DBRS Morningstar Confirms Ratings on DBGS 2018-C1 Mortgage Trust

DBRS Limited (DBRS Morningstar) confirmed its ratings on the following classes of Commercial Mortgage Pass-Through Certificates (the Certificates), issued by DBGS 2018-C1 Mortgage Trust as follows:

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

DBRS Morningstar changed the trends on Class E, F, X-D and X-F to Negative from Stable and maintained the Negative trend on Class G-RR. All other trends are Stable. The Negative trends reflect DBRS Morningstar’s concern with the pool’s high concentration of office collateral with declining performance metrics, including six loans in the top 20, representing 22.8% of the pool.

The rating confirmations reflect the overall stable performance since issuance. As of the September 2022 remittance, all 37 of the original loans remain in the trust. The pool balance has been reduced by 1.1% to $1.05 billion from $1.07 billion at issuance and one loan (3.5% of the pool) has been fully defeased. Nine loans, representing 36.5% of the pool, were shadow-rated as investment grade at issuance. With this review, DBRS Morningstar confirms that performance for those loans remains consistent with the assigned shadow ratings.

Although the performance challenges for select loans backed by office properties are a concern, DBRS Morningstar does note that losses from liquidation scenarios have decreased since the last review as a result of relatively positive developments for loans in special servicing. The largest loan in special servicing at the last review, Outlet Shoppes at El Paso (3.48% of the pool), has returned to the master servicer. Two loans (3.5% of the pool) are currently in special servicing including the 9039 Sunset loan (1.9% of the pool), which is secured by an 11,375-square-foot (sf) commercial building located on Sunset Boulevard in West Hollywood, California. The loan transferred to special servicing in July 2020 for imminent monetary default after the property’s sole tenant, 1 Oak, ceased operations in 2019 and vacated the property prior to its September 2023 lease expiration. It is noteworthy that the property receives more than half of its income from three rooftop billboards. Based on the most recent appraisal available at DBRS Morningstar’s last review, a loss severity of 23.9% was projected; however, an updated appraisal has since shown a slight increase in the as-is value and the trust’s exposure has also been reduced with the borrower submitting past due payments in the last year. When factoring in these developments, the liquidation scenario suggests a loss severity of 6.8% for this review.

The transaction has a high concentration of office exposure, with 12 loans (38.1% of the pool) secured by office properties and three loans (13.14% of the pool) secured by mixed-use properties that have an office component. In recent months, there has been further concern and scrutiny around loans secured by office properties. With office supply on the rise because of low space utilization amid the Coronavirus Disease (COVID-19) pandemic and the changing worker preferences that have come with that event, a dynamic which has led to an increase in space being offered for sublease and tenants downsizing or vacating. As such, there is downward pressure on the office sector and DBRS Morningstar is closely monitoring nine loans (27.2% of the pool) secured in full or in-part by office properties that are exhibiting declining occupancy rates and/or debt service coverage ratios (DSCRs), upcoming tenant rollover risk, and/or soft submarket metrics. A probability of default adjustment was applied to each of these loans to stress the loss.

The most noteworthy of these loans, largely because of their size and, correspondingly, impact to the overall pool expected loss, include Time Square Office Renton (5.3% of the pool), TripAdvisor HQ (7.1% of the pool), and Summit Office Park (2.6% of the pool). Time Square Office Renton is secured by a 323,737-sf suburban office complex in Renton, Washington. Occupancy at the property has declined to 79% as of year-end (YE) 2021 from 91% at YE2020 because a major tenant left upon expiration in 2021. TripAdvisor HQ is secured by a 280,000-sf office property in Needham, Massachusetts, and is fully leased to TripAdvisor through December 2030. TripAdvisor’s business performance was severely affected during the pandemic and the company reduced employee headcount by 25% and closed offices in Boston and San Francisco to reduce costs. Additionally, TripAdvisor has sublet approximately 25,000 sf of the subject collateral and media reports indicate it is seeking to sublet an additional 75,000 sf. Summit Office Park is secured by a 493,461-sf office property in Independence, Ohio. Occupancy and DSCR have declined to 75.0% and 0.84 times (x), respectively, as of March 2022 compared with 77.6% and 0.96x as of YE2021 because of tenants vacating. The market remains soft with excess supply and minimal leasing prospects.

While not a major driver for this review, the pool has exposure to GSK North American HQ (0.95% of the pool), a 207,779-sf office property in Philadelphia’s Navy Yard submarket, built-to-suit for the property’s single-tenant GlaxoSmithKline (GSK) in 2013 when GSK executed a 15-year lease expiring in September 2028 with no termination options. GSK relocated its corporate operations from the subject collateral in 2022 and the property is currently dark; the loan was structured with a cash flow sweep that was to be triggered if GSK vacated or went dark in at least 90% of its space, excluding subleases signed by GSK. According to the appraisal at issuance, the dark value of the property was reported at $91.8 million, which is in excess of the whole-loan amount of $85.2 million. Office properties in the South Philadelphia submarket have historically reported strong market fundamentals, supported by the Q1 2022 vacancy rate of 1.1% as reported by Reis. Although the loan’s refinance risk has significantly increased following the departure of GSK given the upcoming loan maturity in June 2023, mitigating factors include a historically strong submarket and property performance.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) 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/373262 (May 17, 2022).

Classes X-A, X-B, X-D, and X-F 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.

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.

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.

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].

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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