Morningstar DBRS Downgrades Credit Ratings on BBCMS 2020-BID Mortgage Trust, Changes Trends to Negative

DBRS Limited (Morningstar DBRS) downgraded the credit ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2020-BID issued by BBCMS 2020-BID Mortgage Trust:

-- Class A to A (high) (sf) from AAA (sf)
-- Class B to BBB (sf) from A (high) (sf)
-- Class C to BB (low) (sf) from A (low) (sf)
-- Class X-EXT to B (sf) from BBB (low) (sf)
-- Class D to B (low) (sf) from BB (high) (sf)
-- Class E to CCC (sf) from B (sf)
-- Class HRR to CCC (sf) from B (low) (sf)

The trend on all credit ratings is Negative, with the exception of Classes E and HRR, which have credit ratings that do not typically carry a trend in commercial mortgage-backed securities (CMBS) transactions. 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 floating-rate, interest-only (IO) underlying loan for the subject transaction is secured by a 506,000-square foot (sf), Class A office building in Manhattan's Upper East Side submarket. Senior debt of $423.5 million is held in the trust while $60.0 million of mezzanine debt is held outside the trust. The building was fully leased to Sotheby's, one of the world's largest auction houses, and has served as the company's headquarters with a triple-net (NNN) lease extending to September 2035, well beyond loan maturity in October 2025. However, in June 2023, Sotheby's announced its acquisition of and plans to relocate to the Breuer Building. The relocation will begin in 2024 before opening to the public in 2025 and, according to the servicer, Sotheby's is expected to remain at the subject in some capacity through at least loan maturity, given that the tenant's back-end operations are housed at the property. Sotheby's amended its lease at the subject property to release approximately 265,000 sf across floors five through nine. These floors were then leased to Weill Cornell Medicine (Cornell)¿Cornell University's medical school and research arm¿reportedly for use as a research lab. According to the servicer, Cornell may ultimately occupy up to 313,000 sf if the tenant also elects to take the 10th floor.

Cornell entered a 30-year NNN lease for the space, which includes 15 months of free rent and will pay a rental rate of $68.50 per square foot (psf) starting in May 2025 for floors five and six, with the first rent step to $74.50 psf occurring in November 2030, which is well beyond loan maturity. The rent commencement date for floors seven through nine is unknown at this time as the buildout for the space is ongoing, but the starting rental rate will also be $68.50 psf for the first five years. In comparison, Sotheby's was paying $79.04 psf for its space and will continue to pay that rate on the remaining space until its lease expiration in September 2035. The servicer confirmed that, per the terms of the lease modification, Sotheby's will cover the 15-month free-rent period for floors five and six of Cornell's space; however, it is uncertain if Sotheby's will also continue to pay rent on floors seven through nine until Cornell starts paying rent on those floors. The servicer noted that a leasing reserve of $5.0 million will be established to cover buildout costs for Cornell's space while the tenant is expected to fund any remaining costs out of pocket.

Morningstar DBRS reanalyzed its net cash flow (NCF) to account for the amendment to Sotheby's lease and the signing of Cornell for the released space. Morningstar DBRS gave long-term credit-tenant treatment (LTCT) to Cornell as it is currently rated investment grade. The concluded Morningstar DBRS NCF was $26.1 million, which is approximately 40.0% below the YE2023 NCF of $43.0 million and 23.0% below the Morningstar DBRS NCF at issuance of $33.8 million. The overall reduction in rental revenue was the primary reason for the variance between the updated Morningstar DBRS NCF and the Morningstar DBRS NCF at issuance, considering the rental rate of $79.04 psf applied at issuance compared with the current rental rate of $71.30 psf. In addition, Morningstar DBRS removed LTCT treatment for Sotheby's because it is known to be giving up its space at the subject. Generally, tenant improvement costs increased as considerable capital will likely be necessary to convert the space for medical use.

Morningstar maintained the cap rate of 8.0% that it applied in its analysis for the April 2024 credit rating action, resulting in a Morningstar DBRS Value of $326.8 million compared with the issuance Morningstar DBRS Value of $519.7 million (cap rate of 6.5%) and issuance appraised value of $830.0 million. It is worthy to note that at issuance, the appraiser determined a go-dark value of $575.0 million; however, considering the shift in the economic landscape and interest rate environment, Morningstar DBRS believes that the dark value has likely declined. The implied LTV based on the updated Morningstar DBRS Value and the trust debt is 130.0%. Morningstar DBRS maintained positive qualitative adjustments totaling 4.0% to account for the generally favorable property quality and market fundamentals as well as the overall stable cash flows, considering the long-term leases in place.

The updated Morningstar DBRS Value and resulting updates to the LTV Sizing Benchmarks resulted in significant downward pressure on the capital stack, supporting the credit rating downgrades with this review. The Negative trends reflect increased refinance risk as the Sotheby's space is expected to be dark in the coming years. In addition, the in-place NCF will likely be strained as Cornell will be paying lower rents for an extended period of time. At issuance, Morningstar DBRS noted that the subject was generally well positioned to capture space demand in the area coined as Hospital Row that is home to a number of hospitals and biomedical research institutions, given the close proximity combined with the subject's large floorplates and freight infrastructure. However, the capital required to transform the space for immediate medical use will likely be considerable, a factor that could test the sponsor's commitment and/or lower investor demand should a sale of the property is pursued.

Morningstar DBRS' credit ratings assigned to Classes A through C are higher than the results implied by the LTV Sizing Benchmarks by three or more notches. The variances are warranted given the long-term leases in place, which extend well beyond loan maturity, as well as the positive leasing momentum as the borrower secured a backfill for a portion of Sotheby's space in a relatively short amount of time. However, Morningstar DBRS continues to be concerned with the elevated maturity risk in the short-term, therefore supporting the Negative trends.

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 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 (January 23, 2024), https://dbrs.morningstar.com/research/427030.

Class X-EXT 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 Morningstar DBRS.

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

The principal methodology is the 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.

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 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.

DBRS Limited
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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
-- Rating North American CMBS Interest-Only Certificates (June 28, 2024), https://dbrs.morningstar.com/research/435294
-- 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.