Published on Friday, November 20, 2020

Most loans that it analyzed have adequate cushion to sustain a moderate decrease in cash flow.


Unlike other CRE categories, single-asset/single-borrower loans backed by office properties have fared relatively well in the pandemic, according to a report from DBRS Morningstar.<

With longer leases and few mandatory shutdowns of office space, rent collections have remained strong in the SASB space through Q3. As of October, there were no SASB office loans in special servicing. Across the entire CMBS universe, the special servicing rate for office properties stood at 2.95% as of October.<

But the sector should feel some pressure in the future.<

In a moderate coronavirus scenario, which models a 10% decline to the most recent net cash flow, DBRS Morningstar found that most deals had a cushion against drops in performance. In its scenario, the company cut cash flow on its loans modeled by 10% and established value with its DBRS Morningstar cap rate. It used this stressed value to recast a loan-to-value ratio and compared that with the LTVs used in its rating analysis. <

Looking at the loans analyzed, 73.6% reported 2019 unadjusted net cash flows higher than DBRS Morningstar’s assumptions, and 45.3% reported net cash flows that were higher than the issuer’s figure. Less than half of the loans, 41.5%, had implied values higher in the moderate scenario than the value assumed in DBRS Morningstar’s most recent ratings analysis. In loans where the moderate scenario resulted in a value lower than DBRS Morningstar used in its most recent ratings analysis, 61.3% had a moderate scenario LTV that was less than 10% higher than DBRS Morningstar’s assumed LTV, and 32.3% of the loans were less than 5% higher.<

DBRS Morningstar says a small portion of the portfolio has significantly higher LTVs in the moderate scenario. It says the majority of these loans had short-term or anticipated causes of lower reported cash flows in 2019 resulting from rollover and subsequent re-leasing or contractual rent abatements. The small number of remaining deals that show more significant volatility in LTV in the moderate scenario have mitigating factors that make their value unlikely to be adversely affected in the near term. <

In the future, DBRS Morningstar expects more office space to come on the market, which will put downward pressure on rents and could mean a shift in how companies view their need for space. In most downturns, companies give up space. But the move to telework means they might not need as much space when workers come back. Still, most loans that it analyzed have adequate cushion to sustain a moderate decrease in cash flow.<