DBRS Morningstar Upgrades Three Classes and Confirms Two Classes of Bancorp Commercial Mortgage 2018 CRE3 Trust

DBRS Limited (DBRS Morningstar) upgraded the following three classes of Commercial Mortgage Pass-Through Certificates issued by Bancorp Commercial Mortgage 2018 CRE3 Trust as follows:

-- Class B to AAA (sf) from AA (low) (sf)
-- Class C to A (high) (sf) from A (low) (sf)
-- Class D to BBB (sf) from BBB (low) (sf)

DBRS Limited (DBRS Morningstar) confirmed the two remaining classes as follows:

-- Class E at BB (low) (sf
-- Class F at B (sf

All trends are Stable. The rating on Class A-S has been discontinued as the class was repaid as of the April 2021 remittance.

The rating upgrades reflect the significant paydowns to the transaction since issuance as well as the generally stable outlook for the remaining loans in the pool. There is a substantial unrated class in the first loss position, with a balance of $18.3 million (18.6% of the pool balance as of April 2021) and there have been no losses to date. At issuance, the collateral consisted of 30 floating-rate mortgages secured by 35 transitional properties with debt commitments totalling approximately $304.3 million, which included approximately $47.3 million of pari passu future funding commitments. As of the April 2021 remittance, seven loans remain in the pool and there has been a collateral reduction of 67.8% since issuance. All applicable future funding obligations for the seven remaining loans have been disbursed, as confirmed by the servicer. Five of the remaining loans in the trust had future funding components totalling $15.4 million as of issuance. Only the $2.4 million future funding component for the Glenwood Farms Apartments loan (Prospectus ID#18; 7.5% of the pool) is included in the subject trust, with the remaining future funding components securitized by the issuer in other commercial mortgage-backed securities (CMBS) transactions.

As of the April 2021 remittance, three loans, representing 17.9% of the pool, are in special servicing and another three loans, representing 61.4% of the pool, are on the servicer’s watchlist. In general, probability of default penalties were applied to increase the expected loss for these loans in the analysis for this review. Although some of these loans have characteristics suggesting increased risks from issuance, no significant losses are expected, based on information known as of this review.

The Staybridge Suites Conversion loan (Prospectus ID #16; 8.5% of the pool) is the largest loan in special servicing. It is secured by a 224-key limited service hotel in Kissimmee, Florida, and was transferred to special servicing in April 2020 because of payment default. The borrower submitted a relief request, citing hardship amid the Coronavirus Disease (COVID-19) pandemic. One of the primary demand drivers for the property, Disney World, was closed from March to July 2020, when it re-opened at limited capacity. The sponsor’s business plan centered around the conversion of the collateral from a Royale Parc Suites under the Quality Suites flag to a Staybridge Suites flag as part of a new franchise agreement with InterContinental Hotels Group (IHG). The conversion required a property improvement plan (PIP) renovation at a cost of $7.5 million. Work for the required PIP began post-acquisition in September 2017 and was completed in December 2019, with the hotel operating under the new flag upon completion.

The loan was originally scheduled to mature in October 2020 and, as part of the loan modification approved by the special servicer, a one-year extension was granted along with a short-term forbearance. The special servicer obtained an updated appraisal as of July 2020 that showed an as-is value of $21.3 million, up from $13.3 million at issuance and well in excess of the trust balance of $8.3 million and the fully funded loan balance of $15.5 million. As of the April 2021, the loan reports current and the special servicer’s commentary notes the loan remains in special servicing for monitoring to ensure the terms of the loan modification are being met. Although Disney World remains open, capacity is still limited. As of January and February 2021, the collateral reported an occupancy rate of 43.6% and 45.3%, respectively. Although the challenges in depressed occupancy rates are expected to persist through the near to medium term, DBRS Morningstar notes the value improvement from issuance and the sponsor’s apparent commitment to the loan and property as factors for consideration as well.

