DBRS Morningstar Confirms All Ratings on Morgan Stanley Capital I Trust 2018-BOP

DBRS, Inc. (DBRS Morningstar) confirmed the following ratings on the Commercial Mortgage Pass-Through Certificates, Series 2018-BOP issued by Morgan Stanley Capital I Trust 2018-BOP:

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

All trends are Stable.

The rating confirmations reflect the overall stable performance of the transaction since DBRS Morningstar’s last review, with collateral revenue in line with the prior year’s reporting. At issuance, the loan was secured by the fee-simple interest in a portfolio of 12 suburban Class B office properties comprising nearly 1.8 million square feet (sf) of office space in four different states. The majority of the portfolio was concentrated in the Washington, D.C., metro area, as seven of the original properties are in suburban Maryland (72.8% of the initial loan balance) and two are in Northern Virginia (11.3% of the initial loan balance). The others are in Florida and Georgia.

Since issuance, two properties known as West Gude Office Park and Prince Street Plaza were released in January 2022 and June 2020, respectively. These properties collectively represented 12.7% of the issuance allocated loan balance (ALB), and, based on the release provisions as outlined in the transaction documents, a total release premium of $42.7 million was paid. The terms of the loan agreement allow that properties can be released from the collateral for the loan at a repayment amount of 105% of the ALB for the first 20% of the initial loan balance with a 110% release price thereafter, subject to a debt yield requirement of 12.5% following the release of the property in question, as well as other criteria. DBRS Morningstar believes the 105% release price for the first 20% is a weaker structure, and the sizing incorporated a penalty to reflect the increased risk at issuance.

Initial proceeds of $278.4 million, including $55.0 million of mezzanine debt, were primarily used to refinance existing debt of approximately $259.4 million, fund $8.3 million of upfront reserves, pay $9.5 million of closing costs, and return $1.1 million of equity to the sponsor. The loan sponsor is Brookfield Strategic Real Estate Partners II, a global real estate opportunity fund controlled by Brookfield Asset Management Inc. (rated A (low) with a Stable trend by DBRS Morningstar). The loan is interest only (IO) through its initial two-year term, with three one-year extension options and a final maturity in August 2023. The borrower most recently exercised the second extension option to extend the maturity to August 2022. As of March 2022, the trust balance amortized by approximately 19.1% to $180.7 million from $223.4 million at issuance.

Based on the YE2021 rent roll, portfolio occupancy declined to 62.3% from the YE2020 figure of 68.9% and the issuance figure of 78.0%. Approximately 20.2% of the portfolio net rentable area (NRA) is scheduled to roll over in the next 12 months. At issuance, the largest tenants included Bank of America (4.1% of the portfolio NRA), which vacated at lease expiry in December 2021; Henry M. Jackson Foundation for the Advancement of Military Medicine, which downsized its space in the portfolio to just 0.3% of the NRA from 3.0%; and Advanced Micro Devices, Inc. (2.9% of the portfolio NRA, expiring in December 2024). According to the YE2021 financials, net cash flow (NCF) was reported at $19.0 million, in comparison with the YE2020 figure of $21.3 million and DBRS Morningstar’s NCF of $21.8 million. The decline is predominantly due to decreases in gross potential revenue, expense reimbursements, and parking income, all of which have been driven by the occupancy declines as previously outlined. The in-place coverage remains healthy, with the servicer reporting a YE2021 debt service coverage ratio (DSCR) of 3.64 times; however, the NCF and allocated debt service obligation for the released West Gude Office Park were included in the 2021 NCF and DSCR calculations.

The portfolio’s concentration in the District of Columbia (DC) market means the collateral properties are faced with leasing challenges in the soft market conditions, which have been marked by increasing vacancy rates over the last several years. According to Reis, the DC market reported an overall vacancy rate of 14.3%, with an average asking rent of $56.98 per sf (psf) compared with the pre-pandemic figures of 12.7% and $56.81 psf, respectively, in 2019. Over the next few years, Reis projects vacancy rates to rebound back to pre-pandemic levels, declining to 12.7% by 2025, suggesting increased demand that should benefit the sponsor’s re-leasing efforts. DBRS Morningstar also notes that the loan benefits from its strong sponsor, a moderate loan-to-value ratio of 61.8% at issuance, and a healthy in-place coverage ratio and extensive reserves on hand ($11.5 million in leasing reserves as of April 2022) that the sponsor can use to re-tenant vacated spaces.

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-EXT 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.

DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for this transaction.

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.

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

The principal methodology is North American CMBS Surveillance Methodology (March 4, 2022), 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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