DBRS Morningstar Confirms Ratings on Key Commercial Mortgage Trust 2018-S1

DBRS Limited (DBRS Morningstar) confirmed the ratings on the Commercial Mortgage Pass-Through Certificates, Series 2018-S1 issued by Key Commercial Mortgage Trust 2018-S1 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 X at AA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (sf)
-- Class E at BB (sf)
-- Class F at B (sf)

DBRS Morningstar also changed the trend on Class E to Stable from Negative. All other trends are Stable. DBRS Morningstar also removed Class F from Under Review with Negative Implications, where it was placed on August 6, 2020.

The rating confirmations and Stable trends reflect the overall stable performance of the transaction, which has generally been in line with DBRS Morningstar’s expectations at issuance. At the February 2020 review, DBRS Morningstar changed the trend on the lowest-rated certificates, Classes E and F, to Negative because of concerns with two of the largest 10 loans in the pool: Green Bay Plaza (Prospectus ID#1; 8.0% of the pool) and 72nd Street Square (Prospectus ID#6; 5.0% of the pool). Both loans are backed by retail properties that have lost tenants in the last few years and, although both continue to have vacancy rates that are higher than the levels at issuance, more recent developments suggest that there are mitigating factors in each case that reduce the overall risk to the pool through the near to medium term.

As of the January 2021 remittance, all 31 original loans remain in the pool with no defeasance to date. One loan, representing 1.5% of the current pool balance, is in special servicing and six loans, representing 26.0% of the current pool balance, are on the servicer’s watchlist. The watchlisted loans are being monitored for tenant rollover, low debt service coverage ratios (DSCRs), and/or occupancy issues, some of which are caused by disruptions related to the Coronavirus Disease (COVID-19) pandemic.

The largest loan in the pool, Green Bay Plaza, is collateralized by a retail power centre in Green Bay, Wisconsin. DBRS Morningstar has been monitoring this loan because of the May 2019 closure of Office Depot, which composes 13.3% of the net rentable area (NRA) with a lease expiry in April 2022; the concentrated rollover in 2021; and the 2017 closure of the centre’s shadow anchor, Sears. The servicer previously confirmed that Office Depot will honour its lease obligations through the lease expiry date and, as of January 2021, the tenant continues to make its monthly lease payments. More recently, the property lost another tenant in Tuesday Morning (8.8% of the NRA) following the retailer’s bankruptcy filing in early 2020 and ultimate closure of 297 locations within its 687 store portfolio. With the Tuesday Morning closure, the property’s leased rate appears to fall to approximately 83.0%, with the physical occupancy rate at approximately 70.0%, based on the servicer’s reported occupancy rate at Q3 2020 of 92.0%.Other notable tenants, including T.J. Maxx (20.7% of the NRA) and Big Lots (14.4% of the NRA), had original lease expirations in January 2021; however, both tenants recently renewed their respective leases by five years while the lease expirations for the remaining tenants are staggered throughout the loan term.

The loan in special servicing, 775 West Jackson Boulevard (Prospectus ID#25; 1.5% of the pool), is secured by a mixed-use property with office and retail space in Chicago. The loan transferred to special servicing in May 2020 after the borrower requested coronavirus relief and the loan has remained over 90 days delinquent since July 2020. In addition, according to the servicer, the largest tenant at the property, Jia Bo Group (29.4% of the NRA), vacated the property in July 2020 ahead of its lease expiration in September 2022. Although the loan is not reporting quarterly financials, the YE2019 DSCR was reported at 1.23 times (x) with an occupancy rate of 78% compared with a YE2018 DSCR of 1.14x with an occupancy rate of 100%. The issuance value was reported at $3.5 million with a relatively low loan-to-value ratio of 55.4%; there is no updated appraisal value reported to date. Although the servicer is in the process of finalizing a workout strategy, given the extended delinquency and elevated vacancy rate that will likely be in place through the medium to longer term because of the impacts of ongoing road construction in the area and the general effects of the coronavirus pandemic, the risks for this loan remain elevated since issuance. Given the relatively small size of the loan, however, the rated bonds are generally well insulated if the loan is resolved with a loss.

Of the six loans on the servicer’s watchlist, one is backed by an industrial property (6.2% of the pool), one by a manufactured housing community property (6.0% of the pool), one by a retail property (5.0% of the pool), and three by self-storage properties (8.8% of the pool).

The third-largest loan on the servicer’s watchlist, 72nd Street Square, is secured by an anchored retail centre in Tacoma, Washington. The loan was added to the watchlist in October 2019 because the grocery anchor, Safeway (44.0% of the NRA), had a March 2020 lease expiry. Safeway, which has not occupied its space since 2006, had been subleasing its space to Goodwill; however, the Goodwill store closed in January 2020, leaving the space vacant. The loan has no cash management provisions surrounding the Safeway lease expiry. There are recent positive developments, however, as the servicer has confirmed that the borrower is in the process of finalizing the terms with a replacement tenant for the Safeway space. Additionally, throughout the last year when the property reported an elevated vacancy rate with a significant drop in lease income, the loan has remained current.

Although the overall performance for the transaction remains generally stable, DBRS Morningstar notes that the pool has a moderate concentration of retail properties, representing 18.8% of the current pool balance. The initial impact of the coronavirus pandemic has severely affected retail properties. There is only one loan secured by a hospitality property, which represents 4.5% of the current pool balance. Much like retail properties, hospitality properties have been among the most significantly affected by the pandemic. As such, DBRS Morningstar is monitoring these loans closely.

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 did not run a new model as performance was deemed to be generally in line with expectations at the last review. As of the previous actions published on February 5, 2020, a material deviation from the predictive model was reported on Classes A-S, B, and C. The material deviations were warranted, given that the sustainability of loan performance trends were not demonstrated.

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

-- Prospectus ID#1 – Green Bay Plaza (8.0% of the pool)
-- Prospectus ID#6 – 72nd Street Square (5.0% 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 info@dbrsmorningstar.com.

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 info@dbrsmorningstar.com.

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