Morningstar DBRS Changes Trends on Six Classes of BANK 2020-BNK26 to Negative From Stable

DBRS Limited (Morningstar DBRS) confirmed its credit ratings on all classes of Commercial Mortgage Pass-Through Certificates, Series 2020-BNK26 issued by BANK 2020-BNK26 as follows:

-- Class A-2 at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-3-1 at AAA (sf)
-- Class A-3-2 at AAA (sf)
-- Class A-3-X1 at AAA (sf)
-- Class A-3-X2 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-4-1 at AAA (sf)
-- Class A-4-2 at AAA (sf)
-- Class A-4-X1 at AAA (sf)
-- Class A-4-X2 at AAA (sf)
-- Class X-A at AAA (sf)
-- Class A-S at AAA (sf)
-- Class A-S-1 at AAA (sf)
-- Class A-S-2 at AAA (sf)
-- Class A-S-X1 at AAA (sf)
-- Class A-S-X2 at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class B at AA (high) (sf)
-- Class X-B at A (high) (sf)
-- Class C at A (sf)
-- Class D at BBB (high) (sf)
-- Class X-D at BBB (high) (sf)
-- Class E at BBB (sf)
-- Class X-F at BBB (low) (sf)
-- Class F at BB (high) (sf)
-- Class X-G at BB (low) (sf)
-- Class G at B (high) (sf)

Morningstar DBRS changed the trends on Classes E, F, G, X-D, X-F, and X-G to Negative from Stable. The trends on all remaining classes are Stable.

The credit rating confirmations reflect the overall stable performance of the transaction, which remains generally in line with Morningstar DBRS' expectations since issuance, as exhibited by the lack of loans in special servicing or a significant concentration of loans exhibiting credit erosion. There have been no losses to the trust since issuance and there is a sizeable unrated Class H totaling $35.6 million, with a total of $125.5 million in unrated and below investment-grade credit-rated cushion at the bottom of the capital stack providing cushion against loss to the rest of the bonds. However, the Negative trends on Classes E, F, and G reflect Morningstar DBRS' specific concerns with the second-largest loan in the pool, Bravern Office Commons (Prospectus ID#2; 6.4% of the pool). The collateral property remains fully leased but fully dark as of the last update received from the servicer and, although the tenant continues to pay rent, the lease expiration is upcoming in the summer of 2025. The Negative trends are further supported by the large concentration of loans secured by office properties, which represent 38.2% of the current pool balance. Though most of these loans continue to perform, Morningstar DBRS continues to monitor for potential degradation given the challenged office landscape

As of the August 2024 remittance, 74 of the 75 original loans remain in the pool, with a trust balance of $1.17 billion, representing a collateral reduction of 2.5% since issuance as a result of loan amortization. One loan, representing 0.2% of the pool, is fully defeased. There are no loans in special servicing and 10 loans, representing 22.9% of the pool, are on the servicer's watchlist being monitored primarily for servicing trigger events, occupancy concerns, and deferred maintenance. Excluding collateral that has been fully defeased, the pool is most concentrated by loans that are secured by office properties, which represent 38.2% of the pool balance. Morningstar DBRS has a cautious outlook on this asset type as sustained upward pressure on vacancy rates in the broader office market may challenge landlords' efforts to backfill vacant space, and, in certain instances, contribute to value declines, particularly for assets in noncore markets and/or with disadvantages in location, building quality, or amenities offered. Where applicable, Morningstar DBRS increased the probability of default penalties, and, in certain cases, applied stressed loan-to-value ratios (LTVs) for loans exhibiting performance concerns. The resulting weighted-average expected loss (EL) across these identified office properties was nearly triple the overall pool EL.

As previously outlined, the Negative trends placed on the lowest rated classes are reflective of concerns about the Bravern Office Commons loan, which is secured by a Class A office property in Bellevue, Washington. The loan is pari passu, with the other piece of the whole loan secured in BAMLL 2020-BOC (not rated by Morningstar DBRS). The property is leased to a single tenant, Microsoft Corporation (Microsoft), on two triple net leases extending to June 2025 and August 2025. Per communication with the servicer, Microsoft has relocated its staff from the subject property to its Redmond campus in Redmond, Washington. According to the servicer's site inspection completed in March 2024, the property was completely dark at the time of the visit. Morningstar DBRS expects Microsoft will continue to fulfil its obligations under the lease through the 2025 lease expiration; however, given the significant amount of space to be re-leased amid a challenging environment for the sector, the risks for this loan have increased significantly with this development. At issuance, the loan was structured with a cash sweep trigger in the event Microsoft failed to physically occupy more than 50% of its space, and the servicer confirmed a balance of approximately $30 million held in the excess cash reserve account. The servicer also noted a number of large tenants are evaluating the subject property, but no concrete prospects have been identified to date. The servicer reports that the borrower continues to market the subject property and is formulating plans with an architect to renovate the lobby and amenity spaces. Vacancy rates have declined moderately since the previous review, with Reis reporting a Q2 2024 rate of 11.8%, down slightly from the Q2 2023 rate of 12.2% for the Bellevue Issaquah submarket.

At issuance, the subject was valued at $605 million, which represents an LTV of 37.6% on the senior debt and 50.2% on the whole loan of $304.0 million. In its analysis, Morningstar DBRS completed a dark value analysis ahead of the upcoming lease expiration in 2025 and the lack of any meaningful backfill for the Microsoft space to date. Morningstar DBRS concluded a dark value of $230.4 million based on a stabilized NCF of $25.7 million, using an 8.50% capitalization rate that incorporates a 100 basis point stress for the dark status of the asset while deducting leasing and downtime costs that totalled approximately $72 million. Morningstar DBRS also gave credit to the $30 million of in-place reserves held in the excess cash reserve account. At issuance, the loan was shadow-rated investment grade; with this review Morningstar DBRS is removing the shadow rating given the increased risks from issuance as outlined above.

At issuance, four loans in the top 10 were shadow-rated investment grade. This includes 560 Mission Street (Prospectus ID#3; 6.0% of the pool), 55 Hudson Yards (Prospectus ID#6; 4.8% of the pool), 1633 Broadway (Prospectus ID#8; 3.4% of the pool), and Bellagio Hotel and Casino (Prospectus ID#9; 3.0% of the pool). With this review, Morningstar DBRS confirms that these loan performances remain consistent with investment-grade loan characteristics.

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 Factors in Credit Ratings (August 13, 2024), https://dbrs.morningstar.com/research/437781.

Classes X-A, X-B, X-D, X-F, and X-G are interest-only (IO) certificates 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.

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 CMBS Multi-Borrower Rating Methodology (March 1, 2024)/North American CMBS Insight Model v 1.2.0.0, https://dbrs.morningstar.com/research/428797

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. (July 17, 2023)

For more information on this credit or on this industry, visit https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.