DBRS Morningstar Confirms Ratings on Morgan Stanley Capital I Trust 2018-L1, Removes Two Classes from Under Review with Negative Implications

DBRS, Inc. (DBRS Morningstar) confirmed its ratings on the Commercial Mortgage Pass-Through Certificates, Series 2018-L1 issued by Morgan Stanley Capital I Trust 2018-L1 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 X-A at AAA (sf)
-- Class X-B at AAA (sf)
-- Class A-S at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class B at AA (high) (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 (high) (sf)
-- Class G-RR at BB (sf)
-- Class H-RR at B (sf)

DBRS Morningstar also removed the ratings on Classes G-RR and H-RR from Under Review with Negative Implications, where they were placed on August 6, 2020. Classes G-RR and H-RR have Negative trends. DBRS Morningstar changed the trends on Classes B, C, D, E, F-RR, X-B, and X-D to Negative from Stable. All other trends are Stable. The Negative trends reflect the continued performance challenges facing the underlying collateral, many of which have been driven by the impacts of the Coronavirus Disease (COVID-19) global pandemic. In addition to one loan, representing 1.5% of the pool, in special servicing as of the January 2021 remittance, DBRS Morningstar also notes that the pool has a moderate concentration of retail and hospitality properties, representing 31.3% and 13.4% of the pool balance, respectively. The initial impact of the coronavirus pandemic has affected these property types most severely. As such, those concentrations suggest slightly increased risks for the pool, particularly at the lower rating categories, since issuance.

The transaction is concentrated by property type as 17 loans, representing 31.3% of the current trust balance, are secured by retail assets while eight loans, representing 25.2% of the current trust balance, are secured by office assets. Lodging collateral makes up the third-largest concentration with seven loans, representing 13.4% of the current trust balance.

According to the January 2021 remittance, there is one loan in special servicing, Shoppes at Chino Hills (Prospectus ID#23; 1.5% of the current trust balance), that is secured by a retail asset. Shoppes at Chino Hills transferred to the special servicer in July 2020 given the ongoing effects of the coronavirus pandemic. The subject is a mixed-use lifestyle retail (315,519 square feet (sf)) and office (63,157 sf) complex constructed in 2008. The subject benefits from a diverse tenant roster that includes national and local businesses. Tenancy is granular as no tenant makes up more than 9.0% of the net rentable area (NRA). The property has exposure to Forever 21 (6.0% of the NRA), with a lease expiration in December 2023. Forever 21 filed for bankruptcy in 2019 and, although Authentic Brands Group LLC subsequently purchased the company in 2020, it remains a risk. In addition, there is upcoming rollover risk as the July 31, 2020, rent roll reported that 21 tenants, representing a combined 100,320 sf and 26.7% of the NRA, have leases that are scheduled to expire in 2021, including Jacuzzi Brands LLC (32,458 sf), Old Navy (14,534 sf), and Banana Republic (8,652 sf). A modification closed in October 2020 which will bring the loan current with funds from reserves as well as new borrower equity. The loan is in the process of returning to the master servicer. At issuance, the collateral for the loan had an appraisal value of $176.0 million, equating to a loan-to-value ratio of 62.5%. DBRS Morningstar believes that, while the subject is not immune to short-term stresses from the pandemic, the headwinds in the brick-and-mortar retail industry and the declining tourism volume could hamper the property’s long-term outlook. Given that short-term demand remains suppressed, DBRS Morningstar analyzed the loan with an elevated probability of default.

As of the January 2021 remittance, all 47 original loans remain in the pool with a collateral reduction of only 0.6% since issuance as a result of loan amortization. One loan, representing 0.8% of the current trust balance, has been defeased. Additionally, 13 loans, representing 37.0% of the current trust balance, are on the servicer’s watchlist. These loans are being monitored for a variety of reasons, including low debt service coverage ratio and occupancy as well as deferred maintenance issues.

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.

DBRS Morningstar materially deviated from its North American CMBS Insight Model when determining the ratings assigned to Class B, as the quantitative results suggested a lower rating on the class. The material deviation is warranted given the uncertain loan-level event risk with the loans in special servicing and on the servicer’s watchlist.

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 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 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.

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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