DBRS Morningstar Changes Trend on Two Classes and Confirms Ratings on All Classes of Key Commercial Mortgage Trust 2018-S1

DBRS Inc. (DBRS Morningstar) confirmed the ratings on the Commercial Mortgage Pass-Through Certificates, Series 2018-S1, issued by Key Commercial Mortgage Trust 2018-S1 (the Trust), as listed below. In addition, DBRS Morningstar changed the trend on Classes E and F to Negative from Stable. The trend on the remaining classes is Stable.

-- 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 X at AA (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)

The Negative trend assigned to Classes E and F reflects DBRS Morningstar’s concerns about the increased risks to the pool surrounding two top ten loans in Green Bay Plaza (Prospectus ID#1, 8.0% of the pool) and 72nd Street Square (Prospectus ID#6, 5.1% of the pool). While situations in development with both collateral properties suggest the risk has increased since issuance, DBRS Morningstar believes the overall credit profile of the pool remains generally stable from issuance, thus supporting the rating confirmations and Stable trend assignment on the remaining classes.

Green Bay Plaza is a retail power center located in Green Bay, Wisconsin. DBRS Morningstar has been monitoring this loan because of the May 2019 closure of Office Depot (13.3% of net rentable area (NRA); lease expires April 2022) and the 2017 closure of the center’s shadow anchor, Sears. The servicer has confirmed that Office Depot will honor the lease obligations through the lease expiry date. The subject is located in a heavily retailed area with the nearest mall, Bay Park Square, located approximately 3 miles south. Other tenants at the plaza include TJ Maxx (20.7% of NRA; lease expires January 2021), Big Lots (14.4% of NRA; lease expires January 2021), and Ross Dress for Less (9.9% of NRA; lease expires January 2026). The loan reported a YE2018 debt service coverage ratio (DSCR) of 1.55 times (x), which compares with the DBRS Morningstar Term DSCR derived at issuance of 1.80x.

The more problematic loan is 72nd Street Square, the largest loan on the servicer’s watchlist, secured by an anchored retail center located in Tacoma, Washington. The loan was added to the watchlist in October 2019 because of the impending lease expiry of the property’s largest tenant, Safeway (44.0% of NRA; lease expires March 2020). Safeway, which has not occupied its space since 2006, had been subleasing its space to Goodwill; however, that location was recently closed, according to a January 2020 Google search. The loan has no cash management provisions in place and without Safeway’s rent the loan’s DSCR is expected to fall below 1.0x. DBRS Morningstar significantly increased the probability of default for this loan in its analysis for this review.

At issuance, the transaction consisted of 31 fixed-rate loans secured by 40 commercial properties with an original trust balance of $132.3 million. Per the January 2020 remittance, all 31 loans remain in the pool with a current balance of $130.0 million, representing a collateral reduction of 1.7% due to scheduled loan amortization. Per the January 2020 remittance, approximately 80.4% of the pool reported YE2018 financials and the pool reported a weighted-average (WA) DSCR and debt yield of 1.56x and 10.8%, respectively. At issuance, the WA DBRS Morningstar Term DSCR and debt yield for those same loans were 1.47x and 10.0%, respectively. As of the January 2020 remittance, two loans, representing 7.7% of the pool, are on the servicer’s watchlist.

DBRS Morningstar materially deviated from its principal methodology when determining the ratings assigned to Classes A-S, B, and C. DBRS Morningstar considers a material deviation from a methodology to exist when there may be a substantial likelihood that a reasonable investor or other user of the credit ratings would consider the material deviation to be a significant factor in evaluating the ratings. The material deviations are warranted given sustainability of loan performance trends are not demonstrated.

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 applicable reference obligation 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 Morningstar.

DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for the following loans in the transaction:

-- Prospectus ID#1 – Green Bay Plaza (8.0% of the pool)
-- Prospectus ID#6 – 72nd Street Square (5.1% of the pool)

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrs.com. The platform includes issuer and servicer data for most outstanding CMBS transactions (including non-DBRS Morningstar rated), as well as loan-level and transaction-level commentary for most DBRS Morningstar-rated and -monitored transactions.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is North American CMBS Surveillance 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 Morningstar 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 Morningstar 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. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The DBRS Morningstar long-term rating scale definition indicates that ratings of CCC or lower are assigned when the bond is highly likely to default or default is imminent, thereby prevailing over a sensitivity analysis.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at [email protected].

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