DBRS Morningstar Assigns Ratings to BBCMS 2018-TALL Mortgage Trust

DBRS, Inc. (DBRS Morningstar) assigned ratings to the Commercial Mortgage Pass-Through Certificates, Series 2018-TALL issued by BBCMS 2018-TALL Mortgage Trust (the Issuer):

-- Class A at AAA (sf)
-- Class B at AA (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (low) (sf)

All trends are Stable.

These certificates are currently also rated by DBRS Morningstar’s affiliated rating agency, Morningstar Credit Ratings, LLC (MCR). In connection with the ongoing consolidation of DBRS Morningstar and MCR, MCR previously announced that it had placed its outstanding ratings of these certificates Under Review–Analytical Integration Review and that MCR intended to withdraw its outstanding ratings; such withdrawal will occur on or about July 16, 2020. In accordance with MCR’s engagement letter covering these certificates, upon withdrawal of MCR’s outstanding ratings, the DBRS Morningstar ratings will become the successor ratings to the withdrawn MCR ratings. Information about the MCR ratings, including the history of the MCR ratings, can be found at www.morningstarcreditratings.com.

On March 1, 2020, DBRS Morningstar finalized its “North American Single-Asset/Single-Borrower Ratings Methodology” (the NA SASB Methodology), which presents the criteria for which ratings are assigned to and/or monitored for North American single-asset/single-borrower (NA SASB) transactions, large concentrated pools, rake certificates, ground lease transactions, and credit tenant lease transactions. For further information on the NA SASB Methodology, please see the press release dated March 1, 2020, on the DBRS Morningstar website at www.dbrsmorningstar.com.

The subject rating actions are the result of the application of the NA SASB Methodology in conjunction with the “North American CMBS Surveillance Methodology,” as applicable. Qualitative adjustments were made to the final loan-to-value (LTV) sizing benchmarks used for this rating analysis.

The subject loan is secured by a 3.9 million square foot (sf) multitenant office property in Chicago known as the Willis Tower. The borrower used loan proceeds of $1.3 billion to pay off exiting debt of $990.5 million, return $240.0 million of equity to the sponsor, fund reserves of $86.9 million, and cover closing costs of $16.7 million. The loan has an initial term of two years and allows for five one-year extension options. The borrower exercised the first extension option, and the fully extended final maturity data is scheduled to occur in March 2025. The loan sponsor is an affiliate of Blackstone Group L.P. and, at issuance, planned to spend $498.6 million in capital expenditures (capex) on the office, retail, and Skydeck components through March 2022. The sponsor had already incurred $199.3 million of capex and leasing costs on the office, retail, and Skydeck components before the subject loan closed. From the closing date of the subject transaction in April 2018 to the closing date of the prior securitization, Chicago Skyscraper Trust 2017-SKY, in March 2017, the property’s occupancy rate increased to 85.6% from 73.1% and the office component’s occupancy rate increased to 89.8% from 73.3%. As of the rent roll dated March 31, 2019, the property (including the office, retail, and broadcast components) reported a physical occupancy rate of 80.3% and an occupancy rate (including future leased space) of 87.6%. The office component reported a physical occupancy rate of 86.1% and an occupancy rate (including future leasing) of 91.0%.

According to a Chicago Sun-Time’s article published on May 18, 2020, the Willis Tower temporarily closed on May 18, 2020, after heavy rains caused widespread flooding across the Chicago area. The substation and basement at the property flooded, causing a power outage at the Willis Tower and the surrounding block. The outage also affected TV stations that use antennas at the property for broadcasting. DBRS Morningstar has submitted questions to the servicer regarding if any leased space at the property sustained flood damage and will continue to monitor the situation around the temporary closure as more information becomes available.

United Airlines, Inc. (United) has its global headquarters at the property and leases 17 floors comprising 849,505 sf, representing 22.4% of net rentable area (NRA) and 23.4% of DBRS Morningstar base rent. United has been a tenant at the property since 2010 and invested approximately $46.4 million of its own capital to build out its space and relocate its corporate headquarters to the property in 2012. United’s lease at issuance extended through March 2028 with two five-year or 10-year extension options. According to a Chicago Tribune article in March 2019, United exercised a renewal option to extend its lease through 2033 with plans to redesign its 16 floors of space over the next three years and add a 30,000 sf cafeteria and roof deck on the fourth floor. According to another Chicago Tribune article in May 2020, United plans to eliminate more than 3,400 management and administrative positions by October 2020, most of whom work in Chicago at the Willis Tower, because of the Coronavirus Disease (COVID-19) impact on air travel and United reporting a $1.7 billion loss in Q1 2020. While United and several other airlines received financial assistance through the coronavirus relief fund, airlines receiving this assistance agreed to avoid pay cuts and involuntary furloughs through September 2020.

