Morningstar DBRS Downgrades Credit Ratings on Four Classes of BBCMS Mortgage Trust 2020-C7, Changes Trends on Two Classes to Negative from Stable

DBRS Limited (Morningstar DBRS) downgraded its credit ratings on four classes of Commercial Mortgage Pass-Through Certificates, Series 2020-C7 issued by BBCMS Mortgage Trust 2020-C7 as follows:

-- Class X-E to B (sf) from BB (high) (sf)
-- Class E to B (low) (sf) from BB (sf)
-- Class X-F to CCC (sf) from B (high) (sf)
-- Class F to CCC (sf) from B (sf)

In addition, Morningstar DBRS confirmed the following credit ratings:

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-5 at AAA (sf)
-- Class A-S at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class X-A at AAA (sf)
-- Class X-B at AAA (sf)
-- Class B at AA (high) (sf)
-- Class C at A (high) (sf)
-- Class D at BBB (low) (sf)

Morningstar DBRS changed the trends on Classes C and D to Negative from Stable and maintained the Negative trends on Classes E and X-E. There are no trends for Classes F and X-F, which have credit ratings that do not typically carry trends in commercial mortgage-backed securities (CMBS) credit ratings. The remaining classes continue to carry Stable trends.

The credit rating downgrades on Classes E, F, X-E, and X-F reflect Morningstar DBRS' increased loss projections for the loans in special servicing. As of the August 2024 remittance, there were five specially serviced loans that represented 15.8% of the pool balance. Since the last credit rating action, Parkmerced - Trust (Prospectus ID#1, 7.5% of the current pool balance), One Stockton (Prospectus ID#14, 2.6% of the current pool balance), Time Out MHC Portfolio (Prospectus ID#18, 1.8% of the current pool balance), and Bronx Multifamily Portfolio (Prospectus ID#19, 1.8% of the current pool balance) have transferred to special servicing. Morningstar DBRS' analysis included a liquidation scenario for three of the five specially serviced loans, resulting in implied losses in excess of $19.0 million, as compared with the $6.5 million in implied losses at the time of the last credit rating action. Based on the liquidation scenarios for those loans, losses are projected to erode approximately 70% of the unrated Class G certificate, reducing credit enhancement to the junior bonds, supporting the credit rating downgrades on Classes E and F. The primary contributor to the increase in Morningstar DBRS' projected loss is the liquidation scenario for the Meridian One Colorado loan (Prospectus ID#17, 2.0% of the current pool balance), which received an updated appraisal with this review, valuing the property 56.7% below the appraised value at issuance. The Negative trend on Class E is specifically tied to the potential for further value deterioration for the loans in special servicing, indicating that further credit rating downgrades could occur.

The Negative trends on Classes C and D reflect Morningstar DBRS' concerns regarding loans not yet in special servicing: 525 Market Street - Trust (Prospectus ID#2, 7.5% of the current pool balance) and The Cove at Tiburon - Trust (Prospectus ID#3, 6.3% of the current pool balance). At issuance, these loans were assigned investment-grade shadow ratings because of low leverage metrics on the senior debt, high property quality, and strong market fundamentals. However, given recent performance declines, Morningstar DBRS removed the shadow ratings on both loans with this review, as discussed further below. Furthermore, excluding the defeased loans, the pool is most concentrated by office properties or mixed-use properties with a significant office component, which represents 29.1% of the pool balance. Morningstar DBRS has specific concerns about seven of these loans, representing 18.1% of the pool. Morningstar DBRS has a cautious outlook on the office sector given the sustained upward pressure on vacancy rates in the broader office market, challenging landlords' efforts to backfill vacant space, and, in certain instances, contributing 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 (POD), and, in certain cases, applied stressed loan-to-value ratios (LTV) for loans exhibiting increased risks from issuance. The resulting weighted-average (WA) expected loss (EL) for these loans is nearly 150% higher than the pool average. Of these, seven loans (18.1% of the pool) are secured by office properties with concentrated tenancy, meaning there is either a single tenant or the largest and/or second-largest tenants collectively represent more than 50.0% of the net rentable area (NRA); these loans include 525 Market Street, F5 Towers (Prospectus ID#9, 5.0% of the current pool balance) and 650 Madison Avenue (Prospectus ID#13, 2.7% of the current pool balance), which are already reporting a decline in occupancy rates and/or subleasing portions of their space. Interest shortfalls have increased to nearly $500,000, reaching up to the Class F certificate, an increase from $14,000 at the last review in September 2023 as a result of updated valuations for the loans in special servicing. The Negative trends are further supported by the increased propensity for interest shortfalls on Classes C and D, which have credit ratings that allow for tolerance of shortfalls for one to two and three to four reporting periods, respectively. Morningstar DBRS notes that any unforeseen developments in the aforementioned loans' performance or property value trends could result in further credit rating downgrades given the weight these large loans carry in influencing the overall pool EL.

