DBRS Finalizes Provisional Ratings on Morgan Stanley Capital I Trust 2018-L1

DBRS, Inc. (DBRS) finalized its provisional ratings on 16 classes of Commercial Mortgage Pass-Through Certificates, Series 2018-L1 to be issued by Morgan Stanley Capital I Trust 2018-L1:

-- 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 X-A at AAA (sf)
-- Class X-B at AAA (sf)
-- Class A-S at AAA (sf)
-- Class B at AA (high) (sf)
-- Class C at A (sf)
-- Class X-D at BBB (sf)
-- Class D at BBB (high) (sf)
-- Class E at BBB (low) (sf)
-- Class F-RR at BB (high) (sf)
-- Class G-RR at BB (sf)
-- Class H-RR at B (sf)

All trends are Stable.

The Classes X-A, X-B and X-D balances are notional. For the provisional ratings, Class X-B referenced the aggregate of the Class A-S, Class B and Class C certificates, which resulted in a rating of A (high) (sf). The Class X-B structure was revised in the finalized rating to reference only the aggregate of the Class A-S and Class B certificates, which resulted in a rating of AAA (sf).

The collateral consists of 47 fixed-rate loans secured by 74 commercial and multifamily properties. The transaction is a sequential-pay pass-through structure. The trust assets contributed from three loans, representing 17.3% of the pool, are shadow-rated investment-grade by DBRS. Proceeds for the shadow-rated loans are floored at the respective ratings within the pool. When 17.3% of the pool has no proceeds assigned below the rated floor, the resulting pool subordination is diluted or reduced below the rated floor. The conduit pool was analyzed to determine the final 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 stabilized NCF and their respective actual constants, one loan, representing 3.1% of the total 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 29 loans, representing 69.2% of the pool, having refinance DSCRs below 1.00x and 21 loans, representing 58.4% of the pool, with refinance DSCRs below 0.90x. These credit metrics are based on whole-loan balances.

Three loans – Aventura Mall, Millennium Partners Portfolio and The Gateway – representing a combined 17.3% of the pool, exhibit credit characteristics consistent with investment-grade shadow ratings. Aventura Mall exhibits credit characteristics consistent with a BBB (high) shadow rating, Millennium Partners Portfolio exhibits credit characteristics consistent with a AA (high) shadow rating and The Gateway exhibits credit characteristics consistent with an “A” shadow rating. Term default risk is moderate, with no loans exhibiting a DBRS Term DSCR below 1.10x and as further indicated by the relatively strong weighted-average (WA) DBRS Term DSCR of 1.58x. In addition, 23 loans, representing 61.5% of the pool, have a DBRS Term DSCR in excess of 1.50x. Even when excluding the three investment-grade shadow-rated loans, the deal exhibits an acceptable WA DBRS Term DSCR of 1.53x. DBRS did not deem any of the properties securing the loans to be of Average (-), Below Average or Poor property quality. Additionally, nine loans, comprising 50.1% of the DBRS sample balance, were either considered Above Average or Average (+). The remaining loans were classified as Average. Only three loans, representing 4.3% 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 Alliance Data Systems, which represents 3.0% of the total pool balance and 68.3% of the single-tenant concentration, where the collateral serves as the mission-critical headquarters for the tenant and houses significant business functions, including the executive team. Loans secured by properties occupied by single tenants have been found to suffer higher loss severities in an event of default.

Twenty-two loans, representing 54.5% of the pool, including seven of the largest 15 loans, are structured with interest-only (IO) payments for the full term. An additional 13 loans, representing 29.1% of the pool, have partial IO periods remaining ranging from 12 months to 60 months. The DBRS Term DSCR is calculated by using the amortizing debt service obligation, while the DBRS Refi DSCR is calculated by considering the balloon balance and lack of amortization when determining refinance risk. DBRS determines probability of default (POD) based on the lower of Term or Refi DSCR; therefore, loans that lack amortization will be treated more punitively. Further, this concentration includes two shadow-rated loans – Aventura Mall and Millennium Partners Portfolio – which total 12.8% of the pool and are both full-term IO. The transaction’s WA DBRS Refi DSCR is 0.93x, indicating higher refinance risk on an overall pool level. In addition, 29 loans, representing 69.2% of the pool, have DBRS Refi DSCRs below 1.00x, including six of the top ten loans and ten of the top 15 loans. Twenty-one of these loans, comprising 58.4% of the pool, have DBRS Refi DSCRs less than 0.90x, including six of the top ten loans and eight of the top 15 loans. The pool’s DBRS Refi DSCRs for these loans are based on a WA stressed refinance constant of 9.86%, which implies an interest rate of 9.24%, amortizing on a 30-year schedule. This represents a significant stress of 4.42% over the WA contractual interest rate of the loans in the pool. Moreover, DBRS models the POD based on the more constraining of the DBRS Term DSCR and DBRS Refi DSCR. This concentration includes two shadow-rated loans – Aventura Mall and Millennium Partners Portfolio – which are shadow-rated investment grade by DBRS and have large pieces of subordinate mortgage debt held outside the trust. Reflecting the shadow ratings, the senior notes contributed to this transaction have a DSCR of more than 1.00x.

The deal appears concentrated by property type, with 38.7% of the pool secured by retail properties, including two regional malls. The concentration also includes Aventura Mall and Millennium Partners Portfolio, which make up 12.8% of the total pool balance and 33.7% of the retail property exposure, and are shadow-rated BBB (high) and AA (high), respectively. The concentration penalty applied to this pool incorporates property type concentration, as well as concentration by loan size and geographic location. Nine loans, representing 18.5% of the pool, are secured by properties located in tertiary or rural markets, including two of the top 15 loans. Properties located in tertiary and rural markets are analyzed with significantly higher loss severities than those located in urban and suburban markets. Further, the WA DBRS Debt Yield and DBRS Exit Debt Yield for such loans are 9.0% and 9.6%, respectively, which are somewhat, though not materially, higher than the overall pool metrics.

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 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.