DBRS Assigns Provisional Ratings to Key Commercial Mortgage Trust 2018-S1

DBRS, Inc. (DBRS) assigned provisional ratings to the following classes of Commercial Mortgage Pass-Through Certificates, Series 2018-S1 (the Certificates) to be issued by Key Commercial Mortgage Trust 2018-S1:

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-S at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (sf)
-- Class E at BB (sf)
-- Class F at B (sf)
-- Class X at AA (sf)

The Class X balance is notional.

The collateral consists of 31 fixed-rate loans secured by 40 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 balances loan balances were measured against the DBRS Stabilized Net Cash Flow, one loan, representing 1.5% 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. To assess refinance risk given the current low interest rate environment, DBRS applied its refinance constants to the balloon amounts. This resulted in five loans, representing 10.0% of the pool by allocated loan balance, having refinance DSCRs below 1.00x, a threshold indicative of a higher likelihood of maturity default. These credit metrics are based on whole-loan balances.

The deal exhibits ample property type diversification, with no single property type accounting for more than 20.4% of the pool by allocated loan balance. The largest concentrations include Retail, Self-Storage, Manufactured Housing Community (MHC) and Office properties, which account for 20.4%, 18.6%, 17.1% and 15.8% of the pool by allocated loan balance, respectively. Only four loans, representing 9.3% of the pool by allocated loan balance, are secured by multifamily properties and only one loan, representing 5.0% of the pool by allocated loan balance, is secured by a hotel property. Additionally, only one loan, representing 5.5% of the aggregate pool balance, is secured by a property that is fully leased to a single tenant.

The pool exhibits relatively low refinance risk, as indicated by a strong DBRS Refi DSCR of 1.20x. Nine loans, representing 31.8% of the pool by allocated loan balance, have a DBRS Refi DSCR in excess of 1.25x. Excluding Hillcrest Plaza, which individually contributes a DBRS Refi DSCR of 2.65x, the deal still exhibits a favorable DBRS Refi DSCR of 1.16x. Only one loan, representing 3.4% of the pool, is interest only (IO) for the full term and total scheduled pool amortization is high at 15.0%.

The pool has a relatively high concentration of loans secured by properties considered to be in less favorable markets, with 11 loans, representing 37.5% of the pool by allocated loan balance, secured by properties considered to be in tertiary or rural markets. Five of the top ten loans specifically are in markets considered by DBRS to be tertiary or rural. The pool additionally suffers from a relatively high concentration of loans secured by non-traditional property types, with 14 loans, representing 40.7% of the pool by allocated loan balance, secured by self-storage, MHC or hospitality properties. The majority of these loans, 77.6% by allocated loan balance, are structured without IO periods and benefit from full-term amortization.

Of the 18 loans sampled by DBRS, five loans, representing 25.1% of the pool by allocated loan balance (35.0% of the DBRS sample), are secured by properties considered by DBRS to be of Below Average or Average (-) property quality. DBRS increased the probability of default of these loans to account for the elevated risk. Additionally, the five loans have a weighted-average (WA) DBRS Exit Debt Yield of 11.9%, which is greater than the pool’s WA DBRS Exit Debt Yield of 11.6%.

The pool is relatively concentrated based on loan size, as there are only 31 loans, and it has a concentration profile similar to a pool of 24 equally sized loans. The ten largest loans represent 52.9% of the pool by allocated loan balance and the largest three loans represent 20.3% of the pool by allocated loan balance. Excluding the top six loans, which account for 36.1% of the pool by allocated loan balance, no single loan accounts for more than 5.0% of the pool by allocated loan balance. While the concentration profile is like a pool of 24 equally sized loans — which is typically worse than most fixed-rate conduit transactions — the transaction benefits from favorable property type diversification.

Class X is an IO certificate that reference a single rated tranche or multiple rated tranches. The IO ratings mirror the lowest-rated reference tranche adjusted upward by one notch if senior in the waterfall.

All ratings will be the subject to ongoing surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed or discontinued by DBRS.

DBRS notes that the above press release was amended on March 13, 2019, to add a note about ongoing surveillance. The amendment was minor and would not impact the understanding of the reader.

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 Multi-borrower CMBS 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.