Morningstar DBRS Confirms All Credit Ratings on Citigroup Commercial Mortgage Trust 2019-C7

DBRS Limited (Morningstar DBRS) confirmed all credit ratings on the classes of Commercial Mortgage Pass-Through Certificates, Series 2019-C7, issued by Citigroup Commercial Mortgage Trust 2019-C7 as follows:

-- 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-AB at AAA (sf)
-- Class A-S at AAA (sf)
-- Class B at AAA (sf)
-- Class X-A at AAA (sf)
-- Class X-B at AAA (sf)
-- Class C at A (high) (sf)
-- Class D at BBB (high) (sf)
-- Class X-D at BBB (sf)
-- Class E at BBB (low) (sf)
-- Class X-F at BBB (low) (sf)
-- Class X-G at BBB (low) (sf)
-- Class F at BB (high) (sf)
-- Class G at BB (high) (sf)
-- Class X-H at BB (low) (sf)
-- Class H at B (high) (sf)
-- Class J-RR at B (low) (sf)

Morningstar DBRS changed the trends on Classes F, G, H, J-RR, X-F, X-G, and X-H to Negative from Stable. All other trends are Stable.

The Negative trends reflect Morningstar DBRS' increased loss expectations, primarily driven by 650 Madison Avenue (Prospectus ID#2; 4.5% of the pool) and 805 Third Avenue (Prospectus ID#3; 4.5% of the pool), which have exhibited performance deterioration since Morningstar DBRS' last credit rating action. The pool has significant exposure to the office sector, given loans representing 35.6% of the pool are secured office properties or mixed-use properties with significant office components. Where applicable, Morningstar DBRS increased the probability of default (POD) penalties and/or stressed loan-to-value (LTV) ratios for these two loans and others exhibiting increased risks from issuance. The resulting weighted-average (WA) expected loss (EL) for these loans was more than double the pool average.

The 650 Madison loan is collateralized by a Class A office and retail tower that consists of approximately 544,000 square feet (sf) of office space, with additional ground floor retail and storage space. The trust loan represents a pari passu portion of the $586.8 million senior loan that combines with $213.2 million in subordinate debt for a whole loan of $800.0 million. The loan has been on the servicer's watchlist since April 2023 as a result of a low debt service coverage ratio (DSCR), driven by the departure of several tenants, including the former second-largest tenant, Memorial Sloan Kettering Cancer Center, in June 2022. According to the March 2024 rent roll, the property's occupancy was 78.9%, down from 97.0% at issuance. The occupancy rate is expected to fall further following the servicer-confirmed downsizing of both the largest tenant, Ralph Lauren (currently 40.7% of the NRA; lease expiration in December 2024) and the second-largest tenant, BC Partners Inc. (previously 11.7% of the NRA; lease expiration in April 2024). According to the servicer, Ralph Lauren will remain in occupancy for 141,871 sf (23.6% of the NRA; new lease expiration in April 2036), but at a notably lower base rent of $63.00 psf (subject to an 8.0% annual escalation) as compared with the tenant's current base rent of $75.20 psf. The tenant allowance for the renewed space will be $74.07 psf. BC Partners Inc. has agreed to renew a portion of its space representing 7.4% of the NRA (lease expiration in August 2037) at a base rent of $90.00 psf, which is also below its pre-renewal rent, with no tenant improvement allowance. In addition, both tenants were given one year of free rent as part of their respective long-term renewals. With these developments, Morningstar DBRS estimates an availability rate of just under 43.0% for the property.

The declining occupancy trends have driven cash flows down significantly as compared with the issuance figures. Per the most recent financials for the trailing 12 months (T-12) ended March 31, 2024, the net cash flow (NCF) was $38.5 million (reflecting a DSCR of 1.71x on the senior debt; $1.36x on the whole loan), well below the Morningstar DBRS NCF derived at issuance of $50.8 million (DSCR of 2.45x on the senior debt). With the downsizings and renewals at lower rental rates as previously outlined, these trends are expected to escalate over the near term. Although the high availability rate and cash flow declines are indicative of significantly increased risks for this loan, Morningstar DBRS notes mitigating factors in the strong sponsorship provided by Vornado and Oxford Properties, the building quality and desirable location, which is in close proximity to major landmarks, including Central Park and the Rockefeller Center. The ground floor retail is a bright spot, with tenants generally on long-term leases that contribute over 30.0% of the total rent. To stress the loan in the analysis, given the increased risks, Morningstar DBRS considered an elevated LTV and POD, resulting in an EL that is nearly twice the pool's WA EL.

The 805 Third Avenue loan is secured by a Class A building that consists of a 565,000 sf office tower and a 31,000 sf three-story retail pavilion. The whole loan amount of $275.0 million consists of $150.0 million in pari passu senior debt and $125.0 million in subordinate debt. The trust loan represents a pari passu portion of the senior debt. The loan has been on the servicer's watchlist since September 2020, and is currently being monitored for a low DSCR, which is driven by a decline in occupancy. According to the servicer's commentary, the property was 58.0% occupied as of September 2023, a further decline from 68.0% as of September 2022, given the departure of the former second-largest tenant, Toyota Tsusho America, Inc., in November 2022. The largest remaining tenant at the property is Meredith Corporation (36.0% of the NRA; lease expiration in December 2026), which is currently subleasing nearly all of its space to three firms after moving to Brookfield Place in 2018, and has been reported to be planning to terminate its lease at the end of 2024. The issuance information showed a termination option available in January 2024; Morningstar DBRS has requested clarification from the servicer on the tenant's plans for the space and options for exit ahead of the 2026 expiry.

Based on the most recent financials, the loan reported a YE2023 DSCR of 0.80x on the senior debt, a decline from the YE2022 DSCR of 1.05x on the senior debt, as a result of a -10.7% variance in gross potential rent. Based on the August 2024 reporting, four of the five senior pari passu notes are listed as delinquent with the last payment received in June 2024, whereas the trust debt indicates payments are only one month late. Another area of concern is the loan's sponsor, Cohen Brothers Realty Corporation, which, per media sources, has accumulated approximately $1.0 billion of loans in default. Given the observed delinquency, Morningstar DBRS expects the loan to be transferred to special servicing in the near term. To account for the significantly increased risks as outlined for this loan, Morningstar DBRS' analysis considered a stressed scenario to increase the LTV and POD, which resulted in an EL that was approaching three times the pool's WA EL.

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, X-G, and X-H 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 ratings were initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for these credit rating actions.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with these credit rating actions.

These are solicited credit ratings.

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
-- 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
-- Morningstar DBRS North American Commercial Real Estate Property Analysis Criteria (June 28, 2024), https://dbrs.morningstar.com/research/435293

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.