Morningstar DBRS Changes Trends on Three Classes of A10 Single Asset Commercial Mortgage 2023-GTWY to Negative from Stable, Confirms Credit Ratings on All Classes

DBRS Limited (Morningstar DBRS) confirmed its credit ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2023-GTWY (the Certificates) issued by A10 Single Asset Commercial Mortgage 2023-GTWY (A10 SACM 2023-GTWY):

-- 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)

Morningstar DBRS assigned Negative trends to Classes D, E, and F. The trends on the remaining classes are Stable.

All credit ratings have been removed from Under Review with Negative Implications where they had been placed on April 15, 2024, as part of Morningstar DBRS' review of transactions secured by office properties within its North American commercial mortgage-backed securities single-asset/single-borrower (NA CMBS SASB) portfolio. The review was prompted by Morningstar DBRS' view that a shift in the use and demand for office space has been observed in the last few years. Amid the increase in remote work and hybrid schedules, tenant demand in urban markets, such as those most frequently represented in the NA CMBS SASB space, has been the most resilient for those higher-quality buildings that offer extensive amenity packages and are located close to transportation hubs with other nearby draws for commuters and city dwellers alike. These trends are expected to be sustained in the long term and their ripple effects of increased tenant improvement costs, capital improvement expectations, and decreased demand for some markets and neighborhoods will continue to influence investment activity for the office sector as a whole. For more information regarding the approach and analysis conducted, please refer to the press release titled "Morningstar DBRS Takes Rating Actions on North American Single-Asset/Single-Borrower Transactions Backed by Office Properties," published on April 15, 2024.

At the conclusion of the April 2024 review, several transactions, including the subject transaction, remained Under Review with Negative Implications. This generally reflected the existence of evolving factors for those credits for which Morningstar DBRS identified a need for more information to be gathered to inform the analysis. With this review of the subject transaction, Morningstar DBRS has resolved the Under Review with Negative Implications status, which was prompted after the occurrence of an Event of Default when the borrower failed to pay a scheduled debt payment due December 2023. Originally, the Co-Lender Agreement permitted the B-Note holder to keep the A-Note current only for three consecutive months; however, the B-Note holder indicated its intent to take control of the property and hence, a proposal was submitted to amend the Co-Lender Agreement to provide additional time, allowing for foreclosure and likely assumption of the A-Note.

As per Morningstar DBRS' communication with the special servicer, foreclosure was being pursued and the lender was expected to take title of the asset. The foreclosure sale of the property by online auction was scheduled for July 2, 2024; however, as per reporting by The Business Journals on July 3, 2024, the auction was canceled due to the owners' Chapter 11 bankruptcy filing on July 1, 2024. While the implications of the sponsor's bankruptcy and what it entails for the workout strategy of this loan remains uncertain, it is likely the foreclosure timeline will be delayed further, leading to increased fees and other costs.

In its analysis, Morningstar DBRS considered a conservative scenario wherein a haircut was applied to the Morningstar DBRS value, concluding that even in a stressed-value scenario, the senior bonds remain protected from losses; however, the junior bonds are exposed to potential losses and fees given the extended timeline for foreclosure. The Negative trends on the junior bonds are indicative of Morningstar DBRS' concerns about the financial struggles of the sponsor and potential for value deterioration if the B-Note holders cease to make payments and the asset transfers to the special servicer.

The collateral is the borrower's fee simple interest in The Gateway at Wynwood (Gateway), a 219,532 square foot (sf) office building, and an adjacent 5,348 sf retail building (2830 N Miami) in Miami's Wynwood neighborhood. The Gateway was developed by the sponsor, R&B Realty, and delivered in December 2021 while the 2830 N Miami building was built in 1936 and acquired by the sponsor in 2015. Of the $92.0 million A-Note, $80.5 million was initially contributed to the trust; the remaining $11.5 million represents future funding for accretive leasing.

As per the December 2023 rent roll, the property was 66.1% occupied and 72.5% leased, unchanged from issuance. Tenants occupying approximately 10% of the net rentable area (NRA) have scheduled lease expirations over the next 12 months, including the third-largest tenant, Thoma Bravo (9.3% of the NRA, lease expires in August 2024), which signed an 18-month lease at the subject while it awaits the delivery of its space at a neighboring property in Miami. The year-end 2023 net operating income (NOI) was $3.5 million, compared with Morningstar DBRS' NOI of $8.6 million. According to the servicer, the borrower has provided minimal leasing updates since the Event of Default. As of Q1 2024, Reis noted that office properties within the Biscayne Blvd. submarket reported an average vacancy rate of 29.9% and an average asking rental rate of $42.19 per sf (psf). Specifically regarding assets delivered after 2019, such as the collateral, the vacancy rate was 50.0%, with an average asking rental rate of $59.17 psf. Loopnet currently lists 73,682 sf of office space (33.6% of the NRA) at the subject as available for lease at an asking rental rate of $70.00 psf, above the submarket's average asking rental rate as well as the property's current in-place average rental rate of $57.30 psf.

Despite the assets' newer vintage and desirable location, the overall challenges in the office landscape posed by tenant downsizing and remote work have delayed the owner's stabilization efforts. Given the current occupancy rate lags behind the originally concluded Morningstar DBRS stabilized occupancy rate of 85%, the softening submarket metrics, and the expected delay in pursuing a workout strategy with the sponsor's bankruptcy filing, it is likely the value of the property has declined from the issuance appraisal of $193.2 million. At issuance, Morningstar DBRS applied an additional downward adjustment to its LTV benchmarks due to the sponsor's inexperience, low net worth and liquidity, as well as the lack of disclosure related to ongoing litigation.

Morningstar DBRS' credit ratings on the applicable classes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. Where applicable, a description of these financial obligations can be found in the transactions' respective press releases at issuance.

Morningstar DBRS' long-term credit ratings provide opinions on risk of default. Morningstar DBRS considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued. The Morningstar DBRS short-term debt rating scale provides an opinion on the risk that an issuer will not meet its short-term financial obligations in a timely manner.

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: (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. dollar 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.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS' outlooks and credit ratings are monitored.

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 (July 11, 2024; https://dbrs.morningstar.com/research/436004)

Interest Rate Stresses for U.S. Structured Finance Transactions (February 26, 2024; https://dbrs.morningstar.com/research/428623)

Morningstar DBRS North American Commercial Real Estate Property Analysis Criteria (June 28, 2024; https://dbrs.morningstar.com/research/435293)

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

Legal Criteria for U.S. Structured Finance (April 15, 2024; https://dbrs.morningstar.com/research/431205/legal-criteria-for-us-structured-finance)

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/417279 (July 17, 2023).

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