DBRS Assigns Provisional Ratings to BANK 2018-BNK14

DBRS, Inc. (DBRS) assigned provisional ratings to the following classes of Commercial Mortgage Pass-Through Certificates, Series 2018-BNK14 to be issued by BANK 2018-BNK14:

-- 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 (high) (sf)
-- Class X-B at A (high) (sf)
-- Class C at A (sf)
-- Class D at BBB (high) (sf)
-- Class X-D at BBB (sf)
-- Class E at BBB (low) (sf)
-- Class X-F at BB (high) (sf)
-- Class F at BB (sf)
-- Class X-G at BB (low) (sf)
-- Class G at B (high) (sf)

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

The collateral consists of 62 fixed-rate loans secured by 136 commercial and multifamily properties. The transaction has a sequential-pay pass-through structure. Six loans, representing 26.1% 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 26.1% 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 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 and their respective actual constants, five loans, representing 9.3% of the pool, 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 24 loans, representing 60.3% of the pool, having refinance DSCRs below 1.00x, and 17 loans, representing 47.0% of the pool, having refinance DSCRs below 0.90x. These credit metrics are based on whole-loan balances.

Six of the top 20 loans — 685 Fifth Avenue Retail Condo, Aventura Mall, Millennium Partners Portfolio, 1745 Broadway, CoolSprings Galleria and Pfizer Building — exhibit credit characteristics consistent with investment-grade shadow ratings of BBB, BBB (high), A (high), BBB (high), A (low) and AAA, respectively. Combined, these loans represent 26.1% of the pool. Only three loans, totaling 4.2% 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 Pfizer Building, representing 2.1% of the pool balance and 51.1% of the single-tenant concentration, and is shadow-rated investment grade at AAA. Loans secured by properties occupied by single tenants have been found to suffer higher loss severities in an event of default.

Seven loans, representing 17.2% of the pool, are secured by 33 hotel properties, including three 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 10.5% and 11.7%, respectively, which compare quite favorably with the comparable figures of 9.5% and 10.2%, respectively, for the non-hotel properties in the pool. Additionally, the majority, or 95.7%, 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 18 loans, representing 39.4% of the pool, secured by retail properties. Of the retail property concentration, 27.6% of the loans are located in urban and super-dense urban markets, and no loan secured by a retail property is located in a tertiary or rural market, and two loans, representing 18.7% of the retail concentration, are secured by multiple properties (31 in total), which insulates the loans from issues at any one property. Furthermore, four of these loans, representing 51.5% of the retail concentration and 20.3% of the total pool balance, are shadow-rated investment grade.

While the DBRS Refinance (Refi) DSCR is 1.12x, indicating moderate refinance risk on an overall pool level, when excluding the National Cooperative Bank loans, the DBRS Refi DSCR lowers to 1.01x, which indicates a higher level of refinance risk. Twenty-four loans, representing 60.3% of the pool, have DBRS Refi DSCRs below 1.00x, and 17 of these loans, comprising 47.0% of the pool, have DBRS Refi DSCRs less than 0.90x, including seven of the top ten loans and eight of the top 15 loans. These metrics are based on whole-loan balances. Three of the pool’s loans with a DBRS Refi DSCR below 0.90x — 685 Fifth Avenue Retail, Aventura Mall and Millennium Partners Portfolio — which represent 18.1% 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, excluding co-operative loans, improves to 1.07x. The pool’s DBRS Refi DSCRs for these loans are based on a WA stressed refinance constant of 12.67%, which implies an interest rate of 12.35% amortizing on a 30-year schedule. This represents a significant stress of 7.73% 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, X-D, X-F, X-G and X-H 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.

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.