DBRS Finalizes Provisional Ratings on Key Commercial Mortgage Trust 2019-S2

DBRS, Inc. (DBRS) finalized its provisional ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2019-S2 issued by Key Commercial Mortgage Trust 2019-S2:

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

All trends are Stable.

The Class X balance is notional.

The collateral consists of 29 fixed-rate loans secured by 36 commercial and multifamily properties. The transaction employs 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. When the cut-off loan balances were measured against the DBRS Stabilized Net Cash Flow and their respective actual constants, four loans, representing 14.7% of the pool, have a DBRS Term Debt Service Coverage Ratio (DSCR) below 1.15 times (x), including two loans, representing 7.6% of the pool, that have a DBRS Term DSCR below 1.00x, a threshold indicative of a higher likelihood of mid-term default.

The deal has favorable credit metrics, as evidenced by an issuance weighted-average (WA) loan-to-value (LTV) ratio and balloon WA LTV of 64.7% and 55.0%, respectively. Only two loans, comprising 7.2% of the trust balance, have Issuance As-Is LTVs of 75.0% or higher. The deal exhibits ample property-type diversification, with no single property type accounting for more than 22.3% of the pool by allocated loan balance. The largest concentrations include self-storage, office, retail and industrial, which account for 22.2%, 19.3%, 15.0% and 12.0% of the pool by allocated loan balance, respectively. Furthermore, only one loan, representing 8.4% of the pool by allocated loan balance, is secured by two hotel properties. Hotels have the highest cash flow volatility of all property types as their income, which is derived from daily contracts rather than multiyear leases, and their expenses, which are often mostly fixed, account for a relatively large proportion of revenue. As a result, cash revenue can decline swiftly in the event of a downturn and cash flow may decline more exponentially because of high operating leverage. However, the loan is secured by two extended-stay hotels that have a much more stable cash flow profile than traditional hotels.

Fourteen loans, representing 47.2% of the pool, are secured by properties located in markets ranked one or two, which are considered more rural or tertiary in nature, including five of the top ten loans (Forestbrook Village, Coeymans Industrial Portfolio, Pacific Rim Apartments, Sea Breeze MHC and 5950 North Main Street). Further, only two loans (Broadway Ace Hardware & Storage and Siete II Office Building), representing 7.3% of the pool, are secured by a property modeled with a market rank of six, which is typically lighter urban in nature. Only one loan (180 North Wacker Drive), representing 7.0% of the pool, is secured by a property located in a market ranked seven, while no loans are secured by properties in markets ranked eight. Markets ranked seven and eight are generally denser urban in nature and benefit from greater liquidity, even during times of economic stress.

The pool is relatively concentrated based on loan size, as there are only 29 loans, and it has a concentration profile similar to a pool of 23 equally sized loans. The ten largest loans represent 52.2% of the pool by allocated loan balance, and the largest three loans represent 21.0% of the pool by allocated loan balance. While the concentration profile is like a pool of 23 equally sized loans — which is typically worse than most fixed-rate conduit transactions — the transaction benefits from favorable property-type diversification. The pooling simulation analysis within the CMBS Insight Model implicitly accounts for loan concentration, which results in high AAA loss estimates given the relatively low pool-level expected loss of 2.5%.

Class X is an interest-only (IO) certificate that references 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 are subject to surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed or discontinued by DBRS.

For supporting data and more information on this transaction, please log into www.viewpoint.dbrs.com.

Notes:
With regard to due diligence services, DBRS was provided with the Form ABS Due Diligence-15E (Form-15E), which contains a description of the information that a third party reviewed in conducting the due diligence services and a summary of the findings and conclusions. While due diligence services outlined in Form-15E do not constitute part of DBRS’s methodology, DBRS used the data file outlined in the independent accountant’s report in its analysis to determine the ratings referenced herein.

The principal methodology is the North American CMBS Multi-borrower Rating Methodology, which can be found on www.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, which can be found on www.dbrs.com in the Commentary tab under Regulatory Affairs. 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.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.

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