Morningstar DBRS Confirms All Credit Ratings of Hamlet Securitization Trust 2020-CRE1

DBRS, Inc. (Morningstar DBRS) confirmed all credit ratings on the classes of Commercial Mortgage Pass-Through Certificates, Series 2020-CRE1 issued by Hamlet Securitization Trust 2020-CRE1 as follows:

-- Class A at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (low) (sf)
-- Class E at BB (high) (sf)
-- Class F-RR at CCC (sf)

All classes have Stable trends with the exception of Class F-RR as its rating does not carry a trend in commercial mortgage-backed securities (CMBS) transactions.

The credit rating confirmations and Stable trends reflect the overall stable performance of the transaction since the previous Morningstar DBRS credit rating action. As of the September 2024 remittance, 21 of the original 23 loans remain in the pool, with a current trust balance of $1.6 billion, representing a collateral reduction of 14.4% since issuance. Eight loans, representing 38.8% of the pool balance, are on the servicer's watchlist, four of which (27.1% of the current pool balance) were flagged solely for a failure of the respective borrowers to submit financials, while the remaining four loans (11.6% of the current pool balance) are being monitored primarily for low debt service coverage ratios (DSCRs) and servicing trigger events. Two loans, representing 24.7% of the pool are in special servicing. At issuance, there were four transitional loans in the pool. As of this review, only one loan (20 Broad Street, Prospectus ID#1, 13.6% of the pool) has a business plan that remains in progress as the borrower has yet to lease the retail component of the property to stabilization.

At last review, Morningstar DBRS downgraded Class F-RR to CCC (sf), primarily as a result of a sustained period of outstanding interest shortfalls for that class. Morningstar DBRS also noted realized losses for the unrated Class G-RR contributing to the credit rating downgrade rationale. At the time of that October 2023 credit rating action, shortfalls had been outstanding for five months and were approaching the end of Morningstar DBRS' shortfall tolerance. The interest shortfalls and realized loss were both tied to the 545 & 555 North Michigan Avenue loan (Prospectus ID#12, 3.4% of the pool). The interest shortfall remained outstanding until it was repaid with the July 2024 remittance. As of the September 2024 remittance, interest shortfalls remained outstanding for only the unrated Class G-RR certificate, with cumulative unpaid interest of $3.9 million. Although the outlook for the 545 & 555 North Michigan Avenue loan has improved overall with a tenant signing for the entirety of the collateral space, the modified loan structure that divided the loan into a senior $55.0 million A note and a subordinate $20.0 million B note in May 2023 suggests a loss will be incurred at disposition. This factor, as well as the two new loans that have transferred to special servicing since the last review, are drivers for confirming the CCC (sf) credit rating for Class F-RR.

The pool is concentrated with loans secured by office, multifamily, and retail properties, representing 38.7%, 19.7%, and 17.1% of the current pool balance, respectively. In general, the office sector has been challenged given soft submarket conditions and the shift in workplace dynamics observed across the United States. Regarding office loans exhibiting increased risk, such as increased vacancy rates, upcoming material lease rollover, or located in markets with weak fundamentals, Morningstar DBRS increased the probability of default penalties (POD) and, in certain cases, applied stressed loan-to-value ratios (LTVs) in its analysis, resulting in a weighted-average expected loss for those loans at approximately 1.35 times the overall pool average.

The largest loan in special servicing, 20 Broad Street, is secured by a 533-unit, luxury multifamily property with 39,029 square feet of retail space located in Manhattan's Financial District. The loan transferred to the special servicer in August 2024 ahead of the scheduled loan maturity in September 2024. According to the most recent servicer commentary, the lender, for a $70 million mezzanine loan, is preparing to enforce its rights and take ownership of the borrower, an affiliate of MetroLoft. Once that is actioned, the servicer and mezzanine lender are expected to finalize terms to resolve the outstanding defaults for the subject loan. MetroLoft's business plan was to lease up the renovated property and obtain a permanent loan upon stabilization. The pandemic contributed to a slower-than-expected stabilization timeline and cash flows have generally been reported below issuance expectations. Most recently, the servicer reported an annualized September 2022 net operating income (NOI) of $14.1 million, below the Morningstar DBRS' stabilized NOI derived at issuance of $15.4 million. A January 2024 rent roll showed an occupancy rate of 50.1% and 97.6% for the retail and multifamily portions of the property, respectively. The average rental rate for the residential units of approximately $4,433 per unit at January 2024 compares with the December 2019 average of $3,959 per unit. Given the improvement in the occupancy rate for the commercial space from the October 2021 occupancy of 17.1% and the residential rental rate growth, Morningstar DBRS expects the in-place NOI has improved significantly since 2022. Morningstar DBRS considered a stressed POD to increase the expected loss in the analysis for this review but notes that the relatively low LTV of approximately 58.0% on the issuance as-is appraisal, recent performance improvements and the likelihood that the mezzanine lender will be highly incentivized to come to an agreement with the special servicer suggest the overall risk of significant loss at resolution remains low.

The other loan in special servicing and the loan with Morningstar DBRS' highest expected loss in the analysis for this review, Merritt on the River Portfolio (Prospectus ID#3, 12.0% of the pool balance), is secured by a portfolio of three Class A office buildings and two Class B office buildings, totaling 974,575 square feet in Norwalk, Connecticut. The loan transferred to special servicing in June 2024 in order to attain a loan modification, which was subsequently granted. Terms of the modification included a $20.7 million paydown funded by borrower funds from former tenant GE Capital's lease termination deposit of $17.5 million and an additional $3.2 million from a leasing reserve. GE Capital formerly occupied 39.7% of the net rentable area (NRA). The significant paydown indicates the borrower's commitment to the portfolio and according to servicer commentary, the loan is expected to return to the master servicer by October 2024. No updated rent roll has been provided; however, according to LoopNet, approximately 55.0% of the total NRA is currently being marketed for lease, including a portion of the former GE Capital space. According to Reis figures, the central submarket of Fairfield County reported a Q2 2024 vacancy rate of 23.2% compared with the Q2 2023 vacancy rate of 25.5%. While the sponsor commitment is notable, the increase in vacancy and soft submarket conditions remain concerns. In its analysis, Morningstar DBRS applied a stressed LTV and an elevated POD penalty, resulting in an expected loss that was more than three times than the pool average.

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).

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 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.

DBRS, Inc.
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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 CMBS Multi-Borrower Rating Methodology (March 1, 2024)/North American CMBS Insight Model v 1.2.0.0, https://dbrs.morningstar.com/research/428797
-- Morningstar DBRS Commercial Real Estate Property Analysis Criteria (September 19, 2024), https://dbrs.morningstar.com/research/439702
-- 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

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