Morningstar DBRS Confirms Credit Ratings on All Classes of SFO Commercial Mortgage Trust 2021-555

DBRS Limited (Morningstar DBRS) confirmed its credit ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2021-555 issued by SFO Commercial Mortgage Trust 2021-555:

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

All trends are Stable.

The credit rating confirmations and Stable trends reflect that the performance of the underlying collateral remains in line with Morningstar DBRS' expectations since the previous credit rating action in April 2024. The transaction is collateralized by 555 California Street Campus (The Campus), a 1.8 million-square foot (sf) Class A office complex in the North Financial District of San Francisco. The Campus comprises three LEED Gold-certified and Energy Star-rated office buildings: 555 California Street, 345 Montgomery Street, and 315 Montgomery Street. The loan is sponsored by a 70/30 joint venture between Vornado Realty L.P. and Donald J. Trump. Vornado acquired the Campus in 2007 and has invested $164.8 million ($90.63 per square foot (psf)) into the Campus since 2016.

The $1.2 billion floating-rate loan had an initial maturity date in May 2023; however, the borrower has exercised two of up to five one-year extension options to date. The servicer has confirmed the borrower plans to exercise the third maturity extension prior to the upcoming May 2025 loan maturity. At issuance, an interest rate cap agreement was in place with a strike rate of 4.00%. According to the loan agreement, the borrower is required to purchase a new interest rate cap agreement with a strike rate at the greater of 4.00% and the benchmark rate, which, when added to the sum of the spread and, if applicable, the alternative rate spread adjustment, would result in a debt service coverage ratio (DSCR) equal to or greater than 1.10 times (x).

The loan was added to the servicer's watchlist in July 2024 because of a low DSCR. As of the most recent reporting, the financials for the trailing-six-month period (T-6) ended June 30, 2024, reported a DSCR of 0.96 times (x), compared with the YE2023 DSCR of 1.18x and the Morningstar DBRS DSCR of 3.37x derived at issuance. This variance is attributable to the loan's floating interest rate nature, which has resulted in a 362% increase in the annual debt service obligation, raising it to $90.0 million in 2024 from $24.7 million in 2021. According to the financial statement for the trailing-six-month period ended June 30, 2024, the annualized net cash flow (NCF) was $86.2 million, in line with the Morningstar DBRS NCF of $86.4 million. The Morningstar DBRS NCF gave straight-line credit to the lease payments of Bank of America (BofA) over the loan term given its consideration as a long-term credit tenant.

According to the October 2024 rent roll, the property is 96.8% occupied, with leases totaling approximately 16.0% of the net rentable area (NRA) scheduled to roll over in the next 12 months. BofA is the largest tenant at the subject, occupying 18.4% NRA on separate leases at the 315 Montgomery Street and 555 California Street properties, expiring between September 2025 and September 2035. At issuance, BofA executed two lease extensions, including a 10-year extension at 555 California Street, commencing in October 2025. According to the lease extension agreement, there is a six-month rent abatement period ending in March 2026. The tenant also has a termination option for a full floor, effective September 2025, with a minimum 18 months' notice. Morningstar DBRS has inquired whether the tenant has indicated any plans to give back space; however, Morningstar DBRS did not receive a response as of this commentary. Wells Fargo (3.9% of the NRA, lease expires in May 2025) also exercised a renewal and expansion lease agreement through February 2037. The previously vacant 345 Montgomery Street property is now 59.6% occupied (2.4% of the total NRA) by the Institute of Contemporary Art San Francisco on a lease through September 2026.

According to Reis, office properties within the North Financial District submarket reported a vacancy rate of 22.5% as of Q4 2024, an increase from 17.7% in Q4 2023; however, the five-year forecast vacancy rate is expected to decrease to 10.5%. Despite the softening submarket metrics, the subject property continues to outperform comparable properties given its high quality and strong location compared with competitive properties. The competitive advantage is evidenced by the borrower's ability to attract new tenants and execute renewal leases with existing tenants.

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. Morningstar DBRS maintained the valuation approach from the April 2024 review, which was based on a capitalization rate of 7.75% applied to the Morningstar DBRS net cash flow of $86.4 million. Morningstar DBRS also maintained positive qualitative adjustments to the loan-to-value ratio sizing benchmarks totaling 4.25% to reflect the significant capital expenditure projects at the subject properties and long-term in-place tenancy of the investment-grade tenants. The Morningstar DBRS concluded value of $1.1 billion represents a -45.6% variance from the issuance appraised value of $2.0 billion.

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, or 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 (February 28, 2025), https://dbrs.morningstar.com/research/448963

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
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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 (February 28, 2025), https://dbrs.morningstar.com/research/448962

-- 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

-- 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

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.