DBRS Morningstar Assigns Ratings to Morgan Stanley Capital I Trust 2018-MP, Places All Classes Under Review with Negative Implications

DBRS, Inc. (DBRS Morningstar) assigned ratings to the Commercial Mortgage Pass-Through Certificates, Series 2018-MP issued by Morgan Stanley Capital I Trust 2018-MP as follows:

-- Class A at AAA (sf)
-- Class B at AA (high) (sf)
-- Class C at A (high) (sf)
-- Class D at BBB (high) (sf)
-- Class E at BB (sf)

DBRS Morningstar has also placed all classes Under Review with Negative Implications, given the negative impact of the Coronavirus Disease (COVID-19) on the underlying collateral.

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 October 13, 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upon withdrawal of MCR’s outstanding ratings, the DBRS Morningstar ratings will become the successor ratings to the withdrawn MCR ratings.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, at www.dbrsmorningstar.com. On April 24, 2020, DBRS Morningstar placed the ratings on its outstanding SASB transactions secured by retail properties Under Review with Negative Implications while MCR placed the ratings on its outstanding SASB transactions secured by retail properties Under Review Negative as the global shelter-in-place and mandatory retail closures related to the coronavirus have contributed to retail bankruptcies and anticipated vacancies in retail centers. For further information on these rating actions, please see the DBRS Morningstar press release dated April 24, 2020, at www.dbrsmorningstar.com and the MCR press release dated April 24, 2020, at www.morningstarcreditratings.com.

To assign ratings to this transaction, DBRS Morningstar considered both the impact of the updated NA SASB Methodology and its scenarios attributable to the ongoing coronavirus pandemic on the ratings.

Because of the coronavirus’ significant impact on retail performance, DBRS Morningstar first considered the application of the updated NA SASB Methodology in conjunction with the “North American CMBS Surveillance Methodology” to arrive at a baseline result, which incorporated qualitative assumptions, capitalization rates, and loan-to-value (LTV) ratio sizing benchmark quality/volatility adjustments and excluded any potential changes in current or future expected asset performance resulting from the coronavirus.

DBRS Morningstar then overlaid scenarios incorporating additional reductions in net cash flow (NCF) to account for exposure to bankrupt or closed tenants. This resulted in stressed collateral value declines consistent with the projections in its “Global Macroeconomic Scenarios: September Update” published on September 10, 2020, on top of the baseline result to determine the impact of coronavirus-related changes in asset performance on the subject transaction on a tranche-by-tranche basis. For more information on these stress scenarios, please refer to the Coronavirus Impact Analysis section of this document. The global macroeconomic scenarios include a moderate decline of 15% for all commercial real estate (CRE), which acts as an average for all CRE property types. However, DBRS Morningstar expects a greater range of value decline for retail properties, ranging from 10% to 45% based on the type of tenant composition, exposure to bankrupt or challenged retailers, asset sponsorship, and asset location. DBRS Morningstar expects that lower-tier regional malls with in-line sales generally less than $300 per square foot (psf) will be the most affected.

LOAN/PROPERTY OVERVIEW
The loan is secured by the fee simple and leasehold interest in the Millennium Partners Portfolio, a portfolio of eight retail and office condominiums located across dense urban locations including Manhattan, New York; Boston; Miami; San Francisco; and Washington, D.C. The collateral consists of approximately 1.5 million square feet (sf) of space. Most improvements were built between 1992 and 2016, except for the 735-773 Market Street building, which was constructed in 1907 and is part of the Four Seasons San Francisco Retail property, and the Lincoln West property, which was built in 1963. Parking garages are included as part of the trust collateral for the commercial units at the Four Seasons Miami; Ritz-Carlton Washington, D.C.; and Ritz-Carlton Georgetown Retail. All of the properties are part of larger, high-end, mixed-use projects located in central business district locations. The collateral is typically the first seven floors of a much larger hotel or multifamily development.

The portfolio is leased to a variety of tenants ranging from entertainment, apparel, fitness, advertising, and financial services. Equinox Fitness is currently the largest tenant, representing 26.0% of the collateral net rentable area (NRA) the portfolio with recent executions of four leases that extend through June 2039. The next largest tenant is Loews Theater, which occupies space in two properties, representing 14.3% of the collateral NRA with leases extending to November 2028 and 2032. The remaining tenants are granular with no other tenant occupying more than 9.0% of collateral NRA. In total, the top 10 tenants comprise 70.1% of the collateral NRA and 67.5% of the DBRS Morningstar base rent. Furthermore, the top 10 tenants correspond to 15 separate leases spread across all of the properties. The portfolio has moderate rollover risk as 40.8% of tenants have leases scheduled to expire during the 10-year loan team; however, no one year represents more than 15.0% of the collateral NRA.

The subject whole loan consists of a $710.0 million first-mortgage and a mezzanine loan in the amount of $280.2 million, which is held outside of the trust. Of the first mortgage amount, $225.9 million consists of nonpooled pari passu notes that were contributed to other transactions. The trust amount includes $175.0 million of senior debt and $289.3 million of subordinate debt. Whole loan proceeds along with the mezzanine loan were used to refinance $968.1 million of existing debt, cover $15.3 million of defeasance costs, and cover $8.1 million in closing costs. The underlying loan is interest only throughout its 10-year term. All of the collateral properties, except for Millennium Tower Boston Retail, which had not yet been developed, were previously securitized in the MSC 2014-MP transaction.

