Morningstar DBRS Confirms Credit Ratings on All Classes of Natixis Commercial Mortgage Securities Trust 2019-NEMA

DBRS Limited (Morningstar DBRS) confirmed its credit ratings on the Commercial Mortgage Pass-Through Certificates, Series 2019-NEMA issued by Natixis Commercial Mortgage Securities Trust 2019-NEMA as follows:

-- Class A at A (sf)
-- Class B at BBB (low) (sf)
-- Class X at BB (sf)
-- Class C at BB (low) (sf)
-- Class V-ABC at BB (low) (sf)
-- Class V2 at CCC (sf)
-- Class D at CCC (sf)
-- Class V-D at CCC (sf)

The trends on Classes A, B, C, X, and V-ABC are Stable. Classes D, V2, and V-D have credit ratings that do not typically carry trends in commercial mortgage-backed securities (CMBS) credit ratings.

The credit rating confirmations reflect Morningstar DBRS' outlook on the transaction, which remains relatively unchanged since the previous credit rating action in December 2023. While the loan has been modified and was subsequently returned to the master servicer in June 2024, Morningstar DBRS maintains its conservative view on the transaction in light of the updated property valuations for the underlying collateral. As such, Morningstar DBRS did not update its loan-to-value (LTV) sizing benchmarks and maintained the stressed value analysis derived during the previous credit rating action in December 2023, which indicated an LTV ratio in excess of 100% on the secured debt.

The transaction consists of a $199.0 million first-lien mortgage loan secured by NEMA San Francisco, a 754-unit Class A luxury apartment complex with 11,184 square feet of commercial retail space in the South of Market (SoMa) submarket. The trust loan is part of a $384.0 million whole loan and consists of a $130.0 million senior A-1 note and a $69.0 million senior-subordinate A-B note. Outside of the trust, there is $75.0 million of additional debt that is pari passu to the A-1 note, as well as $110 million in subordinate B notes. The trust loan has a 10-year term and pays interest only (IO) for the full term until its maturity in February 2029.

The loan transferred to special servicing in August 2023 following imminent monetary default. A loan modification was executed in February 2024, with the interest rate on the B-1 note reduced to a fixed rate of 2.00% through the earlier of either August 2026 or upon the net cash flow (NCF) debt service coverage ratio (DSCR) achieving a minimum 1.10 times (x) on a quarterly basis. Additionally, the accruing interest on the B-2 note was terminated, requiring the borrower to only repay the unpaid principal at maturity. Among other terms, the borrower was also required to fund approximately $5.0 million upfront for past-due payments to bring the loan current and to commit to funding a minimum of $5.5 million in future equity through the remainder of the loan term, including a $2.5 million deposit in the capital expenditure (capex) reserves and $1.0 million deposits each year following the aforementioned funding. According to the servicer, the required $2.5 million capex deposit has been received. The loan will remain in a cash sweep period until fully repaid. According to November 2024 reporting, there was more than $2.7 million held in reserves.

In its previous analysis of the transaction, Morningstar DBRS was in receipt of an appraisal dated September 2023, which valued the collateral at $279.0 million, a 48.9% decline from the issuance appraised value of $543.6 million and below the whole-loan balance of $384.0 million. In its current analysis, Morningstar DBRS applied a conservative 15.0% haircut to the September 2023 appraised value to reflect the potential for further value declines amid property underperformance, resulting in a stressed value of $237.2 million. The servicer provided a second appraisal in October 2023, valuing the property at $328.8 million. As indicated above, Morningstar DBRS maintains its outlook on the property value as performance has yet to reach levels projected by either appraisal, although there is evidence of moderate improvement.

According to the Q2 2024 financials, the loan reported an annualized NCF of $13.8 million, relatively consistent with the YE2023 and YE2022 figures of $13.6 million and $13.0 million, respectively, but below the Morningstar DBRS NCF of $20.1 million derived in 2020. Based on the modified debt service amount, the loan's DSCR was reported at 1.02x as of Q2 2024, above breakeven for the first time since 2019. Historical declines in cash flow have primarily stemmed from depressed rental rates and increased rental concessions initiated during the pandemic; however, rental rates have shown improvement over the last couple of years, increasing to $3,445 per unit as of June 2024, from $3,318 per unit in April 2023 and $3,183 per unit in April 2022. By means of comparison, according to Reis Q2 2024 data, the average asking and effective rental rates for the SoMa submarket were reported at $3,753 per unit and $3,620 per unit, respectively.

Despite the improvement in the achieved average rental rate, property performance still lags the 2023 appraisal expectations. When applying the annualized Q2 2024 NCF against the September 2023 and October 2023 values of $279.0 million and $328.8 million, the implied capitalization (cap) rates are 4.96% and 4.21%, respectively, below the assumed cap rates in the appraisals of 5.75% and 6.0%, respectively. In comparison, the Morningstar DBRS value of $237.2 million reflects an implied cap rate of 5.83% based on the Q2 2024 NCF. While on the lower end of the Morningstar DBRS range for multifamily properties, the cap rate reflects the subject's urban infill location and above-average property quality. The implied Morningstar DBRS cap rate is further supported by information from the CBRE U.S. Cap Rate Survey H1 2024, which indicates Class A value-added multifamily properties in the infill San Francisco area traded at cap rates ranging from 5.25% to 5.75% while stabilized properties traded at cap rates ranging from 4.75% to 5.50%.

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.
 
Class X is an IO certificate that references 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. 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 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 (September 19, 2024), https://dbrs.morningstar.com/research/439699
-- Morningstar DBRS North American Commercial Real Estate Property Analysis Criteria (September 19, 2024), https://dbrs.morningstar.com/research/439702
-- Legal Criteria for U.S. Structured Finance (October 28, 2024), https://dbrs.morningstar.com/research/441840
-- Interest Rate Stresses for U.S. Structured Finance Transactions (February 26, 2024), https://dbrs.morningstar.com/research/428623
-- North American Commercial Mortgage Servicer Rankings (August 23, 2024), https://dbrs.morningstar.com/research/438283
-- Rating North American CMBS Interest-Only Certificates (June 28, 2024), https://dbrs.morningstar.com/research/435294

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.