DBRS Morningstar Changes Trends on Two Classes, Confirms All Ratings on Morgan Stanley Capital I Trust 2018-MP

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

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

With this review, DBRS Morningstar changed the trends on Classes D and E to Stable from Negative. All other trends are Stable.

The Negative trends previously carried by Classes D and E reflected DBRS Morningstar’s concern about the non-investment-grade tenants, Equinox Fitness (Equinox) and AMC Entertainment Holdings, Inc. (AMC), that occupy 40.3% of the portfolio net rentable area (NRA) and were greatly affected by the Coronavirus Disease (COVID-19) pandemic. While the YE2021 financial reporting continues to reflect a depressed net cash flow (NCF) compared with pre-pandemic figures, the servicer has confirmed that both tenants resumed regular rent payments: AMC in February 2021 and Equinox in October 2021. According to the April 2022 reporting, the collection of deferred rent from AMC commenced in August 2021 with the collection from Equinox expected to commence in January 2023. Given that these two tenants combine to contribute 27.3% of gross potential revenue across the portfolio, financial performance is expected to stabilize during 2022.

The loan is secured by the fee-simple and leasehold interests in the Millennium Partners Portfolio, which consists of eight cross-collateralized retail and office condominiums in dense urban locations, including New York City, Boston, Miami, San Francisco, and Washington, D.C. The collateral consists of approximately 1.5 million square feet (sf) of commercial space along with parking garages at the Four Seasons Miami; Ritz-Carlton Washington, D.C.; and Ritz-Carlton Georgetown Retail properties. The loan is sponsored by Millennium Partners, a Manhattan-based real estate development and management company focused on luxury, mixed-use properties in gateway cities across the U.S. As of June 2022, the sponsor’s portfolio has been valued at more than $4.0 billion with its owned-portfolio including more than 2,900 luxury condominiums, 1.2 million sf of office space, and 1.0 million sf of retail space.

The properties are in desirable, centrally located markets that have minimal available space for future competitive developments, and most of the condominium properties are part of larger, higher-end luxury uses and include quality fit-outs. All eight properties are subject to complex condominium structures, which are not controlled by the borrowers. The portfolio is geographically diverse as the properties are located in four states and the District of Columbia. At issuance, DBRS Morningstar noted the relatively low lease rollover risk, with 48.1% of the portfolio’s NRA scheduled to expire during the loan term. The whole loan loan-to-value ratio (LTV) totalled 141.6%, based on the DBRS Morningstar value of $822.7 million while the total mortgage debt reflects an LTV of 101.5%.

The subject whole loan has a 10-year interest-only (IO) term with a $710.0 million first mortgage and $280.2 million of mezzanine debt held outside the trust. Of the first mortgage amount, $225.9 million consists of non-pooled pari passu notes that were securitized in the following DBRS Morningstar-rated commercial mortgage-backed securities (CMBS) transactions: BANK 2019-BN16, MSC 2018-L1, and BANK 2018-BN14. The BANK 2018-BN14 transaction was last reviewed in January 2022 when DBRS Morningstar confirmed the subject loan’s investment-grade shadow rating. The loan is also securitized in the non-DBRS Morningstar-rated transaction, BANK 2018- BNK15.

According to the YE2021 consolidated financials, the NCF was reported at $54.0 million, a slight decline from the YE2020 figure of $57.5 million and well below the YE2019 figure of $75.6 million. As noted above, however, both AMC and Equinox have resumed regular rent payments, thus cash flow in 2022 is expected to improve to pre-pandemic levels. While deferred rents from July 2020 through September 2021 have not yet been repaid, the sponsor expects to collect all of the past due rents and is in contact with Equinox as collection is expected start no later than January 1, 2023. Regarding AMC, collection of deferred rents from 2020 commenced in August 2021. During 2021, AMC was able to rebound, given the substantial amount of capital that was raised through issuing new shares and from the sale of company-owned stock during peaks of volatile market pricing.

According to the April 2022 rent roll, the portfolio occupancy rate dropped slightly to 90.8% from 92.6% as of April 2021 and 94.3% at issuance. There is minimal lease rollover risk in the near term with eight tenants, representing 3.8% of NRA, having lease expirations in 2022 and 13 tenants, representing 3.6% of NRA, having lease expirations in 2023.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance (ESG) factors that had a significant or relevant effect on the credit analysis.

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/396929.

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 the 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.

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.

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

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577