DBRS Morningstar Confirms All Classes of Morgan Stanley Capital I Trust 2018-H3

DBRS Limited (DBRS Morningstar) confirmed the ratings on the Commercial Mortgage Pass-Through Certificates, Series 2018-H3 issued by Morgan Stanley Capital I Trust 2018-H3 as follows:

-- Class A-2 at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-5 at AAA (sf)
-- Class X-A at AAA (sf)
-- Class A-S at AAA (sf)
-- Class X-B at AA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class X-D at BBB (high) (sf)
-- Class D at BBB (sf)
-- Class E-RR at BBB (low) (sf)
-- Class F-RR at BB (low) (sf)
-- Class G-RR at B (high) (sf)
-- Class H-RR at B (low) (sf)

All trends are Stable with the exception of classes G-RR and H-RR, which continue to carry Negative trends.

The Negative trends reflect DBRS Morningstar’s concerns with the specially serviced loan, Prince and Spring Street Portfolio (Prospectus ID#30; 1.1% of the pool), as well as with select loans on the servicer’s watchlist secured by hotel and retail properties. These loans continue to exhibit performance issues associated with the ongoing effects of the Coronavirus Disease (COVID-19) pandemic.

At issuance, there were 66 loans with an aggregate trust balance of $1.02 billion. As of the November 2021 remittance, 65 loans remain in the pool with a current pool balance of $974.7 million, representing a collateral reduction of 4.8% since issuance. There are 18 loans, representing 23.5% of the pool balance, on the servicer’s watchlist and one loan, representing 1.1% of the pool, in special servicing.

Prince and Spring Street Portfolio, the only loan in special servicing, is secured by a portfolio of three retail/multifamily mixed-use properties with a combined 32,260 square feet (sf) in New York City. The loan transferred to special servicing in December 2020 because of payment default. As of November 2021, the loan is more than 120 days delinquent and a workout strategy is still to be determined. The most recent appraisal reported by the servicer, dated January 2021, valued the property at $35.3 million, down 47% from the appraised value of $66.0 million at issuance.

The most recent financials, representing the trailing six months ended June 30, 2021, reported an occupancy rate of 94.6% and debt service coverage ratio (DSCR) of 0.72 times (x). Both figures are below the issuance levels when occupancy was reported at 100% and the issuer’s DSCR was 1.20x. According to the April 2021 rent roll, the most recent on file, the multifamily portion of the collateral was 91.8% occupied and the retail portion was 87.7% occupied. The largest retail tenant is Spring Lounge, representing 6.2% of the collateral net rentable area (NRA) on a lease through April 2022, followed by John Fluevog Boots & Shoes at 3.1% of NRA on a month-to-month lease. The former second-largest (Mulberry Burger; 6.2% of NRA) and third-largest (Torrisi; 3.1% of NRA) tenants vacated in 2020 because of business interruptions stemming from the pandemic. However, replacement tenants Wan Wan LLC and Bel NYC LLC have been signed to fill the spaces.

The Shoppes at Chino Hills (Prospectus ID#6; 4.1% of the pool) is secured by a 378,676 sf lifestyle retail property in Chino Hills, California. The loan was transferred to special servicing in 2020 because of hardships stemming from the pandemic. The loan was modified by the special servicer and brought current, and returned to the master servicer in February 2021.

The reported YE2020 net cash flow (NCF) was 24% below the issuer's NCF, resulting in a DSCR of 1.17x. Occupancy was reported at 84% in June 2021, 86% in December 2020, 96% in December 2019, and 95% at issuance. The three largest tenants at the property account for 22% of NRA. The previous largest tenant, Jacuzzi Brands, representing 8.6% of NRA, vacated at its least expiry in September 2021, which results in an implied occupancy rate of 75%. The largest tenants at the property now include Barnes & Noble (7.4% of NRA, through June 2023), Forever 21 (5.6% of NRA, through December 2023), and Old Navy (3.8% of NRA, through October 2026).

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.

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 the following loans in the transaction:

-- Prospectus ID#6 – Shoppes at Chino Hills (4.1% of the pool)
-- Prospectus ID#30 – Prince and Spring Street Portfolio (1.1% 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 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.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482.

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.

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].

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