Morningstar DBRS Confirms Credit Ratings on All Classes of MOFT Trust 2020-ABC; Changes Trends on All Classes to Negative From Stable

DBRS, Inc. (Morningstar DBRS) confirmed its credit ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2020-ABC issued by MOFT Trust 2020-ABC:

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

Morningstar DBRS changed the trends on all classes to Negative from Stable.

The Negative trends on all Classes reflect potential upcoming occupancy concerns at the subject properties. Google LLC (Google) leases 85.7% of the total space at the subject, which has been reported fully dark according to the April 2024 property inspection reports. Google occupies its space on three separate leases. The first lease has an upcoming expiry in June 2026 and there has been no subleasing or direct leasing traction to date. Although there is potential for significant cash flow disruption, Morningstar DBRS notes several mitigating factors including strong performance, which would remain higher than breakeven if Google were to vacate their first lease, extended timeline to find additional tenants, and more than $36.0 million in reserves, all supporting the credit rating confirmations.

The 10-year, fixed-rate, interest-only (IO) loan is secured by the fee-simple interest in three Class A office buildings totaling more than 950,000 square feet (sf) in Sunnyvale, California. The three buildings, known as Moffett Towers A, B, and C are 100% leased to five tenants, including two investment-grade tenants, Google (a subsidiary of Alphabet Inc.) and Comcast Cable Communications, accounting for 97.4% of the net rentable area.

The transaction consists of a $328.0 million participation in a $770.0 million whole mortgage loan. The components of the whole mortgage loan securitized in this transaction include $1.0 million of the senior trust notes and all of the $327.0 million in junior trust notes. The remaining $442.0 million of senior trust notes are securitized across seven commercial mortgage-backed security (CMBS) transactions, including two Morningstar DBRS-rated transactions (Benchmark 2020-IG2 Mortgage Trust and Benchmark 2020-IG3 Mortgage Trust). The loan benefits from an experienced sponsor, which is an affiliate of Jay Paul Company, a well-known San Francisco real estate owner and developer with an extensive portfolio of build-to-suit Class A office assets. The firm has expertise in building and leasing office space in Silicon Valley for technology firms including Amazon, Facebook, Microsoft, and HP, among others.

As early as January 2023, there were reports indicating that amid layoffs, Google would be reducing their office footprint with a focus on its California and New York exposure. Google has three separate leases across the buildings with staggered lease expirations in June 2026, September 2027, and December 2030. While Google continues to pay rent, the servicer reports the borrower has been unsuccessful in backfilling any of Google's space to date and there is currently no subleased space. Given the dark nature of the subject, Morningstar DBRS expects Google will not renew its leases, exposing the transaction to heightened vacancy and declining cash flow in an otherwise soft submarket. According to Reis, the Sunnyvale submarket vacancy rate in Q4 2024 was 22.8%, compared with the average vacancy rate of 19.3% in Q4 2023, suggesting the continued weakening submarket fundamentals which could complicate leasing efforts.

While these are significant concerns, the timing as well as the structural features surrounding the transaction and Google's leases does mitigate some of the risk while providing time for the borrowers to backfill any vacancies. Google's first lease expires in June 2026, providing the borrower more than a year to backfill vacancies. Furthermore, the property remains 100% leased and performance remains stable, with the debt service coverage ratio (DSCR) covering at 2.09 times (x), according to the trailing nine-month financials for the period ended September 30, 2024. In the event Google does not renew its first lease at expiry, the DSCR will continue to remain higher than breakeven. The transaction is also structured with a cash flow sweep that will commence nine months prior to Google's first lease expiry and would trap approximately $2.3 million every month in addition to an existing $36 million tenant reserve. The staggered timing of the leases and the structure gives the borrower plenty of time and capital to secure tenants and offer them competitive tenant-improvement (TI) packages. The properties, constructed in 2008, are part of the larger Moffett Towers office campus, which houses several technology companies including Amazon and Meta and also should boost its appeal to future tenants.

At the last credit rating action in April 2024, Morningstar DBRS 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 7.25% applied to the Morningstar DBRS net cash flow (NCF) of $50.4 million. Morningstar DBRS also maintained positive qualitative adjustments to the Loan-to-Value Ratio (LTV)-Sizing benchmarks totaling 6.5% to reflect the recent construction and location along a prime office campus in the Sunnyvale submarket. The Morningstar DBRS concluded value of nearly $695.1 million represents a -39.3% variance from the issuance appraised value of $1.15 billion and implies an all-in LTV of 110.8%.

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-A is 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 (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 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.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS' outlooks and credit ratings are monitored.

DBRS, Inc.
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Tel. +1 312 332-3429

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

For more information on this credit or on this industry, visit https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.