a debt service coverage ratio (DSCR) of 0.72 times (x)), more than the YE2021 figure of $10.9 million (a DSCR of 0.60x) but less than the DBRS Morningstar NCF of $20.1 million derived in 2020. Since 2019, in-place cash flows have been insufficient to cover the $18.3 million annual debt service, a gap that has continued to grow amid Coronavirus Disease (COVID-19) pandemic-related hardships and shifts in workplace dynamics. The primary cause for the decrease in cash flows stems from depressed rental rates and increases in rent concessions that were initiated during the pandemic. Occupancy was relatively unchanged from 93.9% at DBRS Morningstar’s last review in April 2023 while average per unit rental rates increased to $3,318 from $3,183 for the same period. By means of comparison, Reis reported Q3 2023 SoMa submarket asking and effective rental rates of $3,671 and $3,519, respectively, compared with the Q3 2022 figures of $3,776 and $3,631, respectively.

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 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.

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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 13, 2023; https://www.dbrsmorningstar.com/research/425261).
-- 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].