The second-largest loan in special servicing is Glenwood Farms Apartments (Prospectus ID#18; 7.5% of the pool), secured by a 294-unit multifamily property in Richmond, Virginia. The loan transferred to special servicing in February 2021 because of maturity default. The servicer is currently working with the sponsor on a resolution for the loan. At issuance, the business plan was focused on $3.4 million in interior and exterior renovations in an effort to increase rents and occupancy to market levels, with $2.4 million in future funding allocated for the project. Renovations appear complete, based on the June 2020 servicer’s site inspection that was provided, and an occupancy rate of 98.0% in September 2020 was reported by the servicer, with a debt service coverage ratio (DSCR) of 1.90 times (x). Although the maturity default is indicative of increased risks, DBRS Morningstar also notes the increased occupancy rate from issuance and the substantial investment in upgrades to the property have likely contributed to a significant value improvement and should compel the sponsor to continue working with the servicer to resolve the default.

The smallest loan in special servicing is the Corporate Center at Moorestown loan (Prospectus ID#30; 1.9% of the pool), secured by a three-building office campus in Moorestown, New Jersey, totalling 222,000 square feet (sf). The subject trust holds a relatively small $1.9 million future funding participation interest in the $27.5 million whole loan, the bulk of which is held in the Bancorp 2017-CRE2 transaction, also rated by DBRS Morningstar. As of the February 2021 rent roll, the campus is 67.0% occupied, with two of the three buildings being 100.0% occupied and one building 28.9% occupied. The largest tenant in place at issuance, Destination Maternity (74,258 sf) had a lease expiry in 2032 but the company filed for bankruptcy protection in late 2019 and was ultimately acquired by Marquee Brands in December 2019. Based on the February 2021 rent roll, Maternity OpCo Holdings LLC, an affiliate of Marquee Brands, is in place for a portion of the Destination Maternity space with a footprint of 21,473 sf and a lease expiration date of May 2021. DBRS Morningstar could not find evidence that the space is being marketed for lease and has asked the servicer for a leasing update, with the response pending as of this review. The loan transferred to special servicing in May 2020 ahead of its June 2020 maturity date and a September 2020 value obtained by the special servicer showed an as-is value of $28.4 million, below the issuance as-is value of $38.3 million but just above the outstanding principal balance on the loan. The special servicer’s commentary suggests a maturity extension is in the process of being evaluated.

The largest loan on the watchlist, Hue at Cityplace (Prospectus ID#1; 34.8% of the pool), is being monitored for the February 2021 loan maturity. The loan collateral is a 244-unit multifamily property in Dallas. Although the servicer reported an occupancy decline to 87.0% as of the YE2020 reporting compared with the issuance occupancy rate of 92.6%, the leverage appears generally healthy given the fully funded loan-to-value ratio on the as-is figure of $44.8 million of 77.6%, and the servicer’s notes suggest a property sale and loan payoff is expected in the near term.

Crossroads Centre (Prospectus ID#9; 13.3% of the pool), is on the servicer’s watchlist for numerous delinquent debt service payments in the past 12 months. The collateral retail property has seen a modest decline in occupancy to 80.5% at September 2020 from 88.4% at December 2019, related in part to tenant bankruptcies and various disruptions caused by the pandemic. The servicer previously approved a short-term forbearance from August 2020 to October 2020 to allow for debt service payments to be made from the loan’s reserve accounts. The loan had an initial maturity in February 2021 that was extended to February 2022.

The last loan on the servicer’s watchlist, Washington Corners (Prospectus ID#10; 13.3% of the pool) is on the servicer’s watchlist for a depressed DSCR stemming from free rent periods for recently signed tenants. At December 2019, the collateral retail property was 81.0% occupied and lease signings increased that rate to 91.0% at September 2020; however, it was noted that some new tenants received rental concessions during 2020 and the sponsor expects the property cash flow to stabilize as the free rent periods burn off.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

All ratings are subject to surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by DBRS Morningstar.

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Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is the North American CMBS Surveillance Methodology (March 26, 2021), 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.

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