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

DBRS, Inc. (DBRS Morningstar) confirmed its 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)

All trends are Stable. 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 issuance, the transaction consisted of 31 loans with a total trust balance of $132.3 million. As of the January 2022 remittance, all loans remain in the pool and the trust has seen a collateral reduction of 4.9% since issuance as a result of scheduled amortization. Additionally, one loan, representing 3.2% of the current pool balance, defeased in October 2021. According to January 2022 servicer reporting, seven loans, representing 27.6% of the current pool balance, are being monitored on the servicer’s watchlist, and one loan, representing 1.5% of the pool balance, is in special servicing. The pool is relatively diverse in terms of property type, with loans backed by retail properties representing the largest concentration at 20.3% of the current pool balance. Loans backed by self-storage and manufactured housing properties represent the second- and third-largest property type concentrations at 18.6% and 17.1% of the current pool balance, respectively.

The largest loan in the pool, Green Bay Plaza, is collateralized by a retail power center in Green Bay, Wisconsin. The subject loan funded the sponsor’s acquisition of the property out of receivership as the previous commercial mortgage-backed securities loan securing the property, which originated in 2006, defaulted in 2014. DBRS Morningstar has been monitoring the loan closely as the former third-largest tenant, Office Depot representing 13.3% of the net rentable area (NRA), went dark in 2019, and the former fifth-largest tenant, Tuesday Morning representing 8.8% of NRA, filed for bankruptcy and closed its location at the property in 2020. The property is also shadow-anchored by a former Sears, which has been vacant since 2017. Both the Office Depot and Tuesday Morning tenants remained on a rent roll that was provided by the servicer, dated as of December 2020; however, both tenants are confirmed to have ceased operations. While the servicer previously confirmed that the Office Depot tenant had been paying its contractual rent, the lease is scheduled to expire in the near term in April 2022. The servicer did not provide any updated information on whether the Tuesday Morning lease was rejected as part of the tenant’s bankruptcy, but, assuming that the two tenants were counted as occupied and paying rent for 2020, DBRS Morningstar expects occupancy and cash flows to decline in the near term as Office Depot’s lease expires. Removing the two tenants’ implied rental revenue would result in the occupancy rate and debt service coverage ratio (DSCR) to decline to 69.6% and 0.96 times (x), respectively, compared with the year-end 2020 figures of 91.6% and 1.52x, respectively, The property does benefit from its location within Green Bay and the sponsor remains committed to the property as it was able to retain two other major tenants including T.J. Maxx (20.7% of the NRA) and Big Lots (14.4% of the NRA), which both signed lease extensions in January 2021.

The one loan in special servicing, 775 West Jackson Boulevard, is secured by a mixed-use property in the Greektown neighborhood of Chicago comprising retail and a small portion of below-grade office space. The loan transferred to the special servicer in May 2020 for payment default as performance declined as a result of the Coronavirus Disease (COVID-19) pandemic. The property was also affected by nearby road construction along Jackson Boulevard, which was shut down to vehicle traffic for most of 2020 and 2021. Construction was anticipated to be completed in late 2021 or early 2022. The borrower declared bankruptcy in December 2020 with resolution negotiations with the servicer currently ongoing. Special-servicer commentary indicates that there were hearings scheduled in November and December 2021; however, as of the January 2022 reporting period, no further updates were provided as foreclosure continues to be the indicated the workout strategy. An updated appraisal dated January 2021 valued the property at $2.05 million, which represents a 41.3% decline from the issuance appraised value of $3.5 million. When outstanding servicer advances are considered, the current loan balance exceeds the most recent appraised value. Given the pending foreclosure, the borrower bankruptcy and the value decline, DBRS Morningstar assumed a hypothetical liquidation scenario that resulted in an implied loss severity near 30% in its analysis for this review. Given the relatively small size of the loan; however, the rated bonds are generally well insulated if the loan is resolved with a loss.

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.

DBRS Morningstar materially deviated from its North American CMBS Insight Model when determining the rating assigned to Class B as the quantitative results suggested a lower rating. The material deviation is warranted given the uncertain loan-level event risk related to several of the loans secured by retail properties. Although some of the largest loans in the pool have characteristics that suggest a higher probability of default, DBRS Morningstar believes the bond in question remains generally well insulated given its position in the waterfall.

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#1 – Green Bay Plaza (8.0% of the pool)
-- Prospectus ID#6 – 72nd Street Square (5.0% of the pool)
-- Prospectus ID#25 – 775 West Jackson Boulevard (1.5% 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/baseline-macroeconomic-scenarios-application-to-credit-ratings.

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.

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

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