DBRS Morningstar Confirms All Classes of The Bancorp 2018-CRE4 Trust

DBRS, Inc. (DBRS Morningstar) confirmed the ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2018-CRE4 issued by The Bancorp Commercial Mortgage 2018-CRE4 Trust (the Issuer):

-- Class A at AAA (sf)
-- Class A-S at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (low) (sf)
-- Class E at BB (low) (sf)
-- Class F at B (sf)

All trends are Stable.

The rating confirmations reflect the overall stable performance of the transaction since issuance. In its analysis of the transaction, DBRS Morningstar applied probability of default (POD) adjustments to loans with confirmed issues caused in part by the stressed real estate environment associated with the Coronavirus Disease (COVID-19) pandemic. Because of the transitional nature of the underlying collateral, proposed business plans that are necessary to bring the assets to stabilization may be delayed and, in some cases, borrowers may request relief from the Issuer. DBRS Morningstar has built additional POD stress into the analysis for this transaction and, given what is known today, expects that the rated classes are insulated from adverse credit implications at this time, warranting the rating confirmations.

At issuance, the collateral consisted of 45 floating-rate mortgages secured by 50 transitional properties totaling $341.0 million based on the trust cut-off balances ($515.2 million including funded pari passu participation interests) and $568.8 million based on fully funded loan amounts. Per the May 2020 remittance, there were 31 mortgages secured by 39 properties with a trust balance of $249.1 million remaining, representing a 26.9% collateral reduction since issuance. As of April 2020, the servicer reported all future funding loan proceeds has been released with the exception of $2.4 million for Butterfield Office Plaza (Prospectus ID#17 – 3.5% of the trust balance). The loans were structured with three-year initial terms that are scheduled to mature between June 2020 and September 2021, and all loans feature two one-year extension options that are performance-based.

Per the May 2020 remittance, the pool is relatively granular as the largest remaining loan represents 7.0% of the trust balance and the largest 10 loans represent 54.5% of the trust balance. Approximately 77.3% of the remaining pool is secured by multifamily properties, and 16 loans, representing 56.6% of the trust balance, are secured by properties with a DBRS Morningstar Market Rank of 4 or greater. Exposure to lodging and retail property types is limited to four loans, representing 10.9% of the trust balance.

There are two loans (Prospectus ID#36 – Staybridge Suites Conversion and Prospectus ID#38 – Montrose Portfolio 1), representing 1.7% of the trust balance, that are in special servicing as of May 2020. The Staybridge Suites Conversion loan is secured by a 224-key limited-service hotel in Kissimmee, Florida. It transferred to special servicing in April 2020 because of payment default as the borrower made a hardship request because of ongoing performance declines as a direct result of the pandemic, which has significantly affected the travel and lodging industry. The loan’s business plan centered around the conversion of the collateral from a Royale Parc Suites under the Quality Suites flag to a Staybridge Suites flagged under the InterContinental Hotels Group (IHG). The mandated property improvement plan (PIP) renovation, costing $7.5 million, began post-acquisition in September 2017. The PIP was completed in December 2019, at which point the collateral was formally flagged as a Staybridge Suites under IHG. During the construction process, the collateral’s occupancy and financial performance suffered and the loan was subsequently transferred to the servicer’s watchlist in June 2019 for a low debt service coverage ratio (DSCR), which was anticipated. Construction concluded in December 2019 and, as the subject was poised to realize increased occupancy and daily rates as a result of the PIP, the coronavirus pandemic began to affect travel and hotel properties throughout the United States. As a result, the borrower has requested debt service relief from the lender and the loan is classified as 60 to 89 days delinquent. This loan was analyzed with an elevated POD to reflect DBRS Morningstar’s concerns about the hospitality industry and the ultimate delay in property stabilization.

The Montrose Portfolio 1 loan is secured by a three-property multifamily portfolio consisting of 64 units three miles from the Houston central business district (CBD). Property renovations appear to be ongoing based on future funding continuing to be disbursed through April 2020; however, the completion date is well behind schedule. The loan transferred to the special servicer in December 2019 for payment default as the October 2019 loan payment and subsequent payments are over 120 days delinquent. The borrower is also in default for failing to comply with the cash management provision outlined in the loan agreement, which was initiated after the property failed to meet the 4.0% debt yield minimum in Q1 2019. The special servicer later found a $1.8 million second mortgage was filed on the property without the servicer’s consent. The second lienholder is attempting to foreclose on the property and take control of the property. A motion was filed with the court in April 2020 to install a receiver for the property. The special servicer is pursuing foreclosure once an updated Phase-1 environmental report, appraisal report, and property condition report are received, which were on hold as a result of the coronavirus. The loan was liquidated from the pool with a stressed collateral value as part of the subject review as both the special servicer and second lienholder attempt to take control of the property.

As of May 2020, there are two additional loans (Prospectus ID#16 - DoubleTree Columbia and Prospectus ID#10 – Vida on Valley Apartments), representing 8.2% of the trust balance, that have delinquent payments related to the economic impact from the coronavirus. In addition, a forbearance request was proposed for Hotel Indigo Detroit (Prospectus ID#5 – 6.0% of the trust balance), which is being reviewed by the special servicer. DBRS Morningstar increased the POD for these loans as part of the review to reflect the increased default risk for each of these stressed loans.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

DBRS Morningstar materially deviated from its principal methodology when determining the rating assigned to Class C as quantitative results suggest a higher rating. 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 deviation is warranted given the uncertain loan-level event risk associated with the two specially serviced loans, the two delinquent loans, and Hotel Indigo Detroit.

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#2 – Corey Place Apartments (7.0% of the pool)
-- Prospectus ID#3 – Buena Vista Apartments (6.8% of the pool)
-- Prospectus ID#4 – 225 City Avenue (6.4% of the pool)
-- Prospectus ID#5 – Hotel Indigo Detroit (6.0% of the pool)
-- Prospectus ID#6 – Woodbury Place Apartments (5.6% of the pool)
-- Prospectus ID#10 – Vida on Valley Apartments (4.5% of the pool)
-- Prospectus ID#12 – Spanish Square Apartments (4.3% of the pool)
-- Prospectus ID#16 – DoubleTree Columbia (3.7% of the pool)
-- Prospectus ID#36 – Staybridge Suites Conversion (1.0% of the pool)
-- Prospectus ID#38 – Montrose Portfolio 1 (0.7% of the pool)

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.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 (March 6, 2020), which can be found on dbrsmorningstar.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 dbrsmorningstar.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.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

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.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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