The credit rating confirmations and Stable trends on the remaining classes are reflective of the otherwise overall stable performance of the remaining loans in the pool and Morningstar DBRS' expectation that these loans' performance should remain in line with its expectations at issuance as evidenced by the year-end WA debt service coverage ratio (DSCR) of 2.60 times (x) and WA debt yield, which remains above 11.0%. As of the August 2024 remittance, all of the 49 original loans remained in the trust, with an aggregate balance of $795.2 million, representing minimal collateral reduction of 1.6% since issuance. There are four fully defeased loans, representing 1.7% of the current pool balance. Nine loans, representing 22.8% of the pool, are being monitored on the servicer's watchlist for performance-related concerns and deferred maintenance items.

The Parkmerced loan is secured by a 3,165-unit apartment complex in San Francisco. The $1.5 billion mortgage loan consists of a $547.0 million senior loan and subordinate debt composed of a $708 million B note and a $245.0 million C note. There is also $275.0 million in mezzanine debt in place. The trust debt represents a pari passu portion of the senior loan. At Morningstar DBRS' last credit rating action for the subject transaction, the loan was on the servicer's watchlist for a low DSCR and was being cash managed. Although the low DSCR was a concern, Morningstar DBRS noted an occupancy improvement as of the March 2023 rent roll and the subject collateral's strong historical performance as mitigating factors that supported maintaining the investment-grade shadow rating assigned at issuance. However, despite slow and steady improvements over the next six months, the loan eventually transferred to special servicing as of the March 2024 reporting period and was reported as current and with the special servicer as of the August 2024 remittance. The property was revalued in July 2024 at $1.4 billion, reflecting a 34.1% decline from the issuance value of $2.1 billion. Although the value decline and deteriorated performance are indicative of significantly increased risks from issuance, the implied LTV for the senior debt with the updated value remains quite healthy at 39.4%, suggesting that the likelihood of loss to the trust at resolution remains low. In light of the default and generally increased risks from issuance, Morningstar DBRS removed the shadow rating and increased the POD, resulting in a loan EL that is approximately double the pool's WA EL.

The 525 Market Street - Trust loan is secured by the fee, leasehold, and subleasehold interests in 525 Market Street, a 38-story, 1.1 million-square-foot (sf) Class A office tower in San Francisco's central business district. Built in 1973, the LEED Platinum-certified property is primarily configured for office use, with first-floor retail space totaling 14,655 sf. The whole loan of $682.0 million encompasses the $60.0 million trust loan, $410.0 million pari passu notes, and subordinate B note debt of $212.0 million. The controlling piece is secured in the MKT 2020-525M Mortgage Trust transaction, which is also rated by Morningstar DBRS. To read more on Morningstar DBRS' recent credit rating action on this transaction, please see 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, on the Morningstar DBRS website. The loan is sponsored by a joint venture between New York State Teachers' Retirement System (advised by J.P. Morgan Asset Management) and RREEF America REIT II, Inc., a Maryland corporation.

