DBRS Morningstar Upgrades Ratings on CSWF Trust 2018-TOP

DBRS, Inc. (DBRS Morningstar) upgraded its ratings on the Commercial Mortgage Pass-Through Certificates, Series 2018-TOP issued by CSWF Trust 2018-TOP as follows:

-- Class F to AAA (sf) from A (high) (sf)
-- Class G to AA (sf) from BBB (sf)
-- Class H to A (sf) from BB (low) (sf)

All trends are Stable.

The ratings upgrades are reflective of the continued release of collateralized properties and the resultant prepayments to the trust. In total, 11 properties have been released since issuance, with collateral reduction since issuance of 79.9%. Two properties have been released since DBRS Morningstar’s most recent rating action in October 2021, with the total prepayment amount of $64.3 million repaying Class E in full and considerably paying down Class F.

The loan and deal structures include a number of features that were designed to adjust as the loan pays down. At the deal level, prepayment proceeds on the first 20.0% of the pool balance were to be distributed pro rata, with proceeds beyond that threshold to be distributed sequentially. In addition, there was a tiered property release premium that was increased from the initial requirement of 105.0% of the allocated principal balance to 115.0% of the allocated principal balance with the property releases as of April 2021. All releases since April 2021 have been processed at the higher release percentage and payments have been applied according to a sequential payment structure. According to the servicer, the borrower exercised its third one-year extension to extend the loan’s maturity date to August 2023.

The transaction sponsor, TPG Real Estate’s TPG Real Estate Partners Fund II, used the collateral loan to acquire and recapitalize the fee-simple and leasehold interests in a portfolio of 15 mostly single-tenant Class A office properties totaling 3.1 million square feet (sf) in 11 states. The loan facilitated the sponsor’s (1) buyout of Gramercy Property Trust’s (GPT) interest in Strategic Office Partners, a joint venture between the sponsor and GPT and (2) acquisition of four of the original assets included in the portfolio. The four properties remaining in the trust total 1.1 million sf and are primarily located in secondary markets across the U.S. including Charlotte, North Carolina; San Bernardino, California; Tampa, Florida; and, Tempe, Arizona. Leases for 66% of the portfolio’s remaining net rentable area (NRA) are scheduled to roll prior to the August 2023 maturity date and an additional 32% of NRA will expire prior to the fully extended maturity date in August 2025.

Major tenants in the remaining properties include Bank of America (38% of NRA) with an upcoming lease expiration date in February 2023; Wells Fargo (23% of NRA) with an upcoming lease expiration date in December 2022; Bristol Myers Squibb Company (12% of NRA) with an upcoming lease expiration date in June 2024; and Amazon.com, Inc. (11% of NRA) with upcoming lease expiration dates in February 2023 and March 2024.

For the purposes of this analysis, DBRS Morningstar considered both a base-case stress and an upgrade stress on the property values for the remaining collateral. The base-case stress was based on the values derived by DBRS Morningstar as part of the rating actions taken in April 2020, when ratings were assigned. The resulting value is $177.9 million, a -12.1% variance from the aggregate appraised value of the remaining properties at issuance. The DBRS Morningstar net cash flow (NCF) for the remaining properties is $14.7 million, a -5.5% variance from the Issuer’s NCF. The upgrade stress assumed a 20.0% haircut to the base-case values to reflect risks for the transaction in the increased concentration risk for the remaining collateral and the continued unknowns posed by the Coronavirus Disease (COVID-19) pandemic, the upcoming lease expirations and secondary market locations.

DBRS Morningstar made negative qualitative adjustments to the final loan-to-value (LTV) sizing benchmarks used for this rating analysis, totaling -4.0% to account for cash flow volatility, property quality, and market fundamentals.

The DBRS Morningstar rating assigned to Class H is lower than the results implied by the LTV Sizing Benchmarks. The variance is warranted given DBRS Morningstar’s concerns regarding near-term lease rollover and secondary market locations for the collateral office portfolio amid ongoing impacts of the coronavirus pandemic.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022).

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 Morningstar 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. 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 North American CMBS Surveillance Methodology (October 3, 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.

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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