DBRS Finalizes Provisional Ratings on DBGS 2018-C1 Mortgage Trust

DBRS, Inc. (DBRS) finalized provisional ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2018-C1 to be issued by DBGS 2018-C1 Mortgage Trust:

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

All trends are Stable. The Class X-A, X-B, X-D and X-F balances are notional.

The collateral consists of 37 fixed-rate loans secured by 102 commercial and multifamily properties. The transaction is a sequential-pay pass-through structure. The conduit pool was analyzed to determine the final ratings, reflecting the long-term probability of loan default (POD) within the term and its liquidity at maturity. Trust assets contributed from three loans, representing 36.1% of the pool, are shadow-rated investment grade by DBRS. Proceeds for the shadow-rated loans are floored at their respective rating within the pool. When the combined 36.1% of the pool has no proceeds assigned below the rating floor, the resulting pool subordination is diluted or reduced below that rated floor. When the cut-off loan balances were measured against the DBRS Stabilized net cash flow and their respective actual constants, four loans, representing 10.6% 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 (refi) risk given the current low-interest-rate environment, DBRS applied its refinance constants to the balloon amounts. This resulted in 19 loans, representing 58.3% of the pool, having refinance DSCRs below 1.00x and 12 loans, representing 37.7% of the pool, having refinance DSCRs below 0.90x.

Nine loans, representing 38.2% of the DBRS sample, have favorable property quality. Four loans (Pier 70, TripAdvisor HQ, Moffett Towers II – Building 1 and GSK North American HQ), representing 17.8% of the sample in aggregate, received Above Average property quality and the remaining five loans, representing 20.3% of the sample in aggregate, received Average (+) property quality. Additionally, no loans received Below Average or Poor property quality grades. Higher-quality properties are more likely to retain existing tenants/guests and more easily attract new tenants/guests, resulting in more stable performance.

Nine loans (Moffett Towers – Buildings E, F, G; Christiana Mall; Aventura Mall; 90-100 John Street; Carolinas 7-Eleven Portfolio; The Gateway; 601 McCarthy; West Coast Albertsons Portfolio; and Moffett Towers II – Building 1), representing a combined 36.1% of the pool, exhibit credit characteristics consistent with investment-grade shadow ratings. Moffett Towers – Buildings E, F, G exhibits credit characteristics consistent with a BBB (low) (sf) shadow rating, Christiana Mall exhibits credit characteristics consistent with an A (sf) shadow rating, Aventura Mall exhibits credit characteristics consistent with a BBB (high) (sf) shadow rating, 90-100 John Street exhibits credit characteristics consistent with an A (sf) shadow rating and Carolinas 7-Eleven Portfolio exhibits credit characteristics consistent with a BBB (high) (sf) shadow rating, The Gateway exhibits credit characteristics consistent with an A (sf) shadow rating, 601 McCarthy exhibits credit characteristics consistent with an A (low) (sf) shadow rating, West Coast Albertsons Portfolio exhibits credit characteristics consistent with an A (high) (sf) shadow rating and Moffett Towers II – Building 1 exhibits credit characteristics consistent with a BBB (sf) shadow rating.

Seven loans, representing 28.0% of the pool, are located in super-dense urban and urban markets with increased liquidity that benefits from consistent investor demand, even in times of stress. Urban markets represented in the deal include San Francisco, New York and Los Angeles.

Term default risk is moderate as indicated by the relatively strong DBRS Term DSCR of 1.76x. In addition, 17 loans, representing 55.6% of the pool, have a DBRS Term DSCR above 1.50x. Even when excluding the three investment-grade shadow-rated loans, the deal exhibits a favorable DBRS Term DSCR of 1.47x.

None of the loans in the pool are secured by hotels. 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.

The pool is highly concentrated by property type, as office concentration is 45.0%. While the transaction is concentrated by property type, 36.1% of the transaction balance and 28.2% of the office concentration are shadow-rated investment grade by DBRS. Additionally, 38.7% of the office concentration is located in urban markets with the remainder located in suburban markets. The pool is assessed with a concentration penalty, which is partly a result of property-type concentration that increases pool-wide POD. Seventeen loans, representing 60.6% of the pool, including 11 of the largest 15 loans, are structured with full-term interest-only (IO) payments. An additional 15 loans, comprising 28.5% of the pool, have partial-IO periods ranging from 12 months to 60 months. As a result, the transaction’s scheduled amortization by maturity is only 4.7%, which is generally below other recent conduit securitizations.

The DBRS Term DSCR is calculated using the amortizing debt service obligation and the DBRS Refi DSCR is calculated considering the balloon balance and lack of amortization when determining refinance risk. DBRS determines POD based on the lower of term or refinance DSCRs; therefore, loans that lack amortization are treated more punitively. Six of the full-term IO loans, representing 42.4% of the full-IO concentration in the transaction, are located in urban or super-dense urban markets. Additionally, eight of the full-IO loans (Moffett Towers – Buildings E, F, G; Christiana Mall; Aventura Mall; 90-100 John Street; Carolinas 7-Eleven Portfolio; The Gateway; 601 McCarthy; and West Coast Albertsons Portfolio), representing 55.6% of the full-IO concentration, are shadow-rated investment grade by DBRS. Ten loans, representing 32.6% of the transaction balance, are secured by properties that are either fully or primarily leased to a single tenant. This includes five of the largest 15 loans. Loans secured by properties occupied by single tenants have been found to suffer higher loss severities in an event of default. DBRS applied a penalty for single-tenant properties that resulted in higher loan-level credit enhancement. Amazon.com, Inc. has fully executed leases for six office towers in the larger Moffett Place office campus, including the subject buildings (Moffett Towers – Buildings E, F, G and Moffett Towers II – Building 1), and views the entire campus as mission critical.

The transaction’s weighted-average (WA) DBRS Refi DSCR is 0.95x, indicating higher refinance risk on an overall pool level. In addition, 19 loans, representing 58.3% of the pool, have DBRS Refi DSCRs below 1.00x, including ten of the top 15 loans. Twelve of these loans, comprising 37.7% of the pool, have DBRS Refi DSCRs below 0.90x, including six of the top 15 loans. These credit metrics are based on whole-loan balances. Three of the pool’s loans with a DBRS Refi DSCR below 0.90x (Christiana Mall, Aventura Mall and The Gateway), which represent 12.9% 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 to 1.03x and the concentration of loans with DBRS Refi DSCRs below 1.00x and 0.90x reduces to 46.0% and 24.8%, respectively. The pool’s DBRS Refi DSCRs for these loans are based on a WA stressed refinance constant of 9.80%, which implies an interest rate of 9.17% amortizing on a 30-year schedule. This represents a significant stress of 4.51% over the WA contractual interest rate of the loans in the pool.

Classes X-A, X-B, X-D and X-F 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.