Morningstar DBRS Confirms Credit Ratings on Seven Classes of Benchmark 2020-IG3 Mortgage Trust

DBRS Limited (Morningstar DBRS) confirmed its credit ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2020-IG3 issued by Benchmark 2020-IG3 Mortgage Trust:

-- Class 825S-A at A (low) (sf)
-- Class 825S-B at BBB (low) (sf)
-- Class 825S-C at BB (low) (sf)
-- Class 825S-D at B (low) (sf)

-- Class BX-A at A (low) (sf)
-- Class BX-B at BBB (low) (sf)
-- Class BX-C at BB (high) (sf)

All trends are Stable.

These seven classes are loan-specific certificates, or rake bonds. Classes BX-A, BX-B, and BX-C are loan-specific certificates associated with the subordinate component of the BX Industrial Portfolio loan (Prospectus ID#1; 13.3% of the pool balance), which is backed by a portfolio of industrial and logistics properties. Classes 825S-A, 825S-C, and 825S-D are loan-specific certificates associated with the subordinate component of the 825 South Hill loan (Prospectus ID#8; 9.0% of the pool balance) and are backed by a luxury multifamily property in Los Angeles. The pooled certificates and the rake bonds associated with the subordinate component of the Tower 333 loan, which is secured by an office tower in Bellevue, Washington, were placed Under Review with Negative Implications on January 9, 2024. This credit rating action allows Morningstar DBRS to review the North American single-asset/single-borrower office-related loans as the office market dynamics may have shifted, prompting a review of Morningstar DBRS values. For more information, please see the press release titled “Morningstar DBRS Places North American Single-Asset/Single Borrower Transactions Backed by Office Properties Under Review With Negative Implications,“ published on January 9, 2024, at dbrs.morningstar.com.

The credit rating confirmations and Stable trends reflect the overall stable performance of the BX Industrial Portfolio and 825 South Hill assets, which continue to exhibit performance that remains in line with issuance expectations. At issuance, both loans that serve as the collateral for the pooled component of the transaction were shadow-rated investment grade. With this review, Morningstar DBRS confirms that the performance of these loans remains consistent with investment-grade characteristics.

The BX Industrial Portfolio loan is secured by a portfolio of industrial and logistics properties totaling 11,097,713 square feet in 11 states. The loan pays interest only during its six-year loan term and individual property releases are permitted at a prepayment premium of 105.0% of the allocated loan amount (ALA) until the original principal balance reduces by 30.0%, and 110.0% of the ALA thereafter. To date, no properties have been released. According to the January 2024 reporting, the portfolio reported an occupancy rate of 84.7% and a net cash flow (NCF) of $51.4 million (reflecting a debt service coverage ratio (DSCR) of 3.20 times (x)) for the trailing 12-months (T-12) ended June 30, 2023, which is above the YE2022 and YE2021 figures of $49.7 million (reflecting a DSCR of 3.11x) and $50.3 million (reflecting a DSCR of 3.20x), respectively, and the Morningstar DBRS NCF of $43.3 million (reflecting a DSCR of 3.39x). At issuance, the sizing was based on a Morningstar DBRS NCF of $43.3 million and a capitalization rate of 7.25%, resulting in a Morningstar DBRS value of $596.7 million, a 39.1% haircut from the issuance appraisal value of $980.1 million. Positive qualitative adjustments totaling 5.25% were applied to reflect the low cash flow volatility, good property quality, and strong market fundamentals.

The 825 South Hill loan is secured by a 498-unit luxury multifamily property in Los Angeles and amortizes through its seven-year term. For the T-12 ended September 30, 2023, the property’s NCF was $11.9 million (reflecting a DSCR of 1.05x), in comparison with the YE2022 and YE2021 figures of $12.6 million (reflecting a DSCR of 1.12x) and $12.3 million (reflecting a DSCR of 1.08x), respectively, and the Morningstar DBRS NCF of $12.7 million (reflecting a DSCR of 1.47x). The year-over-year decline in NCF has been driven by increased operating expenses, such as real estate tax and property insurance. However, the property maintains a high occupancy rate of 93.1% as of September 2023, which is well above the issuance occupancy of 87.6%, and has achieved an average rental rate of $3,538 per unit, which reflects a $130 rental premium over the Q3 2023 average effective rent of $3,408 per unit for apartments within the Downtown submarket of Los Angeles, according to Reis. The average rental rate was approximately $3,899 per unit at issuance. Despite the dip in NCF, a mitigating factor is the equity contribution at issuance of $102.4 million to acquire the asset, suggesting the sponsor’s continued commitment to the property. At issuance, the sizing was based on a Morningstar DBRS NCF of $12.7 million and a capitalization rate of 6.5%, resulting in a Morningstar DBRS value of $195.5 million, a 42.3% haircut from the issuance appraisal value of $333.0 million. Positive qualitative adjustments totaling 5.75% were applied to reflect the good property quality and strong market fundamentals.

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 Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (July 4, 2023) at https://dbrs.morningstar.com/research/416784.

All credit ratings are subject to surveillance, which could result in credit ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by Morningstar DBRS.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is North American CMBS Surveillance Methodology (March 16, 2023), https://dbrs.morningstar.com/research/410912).

Other methodologies referenced in this transaction are listed at the end of this press release.

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.

Morningstar DBRS 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://dbrs.morningstar.com/about/methodologies.

North American Single-Asset/Single-Borrower Ratings Methodology (October 19, 2023),
https://dbrs.morningstar.com/research/422174

Interest Rate Stresses for U.S. Structured Finance Transactions (June 9, 2023),
https://dbrs.morningstar.com/research/415687

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 22, 2023),;
https://dbrs.morningstar.com/research/420982

North American Commercial Mortgage Servicer Rankings (August 23, 2023),
https://dbrs.morningstar.com/research/419592

Legal Criteria for U.S. Structured Finance (December 7, 2023),
https://dbrs.morningstar.com/research/425081

A description of how Morningstar DBRS analyzes structured finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/417279.

For more information on this credit or on this industry, visit dbrs.morningstar.com or contact us at [email protected].