DBRS Finalizes Provisional Ratings of BBCMS Mortgage Trust 2018-C2

DBRS, Inc. (DBRS) finalized the provisional ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2018-C2 to be issued by BBCMS Mortgage Trust 2018-C2:

-- 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-5 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 C at AA (low) (sf)
-- Class X-B at AA (sf)
-- Class D at A (sf)
-- Class E at BBB (sf)
-- Class X-D at BBB (high) (sf)
-- Class F at BB (high) (sf)
-- Class X-F at BBB (low) (sf)
-- Class G at B (high) (sf)
-- Class X-G at BB (low) (sf)
-- Class H-RR at B (low) (sf)

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

The collateral consists of 44 fixed-rate loans secured by 87 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 within the term and its liquidity at maturity. Trust assets contributed from four
loans, representing 12.6% 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 the combined 12.6% 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, only one loan, Alex Park South, representing 1.7% 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 25 loans, representing 59.5% of the pool, having refinance DSCRs below 1.00x and 11 loans, representing 26.3% of the pool, having refinance DSCRs below 0.90x.

Nine loans, representing 41.7% of the DBRS sample, have favorable property quality. Four loans (Dream Inn, Zenith Ridge, Moffett Towers II – Building 1 and The Shops at Solaris), representing 17.6% of the sample in aggregate, received Above Average property quality and the remaining five loans, representing 24.0% 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.

Four loans (Christiana Mall; Moffett Towers – Buildings E, F and G; Moffett Towers II – Building 1; and Fair Oaks Mall), representing a combined 12.6% of the pool, exhibit credit characteristics consistent with investment-grade shadow ratings. Christiana Mall exhibits credit characteristics consistent with an A (sf) shadow rating; Moffett Towers – Buildings E, F and G exhibit credit characteristics consistent with a BBB (low) (sf) shadow rating; Moffett Towers II – Building 1 exhibits credit characteristics consistent with a BBB (sf) shadow rating; and Fair Oaks Mall exhibits credit characteristics consistent with a BBB (high) (sf) shadow rating. The pool is representative of moderate-leverage financing with a DBRS Going-In and Exit Debt Yield of 9.2% and 9.9%, respectively, based on the whole loans. The metrics improve slightly to 9.5% and 10.2%, respectively, when considering A-note balances. Term default risk is moderate, as indicated by the relatively strong DBRS Term DSCR of 1.65x. In addition, 23 loans, representing 61.9% of the pool, have a DBRS Term DSCR above 1.50x. Even when excluding the four investment-grade shadow-rated loans, the deal exhibits a favorable DBRS Term DSCR of 1.62x.

The pool is highly concentrated by property type, as office concentration is 38.7%. While the transaction is concentrated by property type, 13.6% of the office concentration is shadow-rated investment grade by DBRS. Additionally, the weighted-average (WA) DBRS Term DSCR of the office properties is high at 1.76x. The pool is assessed with a concentration penalty, which is partly a result of property-type concentration that increases the pool-wide probability of default (POD). 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. Additionally, two of the full interest-only (IO) loans (Christiana Mall and Moffett Towers – Buildings E, F and G), representing 9.0% of the full IO concentration, are shadow-rated investment grade by DBRS. Five loans, representing 16.4% of the transaction balance, are secured by properties that are either fully or primarily leased to a single tenant. This includes two 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 and G and Moffett Towers II – Building 1) and views the entire campus as mission critical. GNL Portfolio was excluded from the single-tenant penalty, given the tenant diversification across different portfolio properties.

The transaction’s WA DBRS Refi DSCR is 1.00x, indicating higher refinance risk on an overall pool level. In addition,
25 loans, representing 59.4% of the pool, have DBRS Refi DSCRs below 1.00x, including eight of the top 15 loans. Eleven of these loans, comprising 26.3% of the pool, have DBRS Refi DSCRs below 0.90x, including four of the top 15 loans. These credit metrics are based on whole-loan balances. One of the pool’s loans with a DBRS Refi DSCR below 0.90x, Christiana Mall, which represents 6.2% of the transaction balance, is shadow-rated investment grade by DBRS and has 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 53.3% and 20.1%, respectively. The pool’s DBRS Refi DSCRs for these loans are based on a WA stressed refinance constant of 9.92%, which implies an interest rate of 9.30% amortizing on a 30-year schedule. This represents a significant stress of 4.309% over the WA contractual interest rate of the loans in the pool.

Classes X-A, X-B, X-D, X-F, X-G are IO certificates that reference a single rated tranche or multiple rated tranches. The IO rating mirrors the lowest-rated applicable reference obligation 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 & Criteria. 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.