DBRS Morningstar Finalizes Provisional Ratings on Morgan Stanley Capital I Trust 2020-HR8

DBRS, Inc. (DBRS Morningstar) finalized its provisional ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2020-HR8 issued by Morgan Stanley Capital I Trust 2020-HR8 (MSC 2020-HR8):

-- Class A-1 at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class X-A at AAA (sf)
-- Class A-S at AAA (sf)
-- Class B at AAA (sf)
-- Class X-B at AA (low) (sf)
-- Class X-D at AA (low) (sf)
-- Class C at A (high) (sf)
-- Class D at A (high) (sf)
-- Class E-RR at A (low) (sf)
-- Class F-RR at A (low) (sf)
-- Class G-RR at BBB (sf)
-- Class H-RR at BB (high) (sf)
-- Class J-RR at BB (sf)
-- Class K-RR at B (high) (sf)
-- Class L-RR at B (low) (sf)

All trends are Stable.

The Class X-A, X-B, and X-D note balances are notional.

With regard to the Coronavirus Disease (COVID-19) pandemic, the magnitude and extent of performance stress posed to global structured finance transactions remain highly uncertain. This considers the fiscal and monetary policy measures and statutory law changes that have already been implemented or will be implemented to soften the impact of the crisis on global economies. Some regions, jurisdictions, and asset classes are, however, feeling more immediate effects. DBRS Morningstar continues to monitor the ongoing coronavirus pandemic and its impact on both the commercial real estate sector and the global fixed income markets. Accordingly, DBRS Morningstar may apply additional short-term stresses to its rating analysis, for example by front-loading default expectations and/or assessing the liquidity position of a structured finance transaction with more stressful operational risk and/or cash flow timing considerations.

Despite the impact of the coronavirus, all 43 loans in the pool have received debt service payments for May and June.

The transaction consists of 43 fixed-rate loans secured by 76 commercial and multifamily properties. The transaction is of a sequential-pay pass-through structure. Two loans, representing 11.4% of the pool, are shadow-rated investment grade by DBRS Morningstar. DBRS Morningstar analyzed the conduit pool to determine the ratings, reflecting the long-term probability of loan default within the term and its liquidity at maturity. When the cut-off loan balances were measured against the DBRS Morningstar net cash flow and their respective actual constants, the initial DBRS Morningstar weighted-average (WA) debt service coverage ratio (DSCR) of the pool was 2.58 times (x). Five loans, accounting for 29.08% of the pool balance, had a DBRS Morningstar DSCR below 1.56x, a threshold indicative of a higher likelihood of midterm default. The pool additionally includes seven loans, composing a combined 23.4% of the pool balance, with a DBRS Morningstar loan-to-value (LTV) ratio exceeding 67.1%, a threshold generally indicative of above-average default frequency. The WA DBRS Morningstar LTV of the pool at issuance was 60.0%, and the pool is scheduled to amortize down to a DBRS Morningstar WA LTV of 57.3% at maturity. These credit metrics are based on A note balances.

Seven loans, representing 33.6% of the pool, are in areas identified as DBRS Morningstar Market Ranks of either 7 or 8, which are generally characterized as highly dense urbanized areas that benefit from increased liquidity driven by consistently strong investor demand, even during times of economic stress. Markets ranked seven or eight benefit from lower default frequencies than less dense suburban, tertiary, and rural markets. Urban markets represented in the deal include New York, District of Columbia, and San Francisco.

Sixteen loans, representing a combined 30.8% of the pool by allocated loan balance, exhibit issuance LTVs of less than 59.3%, a threshold historically indicative of relatively low-leverage financing and generally associated with below-average default frequency.

Two of the loans—525 Market Street and Bellagio Hotel and Casino—exhibit credit characteristics consistent with investment-grade shadow ratings. Combined, these loans represent 11.4% of the pool. The credit characteristics of 525 Market Street are consistent with an A (high) rating, and those of Bellagio Hotel and Casino are consistent with AAA.

Term default risk is low, as indicated by a strong WA DBRS Morningstar DSCR of 2.58x. Even with the exclusion of the shadow-rated loans, which represent 11.4% of the pool, the deal exhibits a very favorable DBRS Morningstar DSCR of 2.09x.

The pool is diverse by property type, with multifamily properties representing 38.3% and office properties representing 28.4% of the total pool balance. Compared with other property types, multifamily properties benefit from staggered lease rollover and generally low expense ratios. While revenue is quick to decline in a downturn because of the short-term nature of the leases, it is also quick to respond when the market improves.

While the pool demonstrates favorable loan metrics with WA DBRS Morningstar Issuance and Balloon LTVs of 60.0% and 57.3%, respectively, it also exhibits heavy leverage barbelling. Two loans, accounting for 11.4% of the pool, have investment-grade shadow ratings and a WA LTV of 38.1%. The pool also has 16 loans, composing 30.8% of the pool balance, with an issuance LTV lower than 59.3%, a threshold historically indicative of relatively low-leverage financing. Seven loans, composing 23.4% of the pool balance, have an issuance LTV higher than 67.1%, a threshold historically indicative of relatively high-leverage financing and generally associated with above-average default frequency. The WA expected loss of the pool’s investment-grade component was approximately 0.4%, while the WA expected loss of the pool’s conduit component was substantially higher at more than 2.1%, further illustrating the barbelled nature of the transaction. The WA DBRS Morningstar Market Rank of the high-leverage loans was 6.8. While these loans exhibit higher leverage, their location within urban markets represents a lower likelihood of midterm default.

