DBRS Assigns Provisional Ratings to Morgan Stanley Capital I Trust 2018-H3

DBRS, Inc. (DBRS) assigned provisional ratings to the following classes of Commercial Mortgage Pass-Through Certificates, Series 2018-H3 to be issued by Morgan Stanley Capital I Trust 2018-H3:

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-5 at AAA (sf)
-- Class X-A at AAA (sf)
-- Class A-S at AAA (sf)
-- Class X-B at AA (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)
-- Class H-RR at B (low) (sf)

All trends are Stable.

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

The collateral consists of 66 fixed-rate loans secured by 120 commercial and multifamily properties. The transaction is a sequential-pay pass-through structure. 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, five loans, representing 5.4% of the aggregate pool balance, had 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 31 loans, representing 60.3% of the pool, having refinance DSCRs below 1.00x, and 19 loans, representing 45.7% of the pool, with refinance DSCRs below 0.90x.

Twelve loans, comprising 48.0% of the DBRS sample (35.8% of the pool), were considered to be of Above Average or Average (+) property quality based on physical attributes and/or a desirable location within their respective markets. Six of these loans are within the top ten (Griffin Portfolio II, Rittenhouse Hill, SunTrust Center, Shoppes at Chino Hills, Playa Largo and Crowne Plaza Dulles Airport). Higher-quality properties are more likely to retain existing tenants/guests and more easily attract new tenants/guests, resulting in a more stable performance. Only one loan, comprising 1.0% of the DBRS sample (0.7% of the pool), was considered to be of Below Average property quality.

Ten loans, comprising 17.6% of the transaction balance, are secured by properties that are either fully or primarily leased to a single tenant. This includes three of the largest 15 loans: 6330 West Loop South, Torrance Technology Campus and New York Film Academy. Loans secured by properties occupied by single tenants have been found to suffer higher loss severities in an event of default. The 6330 West Loop South property is primarily leased to subsidiaries of Texas Children’s Health Plan and Texas Children’s Hospital (together), as an investment-grade tenant, which accounts for 76.5% of the DBRS occupied total rent. The Torrance Technology Campus is primarily leased by L-3, a long-term credit tenant (LTCT) that accounts for 89.3% of the DBRS occupied total rent with leases that expire in 2031. Additionally, the loans have been structured with cash flow sweeps prior to tenant expiry and/or lease termination options. The appraisers’ dark value of $90.3 million for Torrance Technology Campus and $28.9 million for New York Film Academy imply low appraised dark loan-to-values based on the $93.8 million and the $21.6 million senior notes, respectively. While the appraiser did not conclude a dark value for 6330 West Loop South, the sponsor contributed $23.2 million of cash equity at funding for the acquisition, representing 31.3% of the total acquisition proceed sources.

The pool is relatively diverse based on loan size, with a concentration profile equivalent to that of a pool of 35 equal-sized loans, though the top ten represent 43.7% of the pool. Diversity is further enhanced by ten loans, representing 21.3% of the pool, that are secured by multiple properties (64 in total). Increased pool diversity insulates the higher-rated classes from event risk. Eleven loans, representing 22.4% of the pool, are secured by properties located in tertiary markets, including two of the top ten loans (Griffin Portfolio II and Playa Largo). Properties located in tertiary and rural markets were analyzed with significantly higher loss severities than those located in urban and suburban markets. The two largest loans secured by properties in tertiary and rural markets are The Griffin Portfolio II and Playa Largo. The Griffin Portfolio II benefits from geographic diversity, as it is secured by four properties across four states. Additionally, the Griffin Portfolio is leased to four separate tenants, and two of these properties are fully leased by LTCTs (Southern Company Services and Amazon). Playa Largo is the first hotel built in the Florida Keys in approximately 20 years, which is primarily due to a Florida state-enforced moratorium on commercial beach-side development to address ecological concerns.

The deal appears concentrated by property type, with 17 loans, representing 40.8% of the pool, secured by DBRS office property type classified properties. Of the office property concentration, 80.8% of the loans are located in suburban or super dense urban markets, and one loan, Griffin Portfolio II, is predominately secured by properties in tertiary markets. The largest loan analyzed with a DBRS office property type classification, Griffin Portfolio II, representing 19.2% of the office concentration, is secured by a mixed-used portfolio. Based on allocated loan amount, the Griffin Portfolio II is secured by 42.0% industrial properties. Excluding the Griffin Portfolio II from the total DBRS office concentration would lower the total DBRS office concentration to 32.9% from 40.8%. Additionally, DBRS sampled 78.5% of the pool, representing 80.8% coverage of the total office loan cut-off balance, thereby providing comfort for the DBRS NCF. There are eight loans, representing 10.9% of the pool, secured by multifamily proprieties, none of which are student housing or military housing properties. Student and military housing often exhibits higher cash flow volatility than traditional multifamily properties

Twenty-four loans, representing 47.8% of the pool, including eight of the largest ten loans, are structured with full-term interest-only (IO) payments. An additional 21 loans, comprising 23.1% of the pool, have partial IO periods. The DBRS Term DSCR is calculated by using the amortizing debt service obligation, and the DBRS Refi DSCR is calculated by considering the balloon balance and lack of amortization when determining refinance risk. DBRS determines probability of default based on the lower of Term or Refi DSCR; therefore, loans that lack amortization will be treated more punitively. Including ARD loans, the DBRS expected amortization by maturity is 6.4%.

Classes X-A, X-B and X-D are 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 the 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.

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