DBRS Finalizes Provisional Ratings on CSAIL 2018-CX12 Commercial Mortgage Trust

DBRS, Inc. (DBRS) finalized its provisional ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2018-CX12 issued by CSAIL 2018-CX12 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‑SB at AAA (sf)
-- Class X‑A at AAA (sf)
-- Class A‑S at AAA (sf)
-- Class B at AA (sf)
-- Class X-B at AA (low) (sf)
-- Class C at A (high) (sf)
-- Class X‑D at A (high) (sf)
-- Class D at A (sf)
-- Class E-RR at BBB (high) (sf)
-- Class F-RR at BBB (low) (sf)
-- Class G-RR at BB (high) (sf)

All trends are Stable.

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

The collateral consists of 41 fixed-rate loans secured by 44 commercial and multifamily properties. The transaction is a sequential-pay pass-through structure. Three loans, representing 23.2% of the pool, are shadow-rated investment grade by DBRS. Proceeds for the shadow-rated loans are floored at their respective ratings within the pool. When 23.2% of the pool has no proceeds assigned below the rated floor, the resulting subordination is diluted or reduced below the rated floor. The conduit pool was analyzed to determine the 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 and their respective actual constants, only one loan, representing 0.2% of the pool, has 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 20 loans, representing 59.8% of the pool, having refinance DSCRs below 1.00x, and 11 loans, representing 34.5% of the pool, having refinance DSCRs below 0.90x.

Three of the largest five loans — 20 Times Square, Aventura Mall and Queens Place — exhibit credit characteristics consistent with investment-grade shadow ratings. Combined, these loans represent 23.2% of the pool. 20 Times Square has credit characteristics consistent with a AAA shadow rating, while Aventura Mall exhibits credit characteristics consistent with a BBB (high) shadow rating, and Queens Place has credit characteristics consistent with an A (high) shadow rating. Only two loans, totaling 1.5% of the transaction balance, are secured by properties that are either fully or primarily leased to a single tenant. The largest of these loans is The Studio School NYC (The Studio School), representing 1.4% of the pool balance and 90.3% of the single-tenant concentration. The property is located in Manhattan’s densely populated Upper West Side neighborhood, occupied solely by The Studio School. Loans secured by properties occupied by single tenants have been found to suffer higher loss severities in an event of default.

Eleven loans, representing 27.1% of the pool, are secured by full- and limited-service hotel properties, including four of the top 15 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 10.6% and 12.3%, respectively, which compare quite favorably with the comparable figures of 7.6% and 8.1%, respectively, for the non-hotel properties in the pool. Additionally, the majority, or 94.4%, 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 13 loans, representing 37.2% of the pool, secured by retail properties. None of the retail concentration is represented by marginal or low-quality regional malls that could suffer extraordinarily high loss severities in the event of default. Two of these loans — Aventura Mall and Queens Place, representing 36.7% of the office concentration and 13.7% of the total pool balance — are shadow-rated investment grade.

The DBRS Refinance (Refi) DSCR is 0.94x, indicating a higher refinance risk on an overall pool level. In addition, 20 loans, representing 59.8% of the pool, have DBRS Refi DSCRs below 1.00x. Eleven of these loans, comprising 34.5% of the pool, have DBRS Refi DSCRs less than 0.90x, including four of the top ten loans. These metrics are based on whole-loan balances. Three of the pool’s loans with a DBRS Refi DSCR below 0.90x, 20 Times Square, Aventura Mall and Queens Place, which represent 23.2% 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 dramatically to 1.09x, and the concentration of loans with DBRS Refi DSCRS below 1.00x and 0.90x reduces to 44.0% and 11.3%, respectively. The pool’s DBRS Refi DSCRs for these loans are based on a WA stressed refinance constant of 9.82%, which implies an interest rate of 9.19% amortizing on a 30-year schedule. This represents a significant stress of 4.4% 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:
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.

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.