DBRS Morningstar Confirms All Classes of Key Commercial Mortgage Trust 2019-S2

DBRS Limited (DBRS Morningstar) confirmed its ratings on all classes of the Commercial Mortgage Pass-Through Certificates, Series 2019-S2 issued by Key Commercial Mortgage Trust 2019-S2 as follows:

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

With this review, DBRS Morningstar removed the ratings on Classes E and F from Under Review with Negative Implications, where they were placed on August 6, 2020. All trends are Stable.

The rating confirmations reflect the overall stable performance of the transaction since issuance. As of the January 2021 remittance, all 29 of the original loans remain in the pool, with an aggregate trust balance of $154.2 million, representing a collateral reduction of approximately 1.6% since issuance because of scheduled loan amortization. The deal has favorable credit metrics, as evidenced by the issuance’s weighted-average (WA) loan-to-value (LTV) ratio and balloon WA LTV of 64.7% and 55.0%, respectively. The balloon WA LTV is representative of the lack of interest-only (IO) exposure in the deal; no loans are full-term IO and only 30.3% are partial IO. In addition, the transaction benefits from property type diversification, with the largest concentration being self-storage assets, representing 20.1% of the current trust balance, followed by office, retail, and mixed-use assets, which account for 15.9%, 13.4%, and 12.0% of the current trust balance, respectively. Only one loan, representing 8.3% of the current trust balance, is secured by hotel properties. While this property type has been the most severely affected by the Coronavirus Disease (COVID-19) pandemic, both of the collateral properties are extended-stay hotels and benefit from a much more stable cash flow profile than traditional hotels given occupants’ longer-term leases. As of Q3 2020, the loan reported an annualized debt service coverage ratio (DSCR) of 1.83 times (x), in line with the DBRS Morningstar figure of 1.80x derived at issuance.

As of the January 2021 reporting, no loans in the pool are in special servicing or delinquent, but there are five loans, representing 20.6% of the current trust balance, on the servicer’s watchlist. Three of these loans, representing 13.3% of the current trust balance, were added to the watchlist for performance-related reasons, while the remaining two loans, representing 7.3% of the current trust balance, were flagged for near-term tenant rollover and deferred maintenance.

The second-largest loan in the pool, 180 North Wacker Drive (Prospectus ID#2, 7.1% of the current trust balance), was added to the watchlist in December 2020 for a low DSCR, which fell to 0.54x as of Q3 2020 following a period of increased vacancy, well below the year-end 2019 figure of 1.55x. The property is secured by a 72,088-square-foot mixed-use property in the Chicago central business district. At issuance, the property had an occupancy rate of 97.3%, but Red Bull contracted its space, leaving the property only 85.9% leased with an average rental rate of $42.29 per square foot (psf) gross. Bar Method (6.0% of the net rentable area (NRA)) vacated in early 2019, ahead of its May 2022 lease expiration, and most recently Hub International (8.7% of the NRA) vacated, leaving the property 71.2% occupied with an average rental rate of $44.60 psf gross. The only remaining significant tenant rollover prior to year-end 2022 is O’Malley Hansen, LLC (7.0% of the NRA), which has a lease expiration in March 2021. Although the loan is current as of the January 2021 reporting and the sponsorship group appears to be able to weather the storm, DBRS Morningstar has increased the probability of default to recognize the increased credit risk to the trust, given the recent spike in vacancy paired with the lease-up period, which may be prolonged by the pandemic.

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.

Class X is an interest-only (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 the following loans in the transaction:

-- Prospectus ID#2 – 180 North Wacker Drive (7.1% 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 related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at [email protected].

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.

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

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