DBRS Morningstar Confirms Ratings on All Classes of US Commercial Mortgage Trust 2018-USDC, Removes Five Classes From Under Review with Negative Implications

DBRS, Inc. (DBRS Morningstar) confirmed all ratings of the Commercial Mortgage Pass-Through Certificates, Series 2018-USDC issued by US Commercial Mortgage Trust 2018-USDC as follows:

-- Class A at AAA (sf)
-- Class B at AAA (sf)
-- Class X at AAA (sf)
-- Class C at AA (high) (sf)
-- Class D at AA (low) (sf)
-- Class E at BBB (low) (sf)
-- Class F at BB (high) (sf)

DBRS Morningstar removed the Under Review with Negative Implications designation assigned to Classes X, C, D, E, and F, where they were placed on October 9, 2020, given the negative impact of the Coronavirus Disease (COVID-19) global pandemic on the underlying collateral. The trends for Classes A and B were changed to Stable from Negative, while Stable trends were placed on Classes X, C, and D. Classes E and F carry Negative trends.

The rating confirmations and Stable trends for the five classes as listed above reflect the low leverage of the trust debt relative to the November 2020 appraised value of $830.0 million that was obtained by the servicer, equating to a loan-to-value ratio (LTV) of 39.8%. The updated appraised value is down 33.1% from the issuance appraised value of $1.2 billion and is reflective of the stress on the collateral’s performance during the coronavirus pandemic. It is noteworthy, however, that various government agencies are finalizing plans for a multibillion dollar renovation and expansion of the property, which is scheduled to occur during the subject loan term and will increase passenger traffic and likely raise the collateral value.

The 10-year interest-only (IO) loan features a $330.0 million loan amount securitized in the trust and $100 million of mezzanine debt held outside of the trust that is co-terminous with the mortgage loan. The trust debt is secured by the sub-leasehold interest in Union Station, a landmarked transit-oriented retail destination near Capitol Hill in Washington, D.C. The property is composed of 200,550 square feet (sf) of retail space (48% of net rentable area (NRA)), 135,652 sf of office space (32% of NRA), 63,770 sf of Amtrak train space (15% of NRA), and 20,825 sf of event space (5% of NRA). The fee interest is owned by the United States, acting through the Federal Railroad Administration (FRA) and was ground leased to the United States Railroad Corporation (USRC) as part of the restoration of the property in 1985. USRC then subleased the property to Union Station Venture, Ltd., which was later assumed by the sponsor in 2007. Both the prime lease and the ground lease expire in October 2084. Sponsorship is provided by Ashkenazy Acquisitions Corporation, a private real estate investment firm headquartered in New York City. According to the sponsor’s website, its portfolio encompasses more than 100 properties valued at $12 billion and primarily focuses on premier retail properties in the Northeast United States.

The loan has been with the special servicer since May 2020 after the borrower requested coronavirus-relief as the pandemic has affected collateral operations since Q1 2020. A forbearance agreement was executed in October 2020, which granted deferral of monthly debt service payments and reserves through December 2020. No payments for the mezzanine loan were to be made until the subject deferred interest were repaid in full. The deferral period was granted an extension through February 2021; however, the borrower failed to repay the deferred amounts beginning in March 2021 and a default notice was issued by the servicer. According to the special servicer commentary dated May 2021, the sponsor is in discussions with a sovereign wealth fund to invest $100 million to recapitalize the project. The special servicer noted the loan must be brought current in order for the servicer to initiate a review of the borrower’s related request for approval. As of August 2021, discussions between the borrower and servicer continue, with approximately $15.4 million of outstanding servicer advances as of the August 2021 remittance.

At issuance, it was noted Amtrak was in the beginning stages of a three-year, $50 million modernization of its concourse space that would triple passenger capacity and significantly increase foot traffic throughout the property. Construction was originally anticipated to begin in 2019 with completion in 2021. According to Amtrak’s website, the planning and environmental review phases have been completed and the project remains in the design phase. The planned improvements will complement the introduction of a new Acela fleet, which is accompanied by more frequent service. The project is also being coordinated with the Washington Union Station Expansion Project, which would expand and modernize the entire Union Station. According to FRA’s website, the project would take approximately 11 to 14 years to complete with costs ranging from $5.8 billion to $7.5 billion. Benefits would include long-term ridership growth, improved train operation efficiency, and more space for passenger circulation. A Washington Post article dated February 2021 noted that the project has been delayed as the FRA is revising key components of the plan, specifically a controversial planned parking garage. The same article notes that a final recommendation is likely expected in 2022.

The May 2021 rent roll showed the property was 48.8% occupied with an average rent of $15.22 per sf. The retail space is 64.0% occupied, down from September 2020 retail occupancy rate of 74.7%, a trend driven by the losses of H&M and Le Pain Quotidian during that time. The office portion of the property has been vacant since Amtrak vacated upon its lease expiration in November 2017. Amtrak still leases the terminal while only paying common area maintenance reimbursements. The three largest property tenants include Walgreens (3.5% of NRA; lease expiration of February 2031), Thunder Grill (2.9% of NRA; MTM lease), and Uno Chicago Grill (2.2% of NRA; lease expiration of March 2030). Upcoming lease rollover includes eight tenants (2.6% of NRA) with lease expirations in 2021 and seven tenants (7.3% of NRA) with lease expirations in 2022. A tenant status report dated July 2021 for the collateral noted several lease amendments had been executed, including Walgreens and Uno Chicago Grill. The borrower is in litigation with four smaller retail tenants to collect past-due rents and it appears the borrower is willing to reach settlements in order to maintain occupancy.

The loan reported a year end (YE) 2020 net cash flow (NCF) of $20.4 million, compared with the YE2019 NCF of $22.1 million, YE2018 NCF of $23.1 million and DBRS Morningstar NCF of $25.1 million. The loan had $884,274 in ground rent reserves as of August 2021, which covers approximately three months of annual ground rent. DBRS Morningstar is closely monitoring the loan modification discussions as the collateral has incurred significant operating cost and debt service shortfalls since Q1 2020, with significant servicer advances still outstanding as of the August 2021 remittance. It appears the borrower is willing to accept an additional partner that will inject considerable capital into the project in order to bring the loan to good standing. Given the stressed value obtained by the special servicer as of November 2020 shows the leverage on the trust debt remains very low, DBRS Morningstar does not anticipate any losses to the bondholders; however, there are many unknowns with regard to the timing for the borrower and servicer to come to an agreement regarding the oustanding defaults and plans for the property going forward, supporting the Negative trends carried by the two lowest rated classes as outlined above.

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.

Class X is an 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.

The DBRS Viewpoint platform provides additional information on this transaction and underlying loans including DBRS Morningstar metrics, commentary, servicer-reported cash flows, and other performance-related data.

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 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 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 [email protected].

DBRS, Inc.
22 West Washington Street
Chicago, IL 60602 USA
Tel. +1 312 332-3429