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

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

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

All trends are Stable.

The Class X-CP and Class X-EXT balances are notional. Class X-CP will be equal to the B-2 portion of the Class B certificates, the C-2 portion of the Class C certificates and the D-2 portion of the Class D certificates. Class X-EXT will be equal to the Class B, Class C and Class D certificates.

The subject loan is secured by the fee simple interest in a portfolio of 12 suburban office properties comprising nearly
1.8 million square feet (sf) of suburban office space, located in four different states on the east coast of the United States. Nine properties within the portfolio (81.7% of the net rentable area (NRA); 82.6% of the loan) are primarily concentrated in the Washington, D.C. metro area, which is composed of the District of Columbia, Northern Virginia (two properties) and suburban Maryland (seven properties), and total 1.3 million sf (81.0% of DBRS Base Rent). The three remaining portfolio properties are located in Florida (two properties) and Georgia (one property) and total 330,907 sf in the Orlando (13.5% of DBRS Base Rent) and Atlanta (5.5% of DBRS Base Rent) metro areas. Built between 1970 and 2007, the portfolio properties are positioned in markets that are beginning to benefit from an expansion away from government demand, which has steadily been generated by diverse thriving local economies. Moreover, the portfolio benefits from tenant diversity across the government, legal, technology, health-care, financial services, education and R&D sectors as evidenced by its granular rent roll. Although none of the subject properties are centered in what DBRS would consider urban markets, these assets are generally located within dense suburban markets that benefit from favorable vehicular accessibility, public transportation availability and favorable proximity to their respective central business districts.

The loan is sponsored by Brookfield Strategic Real Estate Partners II (BSREP II), a large-scale global real estate opportunity fund with $9.0 billion of committed capital to invest in a diversified portfolio of high-quality assets in North America, Europe, Australia, Brazil and other select markets. BSREP II is the second private fund investment vehicle of its kind created by the owner-operator, Brookfield Property Partners (NYSE: BPY; TSX: BPY.UN) (Brookfield). Brookfield is a global real estate company that invests in and operates best-in-class office, retail, industrial, multifamily, hospitality, triple net lease, self-storage and student housing assets. Brookfield’s entire commercial real estate portfolio exceeds 260 assets and 129 million sf worldwide, with a weighted-average (WA) occupancy of 92.3%. The Brookfield Properties office portfolio maintains an interest in 147 properties in gateway markets around the globe in downtown cores and select suburban markets that include New York, Washington, D.C., Houston, Los Angeles, Toronto, Calgary, Ottawa, London, Berlin, Sydney, Melbourne and Perth, making Brookfield the global leader in the ownership and management of office property. Brookfield is led by Richard Clark, Senior Managing Partner and Chief Executive Officer. Mr. Clark has been with Brookfield and its predecessors since 1984 and is a key player in the global commercial property landscape. Since his appointment to the leadership role of CEO in 2009, Mr. Clark has grown Brookfield’s market value to $16 billion from $8 billion.

Brookfield acquired the portfolio through two separate transactions: the WRIT Montgomery County Portfolio in 2016 for $234.1 million and the TA Realty Portfolio in 2017 for an allocated purchase price of $107 million. The WRIT Montgomery Portfolio comprises the Wayne Plaza, 6110 Executive Blvd, Jefferson Plaza, West Gude Office Park, One Metro Square and One Central Plaza properties. The TA Realty Portfolio comprises the University Corporate Center I, University Corporate Center III, Winward Concourse, Montrose Metro I, Arlington Square and Prince Street Plaza properties. The Sponsor has already invested a total of $8.6 million into select properties to improve their competitive position and to stabilize below-market level occupancy. As an example, the United States Fish and Wildlife Service occupied 100.0% of Arlington Square prior to relocating in 2014. Since acquiring the property in 2017, and after the previous owner renovated the lobby into an open two-story design, the sponsor has already invested an additional $2.3 million into the property to attract new tenants with above-market rents. These efforts have increased occupancy to 30.7% from 0.0%.

As of June 27, 2018, the portfolio reported occupancy of 79.9%, which equates to approximately 379,763 sf available for
lease. Much of the portfolio’s stable performance is attributable to its highly granular rent roll with more than 240 tenants, none of which accounts for more than 3.4% of the total NRA. The portfolio’s largest six tenants, representing a combined 16.2% of the NRA and 14.8% of the DBRS Base Rent, include many large corporations, foundations, defense contractors and government entities such as Bank of America, N.A.; Siemens Real Estate Corporation; The Henry M. Jackson Foundation; Advanced Micro Devices, Inc.; Northrup Grumman Space & Mission Systems; Montgomery County, Maryland; and IQ Solutions, Inc. There are five investment-grade tenants that lease 252,269 sf (14.0% of the NRA) across the entire portfolio and generate 11.6% of the DBRS Base Rent.

Total debt proceeds of $278.4 million ($155 psf) were used to pay off $259.4 million ($144 psf) of existing debt, fund
upfront reserves of approximately $8.3 million and cover roughly $9.5 million in closing costs. Upfront reserves included $4.7 million for existing tenant improvement/leasing commission obligations, $1.1 million for upfront real estate tax reserves and $2.6 million for existing free rent obligations, as well as deferred maintenance, insurance, environmental and replacement reserves. The Mortgage Loan Amount is $223.4 million and is secured by the Borrowers’ fee simple interest and first-lien position in the 12-property suburban office portfolio. The interest-only (IO) payments due on the Mortgage Loan are based on a floating-rate one-month LIBOR, plus a 157 basis-point (bps) spread, capped at 4.5% for a two-year term, plus three one-year successive extension options. Coterminous with the Mortgage Loan are two Mezzanine Loans: a $30 million Senior Mezzanine Loan that accrues interest at a rate of one-month LIBOR plus a 400 bps spread and a $25 million Junior Mezzanine Loan that accrues interest at a rate of one-month LIBOR, plus a 510 bps spread, totaling $55 million. Newman Knight Frank has determined the as-is value of the portfolio to be $361.6 million ($201 psf), based on a direct capitalization method using a WA cap rate of 8.44%. The DBRS value is substantially lower at $283.9 million ($158 psf) and was calculated by applying a WA cap rate of 9.0% to the DBRS net cash flow, resulting in a DBRS loan-to-value (LTV) of 78.7% on the mortgage debt, which is indicative of modest-leverage financing. However, the DBRS LTV inclusive of all mezzanine debt is much higher at 98.1%.

Classes X-CP and X-EXT are IO certificates that reference 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 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 Single-Asset/Single-Borrower 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.

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.

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.