Morningstar DBRS Downgrades Credit Ratings on Five Classes of MKT 2020-525M Mortgage Trust, Changes Trends on Six Classes to Stable From Negative

DBRS Limited (Morningstar DBRS) downgraded its credit ratings on five classes of Commercial Mortgage Pass-Through Certificates, Series 2020-525M issued by MKT 2020-525M Mortgage Trust as follows:

-- Class X-A to A (low) (sf) from A (high) (sf)
-- Class C to BBB (high) (sf) from A (sf)
-- Class D to BB (sf) from BBB (sf)
-- Class E to B (sf) from BB (low) (sf)
-- Class F to B (low) (sf) from B (sf)

In addition, Morningstar DBRS confirmed the following credit ratings:

-- Class A at AAA (sf)
-- Class B at AA (low) (sf)

The trends on Classes A, B, C, D, E, and F were changed to Stable from Negative. The trend on Class X-A remains Stable.

The credit rating downgrades for Classes X-A, C, D, E and F are reflective of increased risks for the transaction, largely driven by the market disruption in San Francisco and the occupancy declines for the collateral property over the past few years, with further declines expected in the near to moderate term. The underlying mortgage loan is backed by a San Francisco office property, 525 Market Street. The trust debt comprises $270 million in senior A notes and $212 million in junior B notes; the whole loan totals $682.0 million inclusive of all senior debt and subordinate debt. Classes D, E and F are fully backed by subordinate debt. As of the most recent reporting, the property's occupancy rate has declined by over 25% from the issuance level and the borrower expects further decline as tenants with leases expiring in the next two years are not expected to renew.

The credit rating confirmations reflect Morningstar DBRS' view that the underlying collateral remains one of the most desirable Class A office assets within the submarket, with the subject transaction benefitting from strong sponsorship and the expectation that the in-place cash flows will remain comfortably above the debt service obligation through the concentration of expected roll in the next few years. Moreover, the subject continues to benefit from the occupancy of the investment-grade tenant Amazon.com Services, Inc. (Amazon; 39.0% of the net rentable area (NRA)), leases expiring between January 2028 and February 2030). Amazon has been at the property since 2018 and expanded its space three times since the initial lease signing.

In the analysis for this review, Morningstar DBRS considered a stressed value for the collateral property to gauge the potential impact of the occupancy decline over the near term. Morningstar DBRS determined that, even in the analyzed value stress scenario, Classes A and B remained insulated against liquidated losses. Although the punitive value scenario was considered, Morningstar DBRS did not update its loan-to-value (LTV) Sizing Benchmarks based on that value given the mitigating factors in the strong sponsorship, remaining sufficient cash flow to cover debt service (a factor that significantly reduces term risk) and the expectation that leasing gains should be ultimately achievable over the remainder of the 10-year loan term. As per Reis, office properties within the North Financial District submarket reported a high average vacancy rate of 21.5% in Q3 2024, rising from the average vacancy rate of 15.3% in the prior year; the five-year forecast vacancy rate is expected to decline to 11.9%. Given those factors and the credit rating downgrades for the classes lower in the capital stack, most of which are fully backed by subordinate debt, the trends were changed from Negative to Stable for all classes.

The loan is secured by the fee, leasehold, and sub leasehold 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. The 10-year fixed-rate loan is interest only (IO) for the full term. 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. The sponsor recently invested approximately $25.0 million for the build out of a new amenity space at the property known as The Cove, which features a co-working space, food and beverage services, and a fitness studio. The sponsor reports that the addition of this space was part of the success in the signing of two new tenants, Goodwin Proctor (5.7% of the NRA, lease expires in December 2035) and Jenner & Block LLP (2.8% of the NRA, lease expires in May 2036) within the past six months.

The loan was added to the servicer's watchlist in November 2024 because of declining occupancy, most recently reported at 70.9% occupied as per the September 2024 rent roll, compared with the YE2023 and issuance occupancy rates of 85.6% and 97.3, respectively. The reported debt service coverage ratio (DSCR) during the same time periods were reported at 2.26 times (x), 2.76x, and 2.96x, respectively. Leases representing approximately 20% of the NRA are expected to rollover in the next 24 months, including confirmed dark tenants Wells Fargo Bank (10.8% of the NRA, leases expiring between June 2025 and May 2026) and Willis Insurance Services (2.7% of the NRA, lease expiring in June 2025). When removing the dark tenants, Morningstar DBRS estimated an in-place DSCR of 1.52x, assuming no further leasing occurs. There is a cash flow sweep event that activates in the event the debt yield falls below 5.5%; the debt yield based on the YE2023 financial statement was 8.3% but is expected to fall below the required threshold when the pending tenant exits are realized. As per the loan documents from issuance, during the trigger period, the borrower is required to fund ongoing reserves of taxes and insurance, replacement reserves, tenant rollover, and Amazon rollover accounts. All excess cash remaining after disbursements of the required reserve deposits will accumulate and be held as additional collateral for the loan; excess cash is expected to continue to sweep until the debt yield threshold has been satisfied for two consecutive quarters.

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.

Class X-A 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 (December 13, 2024) https://dbrs.morningstar.com/research/444617.

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.

The credit ratings of this transaction are highly subject to the asset's recoverable value. As a result, a sensitivity whereby Morningstar DBRS stresses the Morningstar DBRS Cap Rate and Morningstar DBRS NCF to evaluate the impact of a Morningstar DBRS value decline based on the LTV sizing benchmarks was not completed.

DBRS Limited
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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 (December 13, 2024) https://dbrs.morningstar.com/research/444612
-- 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 (December 3, 2024) https://dbrs.morningstar.com/research/444064
-- North American Commercial Mortgage Servicer Rankings (August 23, 2024) https://dbrs.morningstar.com/research/438283

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.