DBRS Morningstar Assigns Ratings to US Commercial Mortgage Trust 2018-USDC, Places Certain Classes Under Review with Negative Implications

DBRS, Inc. (DBRS Morningstar) assigned ratings to the Commercial Mortgage Pass-Through Certificates, Series 2018-USDC issued by US Commercial Mortgage Trust 2018-USDC as follows:

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

The trends for Classes A and B are Negative because the underlying collateral continues to face performance challenges associated with the Coronavirus Disease (COVID-19) global pandemic.

DBRS Morningstar has also placed Classes X, C, D, E, and F Under Review with Negative Implications, given the negative impact of the coronavirus 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 23, 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upon withdrawal of MCR’s outstanding ratings, the DBRS Morningstar ratings will become the successor ratings to the withdrawn MCR ratings.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 (sf) will be the most affected.

LOAN/PROPERTY OVERVIEW
The transaction is backed by a $330.0 million, 10-year, fixed-rate, interest-only (IO) first-lien mortgage loan secured by the subleasehold interest in Union Station in Washington, D.C. Loan proceeds along with $100.0 million of mezzanine debt were used to refinance $275.0 million of existing debt plus a payment penalty, fund upfront reserves and closing costs, and return $140.1 million of equity back to the sponsor. The U.S. federal government originally owned Union Station and leased it to the Union Station Redevelopment Corporation (USRC), a D.C. nonprofit corporation formed by an Act of Congress to preserve and restore the station and its historic significance. The loan sponsor, Ashkenazy Acquisition Corporation, an experienced commercial real estate investment company, subleases the building from the USRC through an assignment of the lease from Union Station Venture Ltd, which expires on October 31, 2084. The subject loan was transferred to special servicing in May 2020 because of the pandemic, and a forbearance agreement is in the final stages of negotiation.

Union Station is a 420,797-sf mixed-use property and is the primary transportation hub in downtown Washington, D.C. Situated on a 8.937-acre site, the landmark was constructed in 1908 and has an irreplaceable location with close proximity to numerous demand drivers in the central business district, including government buildings and tourism destinations. The collateral space is divided into four major uses: 220,550 sf for retail, 135,652 sf for office, 20,825 sf for events, and 63,770 sf used by Amtrak as platforms for its Acela and regional rail services. The property also serves numerous other rail lines including Virginia Railway Express, Maryland Rail Commuter Service, and the Metro, as well as national and local bus lines. Major retailers include Walgreens, H&M, and Uniqlo. The sponsor redeveloped the building significantly to enhance its retail service capabilities while maintaining the historic physical structure. The sponsor invested more than $59 million from 2007 to the time of loan origination, and Amtrak had planned a $50 million renovation to be completed in 2021 with the intended purpose of tripling the number of passengers using the station.

At issuance, the property was collectively 57.5% occupied with the office portion being 100.0% vacant and the retail space being 78.4% occupied. Historically, the property operated at 85.0% for the 10-year average and increased to 94.0% when excluding an old movie theater space designated for redevelopment. The dip in occupancy at issuance was primarily the result of Amtrak vacating the office portion of the property in November 2017. At that time, the sponsor was in discussions with numerous potential retail and office tenants that would increase occupancy to be more in line with the 10-year average and potentially add approximately $12.0 million to the NCF if leased at market levels. The sponsor was unable to execute a substantial number of new leases to increase occupancy as the retail portion of the property was 74.7%, based on the September 1, 2020, rent roll, and no update has been provided on the office space. Unfortunately, with the onset of the pandemic in mid-March, new leasing across all sectors has been put to a halt. The collateral is no exception, and only one tenant has a start date in in 2020. Per the servicer’s March 2020 site inspection, the impact of coronavirus was evident as most of the stores were closed, except for the food court, and there were very few customers even around lunchtime. Based on the Union Station website, a number of stores remain temporarily closed including Ann Taylor, The Body Shop, Claire’s, H&M, Uniqlo, Jos. A. Bank, Kiehl’s, L’Occitane, MAC, and Warby Parker, which collectively represent 9.8% of the retail net rentable area. Tenants at the property will continue to struggle as these tenants relied heavily on commuters and tourists using the rail lines at the property, which are now near historic lows because of the pandemic and resulting stay-at-home measures. DBRS Morningstar has requested updated collections to determine the extent of the impact of coronavirus on the property and which tenants have received deferred rent agreements.

Because of the pandemic, the subject loan was transferred to special servicing in May 2020 for imminent default. As of the September 2020 remittance report, a loan forbearance is being negotiated and is expected to include a senior payment deferral through the October 2020 payment date with an option to extend to the November 2020 payment date (subject to lender consent) and deferred amounts to be repaid over a two-month span. Additionally, the agreement is expected to include a mezzanine payment deferral through the end of 2020 with repayment over 18 months beginning in January 2021. As of the September 2020 remittance report, the sponsor has $6.33 million in delinquent and interest payments and last paid in April 2020. An updated appraisal has been ordered but is currently unavailable.

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 $25.1 million and DBRS Morningstar applied a cap rate of 6.0%, which resulted in a pre-coronavirus DBRS Morningstar Value of $418.6 million, a variance of -66.2% from the appraised value of $1.4 billion at issuance. The pre-coronavirus DBRS Morningstar Value implies an A note LTV of 78.8% and whole loan LTV of 102.7% compared with the A note LTV of 26.6% and whole loan LTV of 34.7% on the appraised value at issuance.

The cap rate DBRS Morningstar applied is at the lower end of the range of DBRS Morningstar Cap Rate Ranges for retail properties, reflecting its irreplaceable position in a urban market.

DBRS Morningstar made positive qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis, totaling 5.0% 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 declines 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 10.0% 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 was insulated from loss.

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 a higher variance from the rating assigned to Class D to the results of its LTV sizing benchmarks. The variation is warranted due to going concerns with the impact of the coronavirus pandemic on the collateral assets and, as a result, DBRS Morningstar placed these classes Under Review with Negative Implications.

Class X represents an 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 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.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.

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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