Morningstar DBRS Changes Trends on Two Classes of AOA 2021-1177 Mortgage Trust to Negative from Stable, Confirms Credit Ratings on All Classes

DBRS Limited (Morningstar DBRS) confirmed its credit ratings on all classes of Commercial Mortgage Pass-Through Certificates issued by AOA 2021-1177 Mortgage Trust as follows:

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

Morningstar DBRS changed the trends on Classes E and HRR to Negative from Stable. All remaining trends are Stable.

The Negative trends on Classes E and HRR reflect the sustained decline in net cash flow (NCF) since issuance, most recently reported at $23.3 million with the YE2024 financial reporting. In comparison, YE2023 NCF was $30.4 million and the Morningstar DBRS NCF derived at issuance was $35.5 million. While the NCF declines are attributable to the fluctuation in the collateral's occupancy rate over the past few years, it is noteworthy the borrower has executed six new leases since Q2 2024, totaling 13.3% of the NRA, including an expansion lease with existing tenant Mill Point Capital LLC (2.2% of the NRA; lease expires in February 2030). Morningstar DBRS notes the increased credit risk to the transaction since issuance and will continue to monitor the transaction for meaningful leasing momentum and resulting NCF changes.

The transaction is collateralized by 1177 Avenue of the Americas, a 47-story, 1.0 million square-foot (sf) office tower in the Grand Central submarket of Manhattan. The building is between 45th Street and 46th Street on 6th Avenue (Avenue of the Americas) and was built in 1992. The California State Teachers' Retirement System (CalSTRS), Silverstein Properties, and UBS Group AG (UBS) acquired the building in in 2007, but in June 2021, CalSTRS acquired UBS' 50.0% equity position in the property in a deal that valued the asset at $865.0 million.

The interest-only, floating-rate loan had an initial maturity date in October 2023; however, the borrower has exercised two of up to three one-year extension options to date, extending the loan's current maturity date to October 2025. There are no performance triggers, financial covenants, or fees required for the borrower to exercise any of the extension options; however, the execution of each option is conditional upon, among other things, no events of default and the borrower's purchase of an interest rate cap agreement for each extension term.

The loan has been on the servicer's watchlist since March 2024 because of a low occupancy rate, which was most recently reported at 76.8% in the December 2024 rent roll compared with 74.0% at YE2023, 86.0% at YE2022, and the issuance figure of 87.0%. Despite the decline in occupancy, the loan continues to maintain a healthy debt service coverage ratio (DSCR) of 4.12 times (x) as per the trailing-nine-month reporting period ended September 30, 2024. In comparison, the YE2023 figure was 4.93x and the YE2022 figure was 5.96x. The tenant roster is relatively granular, as aside from the largest tenant, Kramer Levin Naftalis & Frankel LLP (26.7% of NRA; lease expiry in November 2035), no other individual tenant accounts for more than 7.0% of NRA. Tenant rollover risk includes leases totaling 9.2% of the NRA with scheduled expiration dates prior to the loan's fully extended maturity date in October 2026.

According to Q4 2024 Reis data, office properties in the Grand Central submarket reported an average vacancy rate of 12.3% and an average asking rate of $76.48 per sf (psf) gross, compared with the subject's figures of 23.2% and $74.98 psf, respectively, as of the December 2024 rent roll. Although the elevated vacancy rate at the subject is concerning, Morningstar DBRS notes the property benefits from its high quality and proximity to the Grand Central Terminal. Furthermore, the sponsor invested significant capital to improve the lobby and add an amenity floor in 2021.

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 its April 2024 review, which was based on a capitalization rate of 7.0% applied to the Morningstar DBRS NCF of $35.5 million. Morningstar DBRS also maintained positive qualitative adjustments to the loan-to-value ratio sizing benchmarks totaling 7.25% to reflect the quality of the asset and the stability of demand for properties well positioned near major transportation arteries. The Morningstar DBRS concluded value of $506.5 million represents a -41.1% variance from the issuance appraised value of $860.0 million.

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), https://dbrs.morningstar.com/research/437781

Class X-EXT is an interest-only (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 (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.

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 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 (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 03, 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.