Morningstar DBRS Changes Trends on Three Classes of DC Office Trust 2019-MTC to Stable From Negative, Confirms All Credit Ratings

DBRS Limited (Morningstar DBRS) confirmed its credit ratings on all classes of Commercial Mortgage Pass-Through Certificates, Series 2019-MTC issued by DC Office Trust 2019-MTC as follows:

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

At the prior credit rating action, Morningstar DBRS downgraded Classes B, C, D, and E and placed Negative trends on Classes C, D, and E following the largest tenant's, Fannie Mae (82.2% of the net rentable area (NRA)), announcement to vacate the subject property in 2029 by exercising its termination and contraction options. With this review, Morningstar DBRS changed the trends on Classes C, D, and E to Stable from Negative as Fannie Mae has opted to remain at the property and downsize its space from 713,500 square foot (sf) to 340,000 sf (approximately 41.0% of the NRA), effective June 2029, while extending its lease through 2045, according to several news articles. Additionally, the borrower was able to sign two new tenants that are set to backfill portions of the contracted space. All remaining trends are Stable.

The loan is secured by the Midtown Center, an 867,654-sf, 14-story Class A office campus built in 2018 in Washington, D.C., with ground-floor retail and a three-level, below-grade parking garage with 562 spaces. The sponsor, Carr Properties, is an experienced owner, developer, and manager of commercial properties primarily in Washington and Boston. The $404.0 million trust debt consists of three senior pari passu A Notes totaling $261.0 million and three subordinate B Notes totaling $143.0 million. The remaining $121.0 million of the $525.0 million whole loan is composed of pari passu A Notes, with 23.0% held in BANK 2019-BNK22 (also rated by Morningstar DBRS) and the remaining 12.7% in COMM 2018-GC44 (not rated by Morningstar DBRS). The underlying fixed-rate loan for the subject transaction is interest only (IO) through its maturity in September 2033 with an anticipated repayment date (ARD) in October 2029.

Given Fannie Mae's original plan to fully vacate the subject property, the tenant paid $70.7 million of termination and contraction fees that have been held as tenant reserves. However, as Fannie Mae has now decided to keep approximately half of its space, Morningstar DBRS believes a portion of the fees may have been returned. According to the February 2025 reserve report, $39.2 million remain held in tenant reserves. Per the October 2024 rent roll, the property was fully occupied, with Fannie Mae occupying 85.6% of the NRA (inclusive of storage space) via multiple leases. Morningstar DBRS notes that leases covering approximately 406,000 sf of Fannie Mae's footprint (48.6% of the NRA) are set to expire between 2025 and 2029, suggesting the net cash flow (NCF) may incrementally decrease over the next few years as the downsizing occurs, in addition to the rental abatements that have been granted. As of the trailing nine-month period ended September 30, 2024, the in-place annualized NCF was $44.1 million. Only nominal rollover is expected prior to the completion of Fannie Mae's downsizing in 2029. Otherwise, there has been positive leasing momentum, with the signing of ArentFox Schiff and FreshFields, which will collectively backfill approximately 28.0% of the NRA once their leases commence between 2027 and 2028. With these updates, Morningstar DBRS expects the occupancy rate to be around 84.0% following Fannie Mae's downsizing. At the last review, Morningstar DBRS was also concerned about the property's exposure to WeWork, the second-largest tenant, given its bankruptcy in November 2023. The tenant, however, has since successfully modified its lease, downsizing to 9.0% from 13.0% of the NRA at a reduced rate with a lease expiration in November 2037, according to a news article.

For this review, Morningstar DBRS' credit ratings are based on the stressed value analysis from the previous credit rating action that considered a Morningstar DBRS NCF of $42.8 million (derived when the credit ratings were assigned in 2020) and an increased cap rate of 7.25% to account for the decline in the property's average rental rate. Based on the leasing updates mentioned above, Morningstar DBRS believes the loss in rental revenue stemming from Fannie Mae's space contraction would be mitigated by the signing of ArentFox Schiff and FreshFields, and anticipates that cash flow will recover to Morningstar DBRS' expectations in the long run once rent abatements burn off. As of October 2024, the property's average base rent was $54.18 per square foot (psf), in comparison with the East End submarket's average asking rent of $63.13 psf as of Q4 2024, per Reis, and the Morningstar DBRS gross potential rent of $53.14 psf. The resulting Morningstar DBRS value is $590.9 million, reflecting a trust loan-to-value ratio (LTV) of 68.4% and whole-loan LTV of 88.8%. The Morningstar DBRS value represents a -38.4% variance from the issuance value of $960.0 million. In comparison, the property was valued at $980.0 million based on a $490.0 million sale price for a 49.0% stake in the property in April 2021. Additionally, Morningstar DBRS maintained the positive qualitative adjustments to the final LTV sizing benchmarks, totaling 4.0%, to reflect the property's quality and performance stability in the long term.

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 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.

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

-- North American Commercial Mortgage Servicer Rankings (August 23, 2024), https://dbrs.morningstar.com/research/438283

-- Legal Criteria for U.S. Structured Finance (December 3, 2024), https://dbrs.morningstar.com/research/444064

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.