Press Release

DBRS Morningstar Confirms All Ratings on Morgan Stanley Capital I Trust 2019-L2, Removes Under Review with Negative Implications Status for Two Classes

CMBS
November 24, 2020

DBRS, Inc. (DBRS Morningstar) confirmed the ratings on all classes of Commercial Mortgage Pass-Through Certificates, Series 2019-L2 issued by Morgan Stanley Capital I Trust 2019-L2 as follows:

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class A-S at AAA (sf)
-- Class X-A at AAA (sf)
-- Class X-B at AA (high) (sf)
-- Class B at AA (sf)
-- Class C at A (sf)
-- Class D at BBB (high) (sf)
-- Class X-D at BBB (sf)
-- Class E at BBB (low) (sf)
-- Class F-RR at BB (sf)
-- Class G-RR at B (high) (sf)

DBRS Morningstar removed Classes F-RR and G-RR from Under Review with Negative Implications, where it placed them on August 6, 2020. The trends on these classes are Negative. All other trends are Stable. The Negative trends reflect the continued performance challenges for the underlying collateral pool, mainly driven by the impacts of the Coronavirus Disease (COVID-19) global pandemic. In addition to five loans representing 12.3% of the current pool balance in special servicing as of the October 2020 remittance, the pool has a moderate concentration of retail and hospitality properties, representing 17.8% and 17.3% of the current pool balance, respectively. These property types have been the most severely affected by the initial effects of the coronavirus pandemic and, as such, those concentrations suggest increased risks for the pool, particularly at the lower rating categories, since issuance.

As of the October 2020 remittance, all of the original 50 loans remain in the pool, and there has been negligible amortization since issuance. There are five loans, representing 12.3% of the current pool balance, in special servicing, including the fourth-largest loan, Le Meridien Hotel Dallas, which is more than 121 days delinquent and is secured by a 258-key full-service hotel in Dallas, approximately 12.0 miles north of the Dallas central business district. The loan has not submitted any updated financial reporting since Q1 2020, at which point the property’s occupancy was 79.1%, representing only a small decrease from the YE2019 occupancy of 83.0%. During Q1 2020, the loan exhibited a debt service coverage ratio (DSCR) of approximately 1.37x. Vacancy has most likely declined significantly since Q1 2020 as the effects of the pandemic had only begun to percolate throughout the United States hospitality markets at that point. The loan has been delinquent since April 2020 and transferred to special servicing at the borrower’s request in June 2020 for imminent monetary default. According to the appraisal completed at issuance, the property’s demand is broken out as follows: 20% from group demand, 35% from leisure demand, and 45% from corporate individual demand. It is unclear how quickly business travel will recover to prepandemic levels. The $42.8 million loan refinanced existing debt of $33.9 million, returned approximately $8.1 million of cash equity to the borrower, funded reserves, and covered closing costs. The special servicer is currently in negotiations with the borrower regarding a potential workout. In August 2020, the property received an updated appraisal, which indicated its value declined to $52.8 million from $61.2 million at issuance. Given the risks surrounding the property’s recovery and the recently reduced value, DBRS Morningstar analyzed this loan with an elevated probability of default for this review.

The other four loans in special servicing are backed by anchored retail, unanchored retail, full-service hotel, and limited-service hotel property types. The third-largest loan in special servicing is 199 Lafayette Street (Prospectus ID#19, 2.3% of the current pool balance), which transferred to special servicing in July 2020 at the borrower’s request for imminent monetary default after missing the July 2020 debt service payment, making the loan 90 to 120 days delinquent. The special servicer is awaiting a forbearance proposal from the borrower and will evaluate it upon receipt. The collateral is a 20,000-sf retail property in New York City’s SoHo neighborhood. The property has experienced significant occupancy declines since issuance and was 77.5% at YE2019. In addition to declining occupancy, the property has space leased to several tenants (restaurants and fashion retailers) that are at particular risk of business disruptions because of the coronavirus. Furthermore, the loan reported a DSCR of 1.08x for Q1 2020, indicating the loan was narrowly covering debt service payments in those months, and it’s likely significantly lower today. Because of the property’s declining occupancy and riskier tenant profile, DBRS Morningstar analyzed this loan with an elevated probability of default for this review.

Another significant loan in special servicing is the Sheraton Grand Nashville Downtown (Prospectus ID#22, 2.1% of the current pool balance), which has been delinquent since April 2020 and transferred to special servicing in June 2020. The special servicer indicated that the borrower has begun to market the property for sale with an assumption of the mortgage loan as part of the sale. The property received an updated appraisal in July 2020, which provided an updated value of approximately $183.0 million, down from $276.5 million at issuance. The loan has not reported any financial statements to the servicer since YE2019; however, reporting at that date indicated the property was performing well prior to the pandemic. It reported a YE2019 occupancy of 80.0%, and the loan exhibited a 2.53x DSCR. Given its delinquent status and the trend of most other hospitality properties in the United States, the hotel’s occupancy has likely fallen significantly from 80.0% since the beginning of the pandemic in the United States. The downtown Nashville market has also seen several hotel properties completed during 2020, including at least three that compete in some way with the subject; two additional hotels are likely to be finished in 2021 that will also compete with the subject. Because of the collateral’s decline in value, the loan’s delinquent status, and the significant new supply in the downtown Nashville submarket, DBRS Morningstar analyzed this loan with an elevated probability of default for this review.

ESG CONSIDERATIONS
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 interest-only (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.

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

-- Prospectus ID#4 – Le Meridien Hotel Dallas (4.5% of the pool)
-- Prospectus ID#19 – 199 Lafayette Street (2.3% of the pool)
-- Prospectus ID#22 – Sheraton Grand Nashville Downtown (2.1% 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.

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.

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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