DBRS Morningstar Changes Trends on Two Classes, Confirms All Ratings on Morgan Stanley Capital I Trust 2019-L2

DBRS Limited (DBRS Morningstar) confirmed its ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2019-L2 issued by Morgan Stanley Capital I Trust 2019-L2:

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class A-S at AAA (sf)
-- Class X-A at AAA (sf)
-- Class X-B at AA (high) (sf)
-- Class B at AA (sf)
-- Class C at A (sf)
-- Class D at BBB (high) (sf)
-- Class X-D at BBB (sf)
-- Class E at BBB (low) (sf)
-- Class F-RR at BB (sf)
-- Class G-RR at B (high) (sf)

In addition, DBRS Morningstar changed the trends on Classes FRR and GRR to Stable from Negative. All trends are now Stable.

The rating confirmations reflect the generally stable performance of the transaction since DBRS Morningstar’s last rating action, albeit with select loans showing signs of increased stress since issuance, as further detailed below. DBRS Morningstar previously assigned Negative trends to Classes FRR and GRR because of performance challenges related to loans secured by retail and lodging properties, which have generally faced increased levels of stress as a result of the Coronavirus Disease (COVID-19) pandemic. However, two loans, representing 4.7% of the pool, that were previously in special servicing have returned to the master servicer since last review and, based on the most recent loan-level updates and financial reporting available for the pool, the transaction’s overall outlook remains generally stable, supporting the trend changes on Classes FRR and GRR to Stable from Negative.

At issuance, the transaction consisted of 50 fixed-rate loans secured by 68 commercial and multifamily properties with a total trust balance of $934.9 million. As of the June 2022 remittance report, all 50 loans remain within the pool, with negligible collateral reduction of 0.9% since issuance. The pool is concentrated by property type with office, retail, multifamily, and hospitality assets representing 35.8%, 17.8%, 17.2%, and 17.2% of the current pool balance, respectively. As of the June 2022 remittance report, 13 loans, representing 24.2% of the pool, were on the servicer’s watchlist, primarily because of cashflow and occupancy rate declines, including two top10 loans, Ohana Waikiki Malia Hotel & Shops (Prospectus ID#1; 6.8% of current pool balance) and Lincoln Commons (Prospectus ID#9; 3.2% of the current pool balance). In addition, four loans, representing 8.0% of the current pool balance, are in special servicing.

The largest loan in special servicing, Le Meridien Hotel Dallas (Prospectus ID#4; 4.5% of the current pool balance), is secured by a 258-key full-service hotel in Dallas, approximately 12.0 miles north of the central business district. The loan first fell delinquent in April 2020 and transferred to special servicing in June 2020 for monetary default. The loan is currently delinquent and remains past due for the April 2020 payment date. The controlling class representative approved a short-term forbearance agreement in January 2022, which the borrower failed to execute. An online Bloomberg report, as of April 2022, stated that NB Hotels Dallas, LLC., the owner of Le Meridien Hotel Dallas, has filed for Chapter 11 bankruptcy. The special servicer is currently requesting consent to pursue the guarantor, Nadir Badruddin, for full recourse because of the borrower’s bankruptcy filing.

According to the trailing 12 months ended September 30, 2021, financial reporting the property generated net cash flow (NCF) of $1.1 million with a debt service coverage ratio (DSCR) of 0.52 times (x), compared with the NCFs and DSCRs of $4.5 million and 1.37x at YE2020 and $5.1 million and 1.56x at issuance, respectively. According to the January 2022 STR report, the subject property reported running 12-month occupancy rate, average daily rate (ADR), and revenue per available room (RevPAR) figures of 49.3%, $124.55, and $61.35, respectively, slightly outperforming the competitive set’s reported metrics of 43.2%, $95.80, and $41.35. A January 2022 appraisal valued the property at $56.4 million, an increase from the April 2021 appraised value of $53.9 million but a decrease from the issuance valuation of $61.2 million. Although the January 2022 value suggests that the loan remains above water, the extended delinquency and workout period for the loan indicates significantly increased risks from issuance and, as such, DBRS Morningstar applied a probability of default penalty in its analysis to increase the expected loss for this review.

The largest loan on the servicer’s watchlist, Ohana Waikiki Malia Hotel & Shops (Prospectus #1; 6.8% of the pool), is secured by a 327-key hotel located in Honolulu. The hotel comprises two lodging towers connected by a base containing the lobby, common areas, retail, and restaurant space. The loan is being monitored because of stressed occupancy rates and cashflow declines, primarily a result of the disruptions in leisure travel throughout 2020 and 2021. The property reported strong performance in the pre-pandemic period as reflected by the YE2019 NCF of $7.7 million. The YE2020 NCF declined substantially to -$1.2 million, however, it rebounded in YE2021 to $553,963. The annualized trailing three months ended March 31, 2022 NCF of $2.9 million is indicative of a further improvement in property performance as global leisure travel begins to pick up.

According to the March 2022 STR report, the subject property reported running 12-month occupancy, ADR, and RevPAR figures of 57.9%, $118.58, and $68.61, respectively, underperforming the competitive set, which reported the same metrics at 71.5%, $134.49, and $96.13. The March 2022 rent roll noted the retail and restaurant component of the property was 79.6% occupied, down from 100% at issuance. Current in-place leases have remaining lease terms ranging between 12 months and five years, with an average monthly base rental rate of $12 per square foot.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance 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.

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 this transaction.

The DBRS Viewpoint platform provides additional information on this transaction and underlying loan 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.

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].

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