Thirty-one loans, representing a combined 73.9% of the pool by allocated loan balance, are structured with full-term interest-only (IO) periods. An additional 10 loans, representing 18.3% of the pool, have partial IO periods ranging from 12 months to 60 months. Two of the 31 identified loans are shadow-rated investment grade by DBRS Morningstar: 525 Market Street and Bellagio Hotel and Casino.

The pool features a relatively high concentration of loans secured by properties in less favorable suburban market areas, as evidenced by 16 loans, which represent 24.6% of the pool balance, being secured by properties in areas with a DBRS Morningstar Market Rank of either 3 or 4. Furthermore, only six loans, representing 7.1% of the total pool balance, are secured by properties in areas with a DBRS Morningstar Market Rank of either 1 or 2, which are typically considered more rural or tertiary in nature. Ten loans, representing 15.4% of the pool balance, secured by properties in areas with a DBRS Morningstar Market Rank of 1, 2, 3, or 4 will amortize over the loan term, which can reduce default risk over time. The WA expected loss of loans with DBRS Morningstar Market Ranks of 1, 2, 3, or 4 is 2.8%, which is slightly higher than the overall conduit WA expected loss of 2.1% and is reflected in the pool’s credit enhancement.

Eight loans, representing 23.1% of the total pool balance, were modeled with either Weak or Bad (Litigious) sponsor strength. These loans were associated with sponsors with limited commercial real estate experience and/or low net worth and liquidities multiples. Furthermore, two of the eight loans were associated with sponsors that had a prior voluntary bankruptcy or other negative credit events. DBRS Morningstar applied a more punitive probability of default penalty toward these 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.

Classes X-A, X-B, and X-D 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 are subject to surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by DBRS Morningstar.

For supporting data and more information on this transaction, please log into www.viewpoint.dbrsmorningstar.com. DBRS Morningstar provides analysis and in-depth commentary in the DBRS Viewpoint platform.

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

-- Prospectus ID#01 – The LIZ (8.7% of the pool)
-- Prospectus ID#02 – Bayview Corporate Center (8.5% of the pool)
-- Prospectus ID#03 – FTERE Bronx Portfolio 5 (7.8% of the pool)
-- Prospectus ID#04 – Texas Multifamily Portfolio (7.7% of the pool)
-- Prospectus ID#05 – 525 Market Street (5.8% of the pool)
-- Prospectus ID#06 – Bellagio Hotel and Casino (5.6% of the pool)
-- Prospectus ID#07 – 3210 Riverdale Avenue & 161 Amsterdam Avenue (4.7% of the pool)
-- Prospectus ID#08 – UHG Optum Health Campus (3.8% of the pool)
-- Prospectus ID#09 – 235 Canal Street (3.5% of the pool)
-- Prospectus ID#10 – Bushwick Multifamily Portfolio (3.2% of the pool)
-- Prospectus ID#11 – Palms at Cinco Ranch (3.1% of the pool)
-- Prospectus ID#12 – HPE Campus (2.9% of the pool)
-- Prospectus ID#13 – Broadway & Thomas (2.7% of the pool)
-- Prospectus ID#14 – New Haven Multifamily Portfolio (2.5% of the pool)
-- Prospectus ID#15 – Katella Corporate Center (2.4% of the pool)
-- Prospectus ID#16 – Bronx Multifamily Portfolio V (2.2% of the pool)
-- Prospectus ID#17 – Ralph Lauren HQ New Jersey (1.9% of the pool)
-- Prospectus ID#23 – 51 Columbia (1.2 % of the pool)
-- Prospectus ID#26 – 14741 memorial Drive (1.0% of the pool)
-- Prospectus ID#29 – 555 Grand Street (0.9% of the pool)
-- Prospectus ID#36 – 600 University Office (0.6% of the pool)
-- Prospectus ID#39 – Hannah Del Estate MHC (0.5% 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:
With regard to due diligence services, DBRS Morningstar 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 Morningstar’s methodology, DBRS Morningstar 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 (March 9, 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.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

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.

The DBRS Morningstar Sovereign group released on 16 April 2020 a set of macroeconomic scenarios for the 2020-22 period in select economies. These scenarios were last updated on 22 July 2020. For details see the following commentaries: https://www.dbrsmorningstar.com/research/364318/global-macroeconomic-scenarios-july-update and https://www.dbrsmorningstar.com/research/359903/global-macroeconomic-scenarios-application-to-credit-ratings. DBRS Morningstar analysis considered impacts consistent with the moderate scenario in the referenced reports.

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

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