Morningstar DBRS Downgrades Credit Ratings on Two Classes of CSMC 2021-GATE, Removes from Under Review with Negative Implications

DBRS Limited (Morningstar DBRS) downgraded its credit ratings on two classes of Commercial Mortgage Pass Through Certificates, Series 2021-GATE issued by CSMC 2021-GATE as follows:

-- Class D to CCC (sf) from BB (low) (sf)
-- Class E to CCC (sf) from B (low) (sf)

In addition, Morningstar DBRS confirmed its credit ratings on the remaining classes as follows:

-- Class A at AA (high) (sf)
-- Class B at A (sf)
-- Class C at BBB (sf)
-- Class F at CCC (sf)

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

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 (TI) costs, capital improvement expectations, and decreased demand for some markets and neighbourhoods 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 accruing interest shortfalls, which as of the June 2024 remittance, total $7.6 million. The loan was transferred to the special servicer in November 2023, due to imminent monetary default in connection with the December 9, 2023, maturity date. The borrower failed to satisfy all of the conditions required to exercise the first loan extension option. A loan modification was subsequently executed in December 2023, details of which are outlined below. Although the servicer has confirmed that the interest shortfalls are tied to the loan modification, Classes D and E have been accruing interest since January 2024, and have reached the maximum Morningstar DBRS shortfall tolerance of six remittance periods for the BB (sf) and B (sf) rating categories, supporting the credit rating downgrades to CCC (sf). The senior classes are now more susceptible to additional interest shortfalls, which was a consideration for the Negative trends assigned with this credit rating action.

The transaction is secured by three Class A office buildings totaling 1.7 million square feet (sf), including Gateway Center I, Gateway Center II, and Gateway Center IV; an 86,400 sf retail concourse; and two parking garages and a surface lot in downtown Newark, New Jersey. The properties are part of a larger complex known as the Gateway Center with proximity to the Prudential Center arena and the New Jersey Performing Arts Center, and access to Newark Penn Station, which serves as a hub for Amtrak, NJ Transit, and the PATH trains to Manhattan. The borrower has invested over $25.0 million toward capital improvements to upgrade mechanical systems, the interconnecting concourse, retail space, and lobbies in the common areas.

Whole-loan proceeds of $325.0 million consist of the $285.0 million trust loan and $40.0 million mezzanine loan that is not part of the trust. Terms of the loan modification included a 24-month maturity extension to December 2025 with an option to extend the loan to December 2026. The borrower was also required to purchase an interest rate cap agreement (rate cap) with a strike price no less than 4.10% and a minimum term of 12 months, compared to the original loan terms where the required strike price was 3.0%. In addition, the borrower's pay rate was reduced to 4.1% in year one, and 5.0% in year two. The servicer noted that since the loan modification is considered permanent, interest advances will not be made on a monthly basis. The resulting shortfalls will be accrued and deferred for repayment on the loan's maturity date, or any earlier date on which the debt is repaid in full. Lastly, the borrower contributed approximately $45.0 million of additional equity into a leasing reserve at closing of the modification, with those funds earmarked to cover leasing expenses related to the New Jersey Transit Corporation (NJTC) lease. The loan was returned to the master servicer in April 2024 but is on the servicer's watchlist and will be cash managed until maturity.

According to the December 2023 rent roll, the collateral reported an occupancy rate of 56.14%, falling from 67.0% in December 2022. The low occupancy rate has been the primary reason behind the depressed cash flow and debt service coverage ratio (DSCR), which has been well below breakeven for the last several years. However, occupancy is expected to increase as the borrower secured a 25-year lease with NJTC for approximately 407,000 sf (23.9% of the net rentable area (NRA)) with staggered commencement dates that began in January 2024. The tenant will use the space for its headquarters and will receive a 12-month rent abatement from the date of delivery on each of the five spaces (ranging from 9,000 sf to 180,000 sf). NJTC will pay an initial base rent of $39.00 per square foot (psf) through the first 36 months, at which point the rental rate will increase 2.0% each year through lease expiration in 2049. According to the July 2023 lease agreement, the sponsors have agreed to provide approximately $135 psf in TI allowances for the NJTC space, representing the equivalent of nearly $70 million. The second and third-largest tenants include Broadridge Securities (9.4% of NRA, with a lease expiration in September 2032) and WebMD Health Corp. (8.9% of NRA, with a lease expiration in January 2033). Prudential Insurance Company of America (Prudential) formerly occupied 9.3% of NRA with a lease expiration in December 2025; however, the servicer has confirmed that the tenant terminated its lease and is in the process of vacating the remaining space (approximately 0.5% of NRA) in Gateway Center II. Prudential had been a tenant at the property since 1998.

As part of this review, Morningstar DBRS reanalyzed the collateral's NCF to reflect NJTC's lease. Long-term credit tenant treatment was provided to NJTC as the tenant is currently rated investment grade. The concluded Morningstar DBRS NCF is $22.3 million, an increase from the YE2023 NCF and Morningstar DBRS NCF derived at issuance of $9.5 million and $17.2 million, respectively. For the office space component, Morningstar DBRS applied TIs of $50.0 psf for new leases and $15.0 psf for renewals. For the retail/concourse space, TIs for new and renewal leases were $55.0 psf and $10.0 psf, respectively. Leasing commissions were based on 7.5% for new leases and 5.0% for renewals across all spaces. A capitalization rate of 8.75%, which was used in the analysis for the April 2024 credit rating action was maintained for this review, resulting in a Morningstar DBRS value of $255.1 million. Since rent abatements owing to a few tenants, most notably NJTC are not being funded from a reserve account, Morningstar DBRS' analysis considered a negative value adjustment totalling $18.4 million. The final Morningstar DBRS value is $236.7 million, compared to the March 2024 appraised value of $314.7 million, the issuance appraised value of $455.2 million, and the Morningstar DBRS value at issuance of $229.9 million. The implied loan-to-value ratio (LTV) based on the updated Morningstar DBRS value against the trust debt is 120.4%. A positive qualitative adjustment totaling 0.5% was maintained from the prior review to account for property quality. The properties were originally developed between 1971 and 1986; however, over the years, they have received a fair amount of investment to maintain and upgrade building systems and common areas. The buildings are comparable in quality to other more commoditized assets across suburban New Jersey.

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 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.

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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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)
-- Rating North American CMBS Interest-Only Certificates (June 28, 2024), https://dbrs.morningstar.com/research/435294
-- 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 https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.