DBRS Assigns Provisional Ratings to BANK 2018-BNK10

DBRS, Inc. (DBRS) assigned provisional ratings to the following classes of Commercial Mortgage Pass-Through Certificates, Series 2018-BNK10 (the Certificates) to be issued by BANK 2018-BNK10:

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-5 at AAA (sf)
-- Class A-S at AAA (sf)
-- Class X-A at AAA (sf)
-- Class B at AA (high) (sf)
-- Class X-B at A (high) (sf)
-- Class C at A (sf)
-- Class X-D at BBB (sf)
-- Class D at BBB (low) (sf)
-- Class X-E at BB (sf)
-- Class E at BB (low) (sf)
-- Class X-F at B (sf)
-- Class F at B (low) (sf)

Classes X-D, D, X-E, E, X-F and F will be privately placed. The Class X-A, X-B, X-D, X-E and X-F balances are notional.

The collateral consists of 68 fixed-rate loans secured by 181 commercial and multifamily properties. The transaction is a sequential-pay pass-through structure. The trust asset contributed from two loans, representing 10.5% of the pool, are shadow-rated investment grade by DBRS. Proceeds for each shadow-rated loan are floored at their respective rating within the pool. When 10.5% of the pool has no proceeds assigned below the rated floor, the resulting pool subordination is diluted or reduced below the rated floor. The conduit pool was analyzed to determine the provisional ratings, reflecting the long-term probability of loan default within the term and its liquidity at maturity. When the cut-off loan balances were measured against the DBRS Stabilized net cash flow (NCF) and their respective actual constants, no loans have a DBRS Term debt service coverage ratio (DSCR) below 1.15 times (x), a threshold indicative of a higher likelihood of mid-term default. Additionally, to assess refinance risk given the current low interest rate environment, DBRS applied its refinance constants to the balloon amounts. This resulted in 22 loans, representing 52.4% of the pool, having refinance DSCRs below 1.00x, and 14 loans, representing 35.6% of the pool, having refinance DSCRs below 0.90x.

Two of the ten largest loans in the pool – Apple Campus 3 and Moffett Towers II – Building 2 – exhibit credit characteristics consistent with shadow ratings of AA (high) and BBB, respectively. These loans represent 10.5% of the transaction balance. Additionally, there are 16 loans, representing 4.5% of the pool, that are secured by cooperative properties and are very low-leverage with minimal term and refinance default risk.

Term default risk is low, as indicated by the strong DBRS Term DSCR of 1.90x. In addition, 49 loans, representing 75.4% of the pool, have a DBRS Term DSCR in excess of 1.50x. This includes nine of the largest ten loans. Even when excluding the two loans shadow-rated investment grade and the co-operative loans, the deal exhibits a robust weighted-average (WA) DBRS Term DSCR of 1.79x. Only six loans, totaling 13.5% of the transaction balance, are secured by properties that are either fully or primarily leased to a single tenant. The vast majority of this concentration, or 77.9%, is attributed to the two shadow-rated loans, Apple Campus 3 and Moffett Towers II – Building 2, which are both very recently constructed properties occupied by technology giants, Apple and Amazon, respectively, which have invested a significant amount of capital into the subject assets. Loans secured by properties occupied by single tenants have been found to suffer higher loss severities in an event of default.

The pool has a relatively high concentration of loans secured by non-traditional property types, such as self-storage, hospitality and manufactured housing community assets, which, on a combined basis, represent 36.6% of the pool across 18 loans. There are ten loans, totaling 21.1% of the transaction balance, secured by self-storage properties, and seven loans, totaling 14.8% of the pool, secured by hotels. Each of these asset types is vulnerable to high NCF volatility because of the relatively short-term leases compared with other commercial properties, which can cause the NCF to quickly deteriorate in a declining market. However, such loans exhibit a WA DBRS Debt Yield and DBRS Exit Debt Yield of 9.0% and 10.1%, respectively, which are slightly worse than, but still generally in line with, the overall deal. Additionally, the majority, or 75.3%, of such loans are located in established urban or suburban markets that benefit from increased liquidity and more stable performance.

Although the transaction’s weighted-average DBRS refinance (Refi) DSCR is 1.11x, which is relatively moderate, this figure decreases to 0.97x when excluding the two loans shadow-rated investment grade and the co-operative loans, which is indicative of higher refinance risk on an overall pool level. In addition, 22 loans, representing 52.4% of the pool, have DBRS Refi DSCRs below 1.00x, including five of the top ten loans and six of the top 15 loans. Fourteen of these loans, comprising 35.6% of the pool, have DBRS Refi DSCRs less than 0.90x, including four of the top ten loans and five of the top 15 loans. This is mitigated by the fact that the pool’s DBRS Refi DSCRs for such loans are based on a WA stressed refinance constant of 9.84%, which implies an interest rate of 8.49% amortizing on a 30-year schedule. This represents a significant stress of 4.12% over the WA contractual interest rate of the loans in the pool.

Classes X-A, X-B, X-D, X-E, X-F and X-G are interest-only (IO) certificates that reference a single rated tranche or multiple rated tranches. The IO ratings mirror the lowest-rated reference tranche adjusted upward by one notch if senior in the waterfall.

All ratings will be subject to ongoing surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed or discontinued by DBRS.

For more information on this transaction and supporting data, please log into viewpoint.dbrs.com. DBRS will continue to monitor this transaction with periodic updates provided in the DBRS Viewpoint platform.

Notes:
All figures are in U.S. dollars unless otherwise noted.

With regard to due diligence services, DBRS was provided with the Form ABS Due Diligence-15E (Form-15E), which contains the description of the information that the third party reviewed in conducting the due diligence services and a summary of the findings and conclusions. While DBRS did not require due diligence services outlined in Form-15E, DBRS did use the Data File outlined in the Independent Accountant’s Report in its analysis to determine the ratings.

The principal methodology is North American Multi-borrower CMBS Methodology, which can be found on dbrs.com under Methodologies. For a list of the Structured Finance related methodologies that may be used during the rating process, please see the DBRS Global Structured Finance Related Methodologies document on www.dbrs.com. Please note that not every related methodology listed under a principal Structured Finance asset class methodology may be used to rate or monitor an individual structured finance or debt obligation.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com