Morningstar DBRS Downgrades All Credit Ratings on Natixis Commercial Mortgage Securities Trust 2019-MILE with Negative Trends, Removes Credit Ratings From Under Review With Negative Implications

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

-- Class A to BBB (low) (sf) from AAA (sf)
-- Class B to BB (low) (sf) from AA (low) (sf)
-- Class C to B (low) (sf) from A (low) (sf)
-- Class D to CCC (sf) from BBB (low) (sf)
-- Class E to CCC (sf) from BB (low) (sf)
-- Class F to CCC (sf) from B (low) (sf)

Morningstar DBRS assigned Negative trends to Classes A, B, and C. Classes D, E, and F have credit ratings that do not typically carry trends in commercial mortgage-backed securities (CMBS).

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. The full details of the credit rating actions and ratings rationale are outlined below.

The credit rating downgrades reflect Morningstar DBRS' loss expectations for the underlying loan. Given the subject property's low occupancy, declining cash flow, soft submarket, and lack of investor appetite for office properties, Morningstar DBRS believes the collateral's current value is significantly impaired compared with its issuance value of $668.0 million. Morningstar DBRS analyzed this loan with a conservative liquidation scenario based on a newly derived dark value, as further detailed below, which suggests implied losses could be realized into the Class B certificate upon the eventual disposition of the loan. The Negative trends are reflective of the potential for further credit deterioration based on the uncertain timeline for disposition and potential for value to decline further.

The $408.2 million loan is secured by the fee-simple and leasehold interests in Wilshire Courtyard, which comprises two six-story, LEED Gold-certified office buildings (the property) with an aggregate of 1.1 million square feet (sf) in Los Angeles' Miracle Mile submarket. The loan was transferred to the special servicer in May 2023 for imminent default, likely as a result of the borrower's failure to meet the debt service coverage ratio (DSCR) threshold required to exercise the loan's final maturity extension option. However, the loan returned to the master servicer in December 2023 after a loan modification was executed in November 2023, which extended the loan's maturity to July 2026. As a condition of the modification, a $23.9 million principal curtailment was paid, reducing the loan balance to $384.3 million.

According to the May 2024 rent roll, the property was 64.4% leased and 38.5% occupied, as several tenants, including Sony Pictures Entertainment Inc. (Sony; 21.0% of the net rentable area (NRA); expiring in May 2036) are scheduled to take occupancy in the second half of 2024. In comparison, the property was 48.3% occupied in March 2023, 54.5% at YE2022, and 88.5% at issuance. The property's decline in occupancy from issuance is due to the departure of the previous largest and second largest tenants, WeWork (previously 31.5% of the NRA) in 2021 and Media Brands Worldwide (previously 8.4% of NRA) in 2023. While Twentieth Century Fox Television (Twentieth Century; 7.3% of the NRA, expiring in December 2024) and Sky Dance Media (2.1% of NRA, expiring October 2024) remain on the May 2024 rent roll, the servicer has confirmed both tenants' departure per prior watchlist commentaries. Accounting for the confirmed upcoming tenant departures and newly signed leases, the implied occupancy is approximately 55.0%, with only one tenant, representing 2.0% of the NRA, scheduled to expire through the next 12 months, with an additional four tenants, representing 6.7% of the NRA, scheduled to expire prior to the loan's July 2026 maturity. Per the May 2024 rent roll, the average rental rate at the property was approximately $55 per square foot (psf; inclusive of the incoming new tenants), with average rental rates for the new tenants equating to approximately $53 psf. In comparison, the Mid-Wilshire/Miracle Mile/Park Mile submarket's average asking rental rate was $39.51 psf as of Q1 2024, per Reis, with a vacancy rate of 23.3%. Per the YE2023 financials, the loan reported a net cash flow (NCF) of $17.5 million (a DSCR of 0.54 times (x)), a further decline from the YE2022 figure of $20.0 million (a DSCR of 0.94x), and well below the Morningstar DBRS NCF of $22.8 million derived during the 2020 surveillance review.

While an updated appraisal has not been provided, Morningstar DBRS believes the property value has deteriorated significantly since issuance and conducted a dark value analysis in order to analyze the potential for principal recoverability in the scenario that the property is 100% vacant. To determine the dark value, Morningstar DBRS assumes that the property is fully vacant, and after 1.5 years of down time, the property is re-leased to a market occupancy. The concluded market rent for the space was assumed at $50.00 psf, based on recently signed leases at the property. Morningstar DBRS then assumed a stabilized vacancy rate of 20.0%, which is in line with the Q1 2024 Reis submarket vacancy in the Mid-Wilshire/Miracle Mile/Park Mile submarket. Expenses were based on a 40.0% expense ratio, which resulted in a stabilized Morningstar DBRS NCF of $28.5 million. A cap rate of 9.25% was applied, supported by market trends and incorporating a 100-basis point (bps) dark value adjustment to account for the time and risk to re-tenant the space. Tenant improvements (TI) of $68.16 psf and leasing commissions (LC) of 6.0% were maintained from the 2020 analysis. The total leasing cost to stabilize, including the downtime, during which a property owner will still have fixed operating expenses, was $132.9 million. In its analysis, Morningstar DBRS gave credit to the loan's outstanding TI/LC and termination fee reserves of $28.7 million, as of the June 2024 remittance, resulting in a dark value of $204.1 million ($192 psf) and a loan-to-value-ratio (LTV) of 188.3%. Based on the trust amount of $384.3 million, a 1.0% liquidation fee, and one year of principal and interest advances, the total trust exposure could reach approximately $420.3 million. The results of liquidation analysis suggested a loss severity exceeding 50%, which would fully reduce the balance of Class C through Class G and a small portion of Class B.

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, or 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 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 info-DBRS@morningstar.com.

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.

The credit ratings of this transaction are highly subject to the asset's liquidation value. As a result, a sensitivity whereby Morningstar DBRS stresses the Morningstar DBRS Cap Rate and Morningstar DBRS NCF to evaluate the impact of a Morningstar DBRS value decline based on the LTV sizing benchmarks was not completed. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The Morningstar DBRS 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.

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.

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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)
-- 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

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 info-DBRS@morningstar.com.