Morningstar DBRS Confirms Credit Ratings on All Classes of DBGS 2019-1735 Mortgage Trust

DBRS Limited (Morningstar DBRS) confirmed its credit ratings on all classes of the Commercial Mortgage Pass-Through Certificates issued by DBGS 2019-1735 Mortgage Trust as follows:

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

All trends are Stable.

The credit rating confirmations and Stable trends reflect the performance of the underlying collateral remains in line with Morningstar DBRS' expectations following its previous credit rating action in April 2024. Although occupancy has declined slightly from YE2023, the sponsor continues to have success in leasing vacant space with financial performance above Morningstar DBRS' expectation. The current tenant mix primarily consists of law firms and financial companies including select investment-grade tenants, providing further stability to in-place cash flow.

The $311.4 million first-lien mortgage loan is secured by the fee-simple interest in a 53-story Class A office building totaling 1.3 million square feet (sf) in the Philadelphia central business district (CBD). The 10-year interest-only (IO) loan matures in April 2029. The sponsor, Silverstein Properties, Inc., used loan proceeds along with $164.2 million of cash equity to acquire the asset for $451.6 million in 2019.

According to the June 2024 rent roll, the property was 81% occupied as compared with 85% and 88% at YE2023 and YE2022, respectively. The largest tenant at the property is Ballard Spahr LLP (13.1% of the net rentable area (NRA), lease expiry in January 2031), a national law firm that maintains its headquarters at the subject. The second-largest tenant, Willis Towers Watson (7.6% of NRA, lease expiry in February 2031), is considered an investment-grade tenant; however, the servicer confirmed that KPMG currently subleases the entirety of this space. The third- and fourth-largest tenants (Montgomery McCracken Walker & Rhoads LLP (lease expiry in May 2034) and Brandywine Global Investment Management, LLC, (lease expiry in June 2028) respectively) also have their headquarters at the collateral property. According to the servicer, Montgomery McCracken Walker & Rhoads LLP amended its lease to give back one floor (approximately 1.7% of NRA), effective May 2025; however, it also waived the right on any remaining termination options through its lease expiration.

There is marginal near-term tenant rollover risk as leases representing only 4.4% of NRA are scheduled to roll by YE2025. According to the property's website, approximately 9.0% of NRA is listed as available According to a Q3 2024 Reis report, office space in the Center City submarket reported an average vacancy of 13.9%, a slight decline from the YE2023 figure of 14.6%.

According to the most recent financials dated June 30, 2024, the annualized net cash flow (NCF) for the trailing six-month period was $29.5 million, equating to a debt service coverage ratio (DSCR) of 2.21 times (x), which remained similar with the YE2023 NCF figure of $28.7 million (DSCR of 2.16x), and well above the Morningstar DBRS NCF of $22.5 million derived in 2020.

The April 2024 Morningstar DBRS credit rating analysis and action included an updated collateral valuation. For more information regarding the approach and analysis conducted, please refer to 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. For purposes of this credit rating action, Morningstar DBRS maintained the valuation approach from the April 2024 review, which was based on a capitalization rate of 7.5% applied to the Morningstar DBRS NCF of $22.5 million. Morningstar DBRS also maintained positive qualitative adjustments to the Loan-to-Value Ratio (LTV) Sizing benchmarks totaling 3.5% to reflect the subject property's quality and generally long-term in place tenancy to investment-grade tenants. The Morningstar DBRS concluded value of $300.6 million represents a -31.7% variance from the issuance appraised value of $440.3 million and implies an all in LTV of 103.6%.

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 factor(s) 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.

Class X is an IO certificate 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 (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.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the credit rating process.

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 (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.