The property’s Skydeck comprises 11,948 sf on the 103rd floor and 11,832 sf on the 99th floor, and is the highest observation deck in Chicago. As a part of the capital improvement plan, the sponsor plans to flow guests through the retail component, enhance elevator efficiency, and create a ticketed queuing system. In response to the coronavirus pandemic, the sponsor temporarily closed the Skydeck on March, 14 2020. Skydeck revenue accounts for 19.9% of the DBRS Morningstar net cash flow (NCF), which assumed the YE2017 Skydeck revenue; however, the loan’s hypothetical implied DBRS Morningstar debt service coverage rate (DSCR), assuming a one-month Libor rate as of April 30, 2020, and the margin rate under two stressed scenarios, indicate a low probability of default. If DBRS Morningstar applied a 25.0% vacancy on the Skydeck revenue, the hypothetical implied DBRS Morningstar DSCR would be 3.29 times (x). If DBRS Morningstar assumed no revenue or expenses associated with the Skydeck, the hypothetical implied DBRS Morningstar DSCR would be 2.73x, which is still very strong and indicates a low probability of term default. The Skydeck is scheduled to open on July 1, 2020, under reduced guest capacity, which allows one party at a time on The Ledge. Management has implemented measures in accordance with guidelines from the City of Chicago’s Phase 4 plan, the Centers for Disease Control and Prevention, and the federal government to mitigate the spread of the coronavirus at the property.

The property’s retail component comprises 231,588 sf and is primarily located on the lobby and lower level. The sponsor was vacating the existing retail tenants to reposition the retail space as part of the capital improvement plan at loan closing in April 2018. DBRS Morningstar did not give revenue credit to any new retail leases executed after March 9, 2018, the date of the issuance rent roll, in the DBRS Morningstar NCF. According to the Willis Tower website as of June 30, 2020, Shake Shack, Brown Bag Seafood Co, Tortazo, Do-Rite Donuts & Chicken, sweetgreen, Fifth Third Bank, and Starbucks were open. Tortazo and Brown Bag Seafood Co. were temporarily closed during the City of Chicago’s Phase 1 period and the other restaurants at the property were only offering carryout and/or online order/pickup or delivery-only options. The Willis tower website also noted that Market Creations Cafe, Sushi-san, and Urbanspace are still planning to open, but there is no detailed timeline in place.

The DBRS Morningstar NCF derived at issuance was reanalyzed for the subject rating action to confirm its consistency with the “DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria.” The resulting NCF figure was $84.5 million and a cap rate of 7.25% was applied. Additionally, DBRS Morningstar concluded to a $144.7 million value attributed to the stabilization of the retail and Skydeck components and outstanding office stabilization costs in conjunction with a 75.0% credit applied to the sponsor guarantees. While the appraiser’s as-is value is $1.78 billion, the projected as-stabilized value for the property is $2.44 billion as of March 2022, which represents a 37.2% increase in value. The resulting DBRS Morningstar Value is $1.3 billion, a variance of -26.4% and -46.4% from the appraised as-is value at issuance and the projected as-stabilized appraised value, respectively. The DBRS Morningstar Value implies an LTV of 101.1% compared with the LTV of 74.4% on the as-is appraised value at issuance and the LTV of 54.2% on the projected as-stabilized value. The NCF figure applied as part of the analysis represents a -17.0% variance from the Issuer’s NCF, primarily driven by leasing costs.

DBRS Morningstar applied a cap rate applied at the middle of the DBRS Morningstar Cap Rate Ranges for office properties, reflecting the property’s location, marketing positioning, and quality. In addition, the 7.25% cap rate DBRS Morningstar applied is above the implied cap rate of 5.72% based on the Issuer’s underwritten NCF and as-is appraised value.

DBRS Morningstar made positive qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis, totaling 3.5% to account for cash flow volatility, property quality, and market fundamentals.

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.

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 this transaction.

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com The platform includes loan-level 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 methodologies are the North American Single-Asset/Single-Borrower Ratings Methodology and North American CMBS Surveillance Methodology, which can be found on www.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 www.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 [email protected].

DBRS, Inc.
22 West Washington Street
Chicago, IL 60602 USA
Tel. +1 312 696-6293