Morningstar DBRS Confirms Credit Ratings on All Classes of Citigroup Commercial Mortgage Trust 2020-420K

DBRS Limited (Morningstar DBRS) confirmed its credit ratings on the Commercial Mortgage Pass-Through Certificates, Series 2020-420K issued by Citigroup Commercial Mortgage Trust 2020-420K as follows:

-- Class A at AAA (sf)
-- Class X at AAA (sf)
-- Class B at AA (high) (sf)
-- Class C at AA (low) (sf)
-- Class D at A (low) (sf)
-- Class E at BBB (low) (sf)
-- Class HRR at BB (high) (sf)

All trends are Stable.

The credit rating confirmations reflect the overall stable to improving performance of the underlying collateral, as evidenced by the year-over-year growth in net cash flow (NCF) and steady residential occupancy rates that have remained above 90.0% since issuance.

The loan is secured by the borrower's fee-simple interest in two 22-story luxury residential towers, 416 Kent and 420 Kent, located along the waterfront in the Williamsburg neighborhood of Brooklyn, New York. The high-rise buildings consist of 857 residential units and 18,827 square feet of commercial space with extensive amenities including two parking garages consisting of 429 parking spaces. The sponsor and guarantor for the mortgage loan is Eliot Spitzer, the former governor of New York and the head of Spitzer Enterprises. Spitzer Enterprises has a 60-plus year history of developing, owning, and managing real estate in New York City and Washington, D.C.

The residential portion of the development benefits from significant 421-a tax exemptions during the loan term and, in return, the developer has designated between 20% and 25% of the units at each address as affordable housing (65 units at 416 Kent and 121 units at 420 Kent). The market-rate units at 416 Kent are generally not subject to any restrictions on rental rates, while the market-rate component at 420 Kent is subject to limitations on rental rate increases set by the New York City Rent Guidelines Board during the 25-year exemption period. The tax abatements exempt each of the properties from 100.0% of the taxes on the improvements and will extend beyond loan maturity. The $388.0 million whole loan consists of a mortgage loan totaling $298.0 million and a mezzanine loan totaling $90.0 million. The mortgage loan comprises $216.9 million in senior notes and $81.1 million in junior notes. The 10-year, fixed-rate, interest-only (IO) loan matures in November 2030 with no extension options.

As of the YE2023 financial reporting, the collateral was 96.9% occupied, generally in line with the prior year and above the issuance occupancy rate of 83.3%. Similarly, NCF continues to trend upward with the YE2023 figure of $28.8 million (a debt service coverage ratio (DSCR) of 1.95 times (x)), considerably higher than the YE2022, YE2021, and Morningstar DBRS figures of $24.4 million (DSCR of 1.66x), $16.8 million (DSCR of 1.14x) and $21.8 million (DSCR of 2.15x), respectively. According to Reis, the Kings County submarket reported average asking rents of $2,733 per unit and an average vacancy rate of 4.3% as of Q1 2024. The underlying collateral continues to outperform the submarket given its above-average property quality and finishes with in-place rent for market units averaging $4,747 and $4,350 for 416 Kent and 420 Kent, respectively. The in-place rent for the smaller subset of affordable units averages $1,117 and $957, respectively.

Morningstar DBRS' analysis considered a stressed scenario that was based on a 20.0% haircut to the YE2023 NCF to test the durability of the credit ratings. A 6.25% cap rate was maintained, resulting in a Morningstar DBRS stressed value of $369.0 million, representing a -43.0% variance from the appraised value at issuance of $647.0 million and a 5.9% variance from the Morningstar DBRS value derived at issuance. The updated implied loan-to-value ratio (LTV) was 80.8%, slightly below the LTV implied by the Morningstar DBRS value at issuance of 85.5%, supporting the credit rating confirmations made with this review. As a result of the collateral's strong rental-rate growth, above-average property quality, and location in a high-growth market, Morningstar DBRS maintained positive qualitative adjustments totaling 10.0% to the final LTV sizing benchmarks to account for cash flow volatility, property quality, and market fundamentals.

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

Class X is an interest-only (IO) certificate that reference 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 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.

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

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 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 info-DBRS@morningstar.com.