Morningstar DBRS Confirms Credit Ratings on All Classes of Prima Capital CRE Securitization 2019-RK1

DBRS Limited (Morningstar DBRS) confirmed its credit ratings on the Commercial Mortgage Pass-Through Certificates, Series 2019-RK1 issued by Prima Capital CRE Securitization 2019-RK1 as follows:

The Gateway (Group G Certificates):

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

TriBeCa House (Group T Certificates):

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

All trends are Stable. Interest is deferrable on all rated certificates other than Class A-G, Class A-T, and Class B-G.

The credit rating confirmations reflect the overall stable performance of the transaction, with both underlying multifamily properties, The Gateway and TriBeCa House, continuing to report residential occupancy rates above 90.0%, in addition to healthy debt service coverage ratios (DSCRs) of well above 1.5 times (x), as of the most recent financial reporting.

The transaction consists of two nonpooled B notes tied to The Gateway and TriBeCa House loans, which are categorized as Loan Groups —Group G and Group T, respectively. The notes are secured by the grantor trust certificate representing beneficial interests in a subordinate loan, which is a portion of a whole loan. The loans are interest only through their respective loan terms. As the notes are not pooled together, proceeds from the collateral interest relating to either Loan Group will not be available to support shortfalls of the other Loan Group. Additionally, TriBeCa House is the only loan in the transaction that has existing mezzanine financing in place. No loans in the transaction are allowed to take on mezzanine or unsecured debt in the future. Neither of the two loans are on the servicer’s watchlist or in special servicing. At issuance, DreamWorks Campus and Headquarters (Group D) was part of the transaction but was repaid in April 2023, bringing the total mortgage balance to $89.5 million.

The Gateway loan (Group G; 58.7% of the transaction) is secured by four high-rise multifamily buildings totaling 1,254 units with ground-floor retail space in downtown San Francisco. Since 2015, the sponsor has invested more than $21.0 million toward upgrading the property, including select units as they become vacant, and re-leasing them at market rates. The property is composed of studio, one-, two-, three-, and four-bedroom units with monthly rental rates ranging from $850 to $9,600. Average rental rates at the property have remained relatively flat since issuance, with the February 2024 rent roll reflecting a blended figure of approximately $3,000 per unit across all floorplans. Although all of the property’s multifamily units were initially rent controlled, San Francisco's rent control ordinance allows for units to be marked to market, within stipulated limits, once a unit turns over, suggesting incremental revenue growth could be achieved in the future. According to the February 2024 rent roll, the residential portion was 93.2% occupied, while the commercial portion was approximately 70.0% occupied. Commercial occupancy decreased after the former largest tenant, Bank of America (previously 9.1% of the net rentable area (NRA)), vacated upon its April 2022 lease expiration. The largest remaining commercial tenants include Safeway, Inc. (Safeway; 23.5% of NRA; lease expiration in 2025), Bay Club at Golden Gateway (12.0% of NRA; lease expiration in 2027), and 42nd Street Moon (7.4% of NRA; lease expiration in 2030). The borrower has indicated that Safeway will likely extend its lease.

The annualized net cash flow (NCF) for the trailing nine (T-9) month period ended September 30, 2023, was $26.8 million, above the YE2022 and YE2021 figures of $22.7 million and $25.2 million, respectively, but below the Morningstar DBRS figure of $33.6 million. Although NCF is below Morningstar DBRS’ expectation (primarily a factor of COVID-19-related disruptions), revenue has been increasing and operating expenses have shown signs of normalization, suggesting cash flows could stabilize in the near to moderate term. In addition, the loan continues to exhibit healthy credit metrics, most recently reporting a DSCR of 2.15x. The property has historically maintained an occupancy rate above 90.0%, and it continues to benefit from committed institutional sponsorship including Prime Group and C.M. Capital Corporation, who have owned and managed the property since 1991.

The TriBeCa House loan (Group T; 41.3% of the transaction) is secured by a high-rise multifamily complex totaling 503 units in the Tribeca neighborhood of New York City. The 50 Murray Street building totals 388 units and approximately 38,000 square feet (sf) of retail space on the first and second floors. The 53 Park Place building totals 115 units and approximately 8,600 sf retail space. As of September 2023, the residential portion was 95.0% occupied, in line with previous years. The sole retail tenant at 53 Park Place, Amish Market, vacated the space in 2020, because of financial hardship stemming from COVID-19. Morningstar DBRS has requested a leasing update from the servicer. Equinox, a fitness and health club, continues to occupy the retail space at 50 Murray Street. The annualized NCF for the T-9 month period ended September 30, 2023 was $21.0 million (A and B note DSCR of 1.92x), which compares favorably with the YE2022 and Morningstar DBRS figures of $18.2 million and $17.4 million, respectively. According to Reis, submarket fundamentals will remain strong through to the loan’s maturity in 2028, with vacancy rates expected to remain below 5.0% in the West Village/Downtown submarket. Given the subject’s strong historical performance, favorable location, and low submarket vacancy rate, Morningstar DBRS expects performance to remain stable in the near to moderate term.

Morningstar DBRS maintained its analysis, conducted in 2020 during the “North American Single-Asset/Single-Borrower Ratings Methodology” update. For The Gateway, a capitalization rate of 6.25% was applied to the Morningstar DBRS NCF of $33.6 million, resulting in a Morningstar DBRS value of $538.3 million. This represents a 38.0% haircut from the issuance appraised value of $868.0 million and a whole-loan loan-to-value ratio (LTV) of 102.2%. In addition, Morningstar DBRS maintained positive qualitative adjustments to the final LTV sizing benchmark, totaling 4.0%, to account for low cash flow volatility and market fundamentals. For TriBeCa House, a capitalization rate of 6.25% was applied to the Morningstar DBRS NCF of $17.4 million, resulting in a Morningstar DBRS value of $278.9 million. This represents a 51.9% haircut from the issuance appraised value of $580.0 million and a whole-loan LTV of 92.1% (excluding mezzanine debt). In addition, Morningstar DBRS maintained positive qualitative adjustments to the final LTV sizing benchmarks used for this credit rating analysis, totaling 4.0%, to account for low cash flow volatility and market fundamentals.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) 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 Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at (January 23, 2024) https://dbrs.morningstar.com/research/427030.

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 1, 2024), https://dbrs.morningstar.com/research/428798.

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 (March 1, 2024; https://dbrs.morningstar.com/research/428799)

-- 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].