As of the March 2024 rent roll, the property was 68.9% occupied with approximately 15.0% of the NRA scheduled to roll over in the upcoming 12 months, including the second-largest tenant. Occupancy continues to decline from 95.0% at issuance. The largest tenants at the building include Amazon.com Services, Inc. (39.0% of the NRA, leases expire between 2028 and 2031); Wells Fargo Bank (13.7% of the NRA, lease expires in June 2025); and Disney Streaming Services, LLC (3.5% of the NRA, lease expires in July 2027). Morningstar DBRS inquired whether Wells Fargo Bank will be renewing its lease but did not receive a response as of this review. As per the most recently reported financials, the loan reported a healthy DSCR of 2.57x as of YE2023, compared with the Morningstar DBRS DSCR of 2.51x. At issuance, the loan was shadow-rated investment grade given its strong sponsorship and long-term credit tenancy. In its analysis, Morningstar DBRS updated the LTV to reflect its updated value for the property as concluded with the April 15, 2024, credit rating action, as well as a stressed POD to account for the decline in occupancy from issuance, concentrated tenant rollover risk, and softening submarket, which reported a vacancy rate of 19.8% in Q2 2024 as per Reis. Given the aforementioned factors, Morningstar DBRS removed the loan's previously assigned shadow rating as the loan's characteristics are no longer consistent with the investment-grade shadow rating determined at issuance.

The third-largest loan in the pool, The Cove at Tiburon (Prospectus ID#3, 6.3% of the current trust balance), is secured by a 283-unit Class A multifamily property on 20 waterfront acres in Tiburon, California. At issuance, Morningstar DBRS shadow-rated the loan investment grade given that the property benefits from a prime waterfront location, superior amenities, and limited competition within the submarket. However, despite these aspects, which Morningstar DBRS expected to contribute to cash flow stability over the loan term, the property's reported occupancy rate and cash flow trended downward shortly after issuance, primarily as a result of a slowdown in leasing activity. The $210 million whole loan is composed of the $50.0 million trust balance, and the remaining balance is securitized in the SG Commercial Mortgage Securities Trust 2020-COVE (SGCMS 2020-COVE) transaction, which is also rated by Morningstar DBRS. Morningstar DBRS has placed the SGCMS 2020-COVE transaction Under Review with Negative Implications given the sustained challenges in performance at the underlying collateral; for further detail, please refer to the press release published on September 5, 2024. As per the March 2024 rent roll, the property was 80.2% occupied at an average rental rate of $5,789 per unit, compared with June 2022 figures of 91.9% and $5,852 per unit, respectively. It appears that new leases are being signed at lower rental rates to curb increases in vacancy rates, resulting in lowered cash flows. As per Reis, apartment properties with a similar vintage to the property within the South Marin submarket reported an average vacancy rate of 4.3% and average asking rent of $4,292 per unit in Q1 2024. Although rental rates remain above the submarket's, per the most recent financials, the YE2023 NCF was reported at $9.6 million (a DSCR of 1.22x), compared with the YE2022 NCF of $11.9 million (DSCR of 1.49x) and Morningstar DBRS NCF of $10.7 million (Morningstar DBRS DSCR of 2.51x). Although the property benefits from its ideal waterfront location, strong property quality, and limited competition within the submarket, the year-over-year declines in occupancy and rental rates, coupled with the lack of leasing momentum, have inherently increased this loan's credit profile from issuance. Therefore, Morningstar DBRS removed the shadow rating for this loan and increased the POD to account for the heightened risk.

At issuance, two other loans were shadow-rated investment grade: Acuity Portfolio - Trust (Prospectus ID#8, 5.0% of the current pool balance) and F5 Towers (Prospectus ID#9, 5.0% of the current pool balance). With this review, Morningstar DBRS confirms that the loan performance trends remain consistent with the investment-grade shadow ratings.

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) at https://dbrs.morningstar.com/research/437781.

Classes X-A, X-B, X-E, and X-F 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 credit ratings assigned to Classes B and C materially deviate from the credit ratings implied by the predictive model. Morningstar DBRS typically expects there to be a substantial likelihood that a reasonable investor or other user of the credit ratings would consider a three-notch or more deviation from the credit rating stresses implied by the predictive model to be a significant factor in evaluating the credit ratings. The rationale for the material deviations is uncertain loan-level event risk. The results of Morningstar DBRS' analysis suggested downward pressure through the middle of the bond stack, most pronounced for Classes B and C; however, Morningstar DBRS has adequately stressed loans of concern, and the remaining loans in the pool continue to exhibit stable performance in line with Morningstar DBRS' expectations at issuance.

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
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 CMBS Multi-Borrower Rating Methodology (March 1, 2024)/North American CMBS Insight Model version 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, 2024), https://dbrs.morningstar.com/research/438283
-- 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.