Sponsorship is provided by Millennium Partners, a Manhattan-based real estate development and management established in 2009. Millennium Partners places a focus on operating and developing luxury, mixed-use properties in gateway cities across the United States. At issuance, the sponsor’s portfolio was valued at over $2.2 billion and included more than 3,200 condominium units, 10 luxury hotels, 1.4 million sf of office space, 0.9 million sf of retail space, five movie theaters, and five health clubs.

Performance Update
The portfolio has considerable tenant exposure to movie theaters and fitness clubs, which accounts for 40.3% of the collateral NRA. Both movie theater and gym operators have been heavily affected by the closures mandated by state and local governments amid the coronavirus pandemic. The subject portfolio’s two largest tenants as previously mentioned are Equinox Fitness (26.0% of collateral NRA; 20% of gross potential rent (GPR)), a luxury gym and health club operator, and Loews Theatre (14.3% of collateral NRA and 6.2% of GPR), a movie theater chain owned by AMC Entertainment Holdings, Inc. (AMC). In recent news articles, AMC has publicly reported concerns surrounding its operations amid the pandemic with statements noting severe cash flow impairments as all locations were closed beginning in March 2020. As of September 2020, AMC was able to reopen some locations across the country, but both locations in this transaction remain closed. In addition, Equinox Fitness’ debt was recently downgraded stemming from concerns over cash flow, with the company’s corporate family rating also downgraded in May 2020. All but approximately 25 of the company’s 300-plus locations in the United States, Great Britain, and Canada remained closed as of June 2020. As of September 2020, Equinox Fitness has reopened all clubs in the U.S. outside of California. Other noteworthy tenants include Century 21 (4.0% of the collateral NRA), a department store chain that is closing all of its stores following a bankruptcy filing. The servicer reported that four small tenants, collectively representing 1.0% of the collateral NRA, have closed permanently.

Both Equinox Fitness and AMC have received lease modifications because of the pandemic. Equinox Fitness was able to defer all of its April 2020 rent, 37.5% of its rent from May through August, and 25% of its rent from September through December. All deferred rent is to be repaid over a 24-month term starting on January 1, 2021. For AMC, which has only paid two months of rent since March, the lease modification allows AMC to pay a percentage of rent from August through December 2020 with a minimum of 20% of the base rent. Any unpaid rent will be deferred and must be repaid between February and December 2021. The servicer reported that smaller tenants within the portfolio have received or are expected to receive rent deferrals during the pandemic shutdown. These tenants represent approximately 13% of the total NRA.

DBRS Morningstar reanalyzed the NCF derived at issuance 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 $55.9 million and DBRS Morningstar applied a cap rate of 6.79%, which resulted in a pre-coronavirus DBRS Morningstar Value of $822.7 million, a variance of 43.7% from the appraised value of $1.46 billion at issuance. The pre-coronavirus DBRS Morningstar Value implies a secured debt LTV and an all-in LTV of 101.5% and 141.6%, compared with the 48.6% and 67.8% on the appraised value at issuance, respectively.

The cap rate DBRS Morningstar applied is at the lower end of the range of DBRS Morningstar Cap Rate Ranges for retail properties, reflecting the subjects’ urban locations and property quality.

DBRS Morningstar made positive qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis, totaling 6.0% to account for cash flow volatility, property quality, and market fundamentals.

CORONAVIRUS IMPACT ANALYSIS
DBRS Morningstar overlaid various scenarios incorporating higher NCF declines, resulting in stressed collateral value consistent with the projections in the “Global Macroeconomic Scenarios: September Update” (https://www.dbrsmorningstar.com/research/366542) to estimate the impact of coronavirus-related changes in asset performance on a tranche-by-tranche basis for the subject transaction. The scenarios included deducting cash flow for bankrupt retailers and increased vacancy expected at the asset to arrive at a coronavirus DBRS Morningstar Value under the moderate scenario, a 15.0% reduction from the pre-coronavirus DBRS Morningstar Value. Because of the more permanent value impairment resulting from the lost tenancy revenue stream, DBRS Morningstar’s analysis considered this value when assigning ratings.

Under the moderate scenario, the cumulative rated debt through Class E exceeded the value under the Coronavirus Impact Analysis and therefore DBRS Morningstar presumes that the economic stress from the coronavirus had affected the Class.

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.

After applying the Coronavirus Impact Analysis, DBRS Morningstar had higher variances from the ratings assigned to Classes A, B, C, D, and E to the results of its LTV sizing benchmarks. The variation is warranted due to going-concerns with the impact of the coronavirus on the collateral assets and as a result, DBRS Morningstar placed these classes Under Review with Negative Implications.

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 (March 1, 2020) and North American CMBS Surveillance Methodology (March 6, 2020), 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.

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. 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.

DBRS Morningstar’s North American CMBS analytical team will continue to monitor the transaction to evaluate the increased risk factors related to the coronavirus pandemic. As information (e.g., updated property-level financials, rent rolls, new valuations for specially serviced loans, and workout and/or modification specifics, if applicable) becomes available, DBRS Morningstar will address the Under Review with Negative Implications rating actions over the near to moderate term. DBRS Morningstar typically endeavors to resolve an Under Review rating action within 90 days, but the circumstances surrounding these rating actions (i.e., the unknown length of the pandemic-related downturn) may result in a prolonged resolution period.

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

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