DBRS Finalizes Provisional Ratings of CSAIL 2018-CX11 Commercial Mortgage Trust

DBRS, Inc. (DBRS) finalized its provisional ratings of the following classes of Commercial Mortgage Pass-Through Certificates, Series 2018-CX11 issued by CSAIL 2018-CX11 Commercial Mortgage Trust:

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

DBRS has withdrawn its provisional rating of the following class:

-- Class X-B at A (sf)

DBRS has also assigned a new rating to the following class:

-- Class X-B at AA (sf)

Classes X-D, D, E-RR, F-RR and G-RR have been privately placed. The Class X-A, X-B and X-D balances are notional.

As a result of the pricing of the transaction, no excess interest proceeds from the Class C Certificates will be available to be contributed to the Class X-B Certificates. Therefore, excess interest proceeds that will be contributed to Class X-B will only come from the Class B Certificates. Per the DBRS Rating North American CMBS Interest-Only Certificates Methodology, DBRS rates IO tranches to the lowest rated Applicable Reference Obligation, which in the case for Class X-B now references Class B with a one notch deviation.

The collateral consists of 56 fixed-rate loans secured by 118 commercial and multifamily properties. The transaction is of a sequential-pay pass-through structure. The trust assets contributed from five loans, representing 16.2% of the pool, are shadow-rated investment grade by DBRS. Proceeds for each shadow-rated loan are floored at their respective ratings within the pool. When 16.2% 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 stabilized net cash flow (NCF) and their respective actual constants, eight loans, representing 11.6% of the pool, 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 27 loans, representing 55.8% of the pool, having refinance DSCRs below 1.00x, and 21 loans, representing 51.7% of the pool, having refinance DSCRs below 0.90x.

Five of the largest loans – One State Street, Moffett Towers II – Building 2, the Northrop Grumman Portfolio, Lehigh Valley Mall and Yorkshire & Lexington Towers – exhibit credit characteristics consistent with investment-grade shadow ratings. These loans represent 16.2% of the transaction balance. One State Street and the Northrop Grumman Portfolio have credit characteristics consistent with a AAA shadow rating, Moffett Towers II – Building 2 exhibits credit characteristics consistent with a BBB shadow rating and Lehigh Valley Mall and Yorkshire & Lexington Towers have credit characteristics consistent with a BBB (low) shadow rating. Only nine loans, totaling 12.7% of the transaction balance, are secured by properties that are either fully or primarily leased to a single tenant. The largest of these loans are Moffett Towers II – Building 2 and the Northrop Grumman Portfolio, representing 6.0% of the pool balance and 47.3% of the single-tenant concentration, and both are shadow-rated investment grade. Loans secured by properties occupied by single tenants have been found to suffer higher loss severities in an event of default.

Sixteen loans, representing 25.1% of the pool, are secured by 18 hotel properties, including three of the top ten loans. Hotels have the highest cash flow volatility of all major property types, as their income, which is derived from daily contracts rather than multi-year leases, and their expenses, which are often mostly fixed, are quite high as a percentage of revenue. These two factors cause revenue to fall swiftly during a downturn and cash flow to fall even faster as a result of high operating leverage. However, the loans in the pool secured by hotel properties exhibit a weighted-average (WA) DBRS Debt Yield and DBRS Exit Debt Yield of 10.0% and 11.6%, respectively, which compare quite favorably with the comparable figures of 8.2% and 8.9%, respectively, for the non-hotel properties in the pool. Additionally, the majority, or 87.2%, of such loans are located in established urban or suburban markets that benefit from increased liquidity and more stable performance.

The deal appears concentrated by property type, with 14 loans, representing 36.3% of the pool, secured by office properties. Of the office property concentration, 44.3% of the loans are located in urban markets and four loans, representing 46.2% of the office concentration, are secured by multiple properties (41 in total), which insulates the loans from issues at any one property. Furthermore, three of these loans, representing 30.9% of the office concentration and 11.2% of the total pool balance, are shadow-rated investment grade.

The DBRS Refinance (Refi) DSCR is 0.99x, indicating a higher refinance risk on an overall pool level. In addition, 27 loans, representing 55.8% of the pool, have DBRS Refi DSCRs below 1.00x. Twenty-one of these loans, comprising 51.7% of the pool, have DBRS Refi DSCRs less than 0.90x, including six of the top ten loans and eight of the top 15 loans. These metrics are based on whole-loan balances. Two of the pool’s loans with a DBRS Refi DSCR below 0.90x, One State Street and Yorkshire & Lexington Towers, which represent 7.3% of the transaction balance, are shadow-rated investment grade by DBRS and have a large piece of subordinate mortgage debt outside the trust. Based on A-note balances only, the deal’s WA DBRS Refi DSCR improves to 1.07x, and the concentration of loans with DBRS Refi DSCRs below 1.00x and 0.90x reduces to 49.4% and 43.3%, respectively. The pool’s DBRS Refi DSCRs for these loans are based on a WA stressed refinance constant of 9.90%, which implies an interest rate of 9.28% amortizing on a 30-year schedule. This represents a significant stress of 4.47% over the WA contractual interest rate of the loans in the pool. DBRS models the probability of default based on the more constraining of the DBRS Term DSCR and DBRS Refi DSCR.

Classes X-A, X-B and X-D are interest-only (IO) certificates that reference a single rated tranche or multiple rated tranches. The IO rating mirrors 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 www.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 CMBS Multi-borrower Rating 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.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at info@dbrs.com.