DBRS Morningstar Changes Trend on One Additional Class of DBGS 2018-C1 Mortgage Trust to Negative from Stable, Confirms Ratings on All Classes

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

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

DBRS Morningstar also changed the trend on Class D to Negative from Stable, while Classes X-D, E, X-F, F, and G-RR continue to carry Negative trends. All other trends are Stable.

The rating confirmations and Stable trends reflect the overall stable performance of the transaction, which remains in line with DBRS Morningstar’s expectations since the last rating action. However, there are some challenges for the pool with three loans in special servicing and a high concentration of loans secured by office properties, some of which have exhibited notable declines in performance since issuance. DBRS Morningstar notes mitigating factors including the relatively low loss severities assumed for the specially serviced assets given the current workout strategy or recent property valuations, and the overall performance metrics for office loans based on the most recent reporting. The transaction also benefits from a concentration of loans shadow-rated investment grade, representing 30.2% of the pool, and five years of amortization since issuance. However, given the loan-specific challenges for some of the office loans and the downward pressure implied by the CMBS Insight Model results, the Negative trends for the six lowest-rated classes most exposed to loss were warranted.

Per the August 2023 reporting, 35 of the original 37 loans remained in the trust, with an aggregate principal balance of approximately $1.0 billion, reflecting a collateral reduction of 5.9% since issuance as a result of scheduled loan amortization and loan repayment. Two loans, representing 4.3% of the pool, are secured by collateral that has been fully defeased. There are five loans, representing 14.6% of the pool, on the servicer’s watchlist, and three loans, representing 4.6% of the pool, in special servicing, discussed in more detail further below.

Excluding collateral that has been defeased, the pool is most concentrated by loans that are secured by office and retail properties, which represent 39.5% and 26.8% of the pool, respectively. In general, the office sector has been challenged, given the low investor appetite for the property type and high vacancy rates in many submarkets as a result of the shift in workplace dynamics. In its analysis for this review, DBRS Morningstar adjusted seven loans backed by office properties exhibiting declines in performance with stressed loan-to-value (LTV) ratios or increased probability of default (POD) assumptions, resulting in a weighted-average (WA) expected loss (EL) for those loans that was more than double the pool’s WA figure.

The largest loan on the servicer’s watchlist, Time Square Office Renton, is secured by a 323,737-square-foot (sf), Class B suburban office property in Renton, Washington. The loan was added to the servicer’s watchlist in May 2023 because of a low debt service coverage ratio (DSCR), most recently reported at 1.13 times (x) as of Q1 2023, reflecting a 16.9% decline since issuance as a result of increased vacancy. Per the March 2023 rent roll, the property was 76.5% occupied, well below 90.6% at issuance, primarily stemming from the departure of Integra Telecom (formerly 14.1% of the net rentable area (NRA)) in June 2021. While the largest tenant, Geico (17.7% of the NRA), renewed prior to its 2020 lease expiration through April 2028, tenants representing approximately 22.5% of the NRA have scheduled lease expirations during the next 12 months, including the second-largest tenant, Microscan Systems (12.7% of the NRA), which has a lease expiration in May 2024. As of Q2 2023, Reis reported that office properties in the Renton/Kent/Southend submarket reported an average vacancy rate of 25.1%, an average asking rental rate of $29 per sf (psf), and an average effective rental rate of $23 psf, compared with the subject’s average in-place rental rate of $18 psf. While the property’s below-market rental rate could indicate a potential upside if leasing momentum were to garner some traction, the borrower would likely have to fund leasing costs out of pocket as only $0.4 million remains in leasing reserves per the August 2023 reporting. Given the decline in performance, paired with the soft market conditions, DBRS Morningstar analyzed this loan with a stressed LTV and POD, resulting in an EL of more than triple the pool average.

The second-largest loan on the watchlist, 90-100 John Street (Prospectus ID#7, 4.2% of the pool), is secured by a 34-story, Class B mixed-use residential and commercial building in Manhattan’s financial district. The property comprises approximately 60.0% residential and 40.0% commercial space. The loan was added to the watchlist in June 2021 as a result of declining occupancy and DSCR. As of Q1 2023, the loan reported an annualized net cash flow of $0.5 million (reflecting a DSCR of 0.28x), compared with the YE2022 figure of $1.4 million (a DSCR of 0.73x) and the Issuer’s underwritten figure of $5.4 million (a DSCR of 2.89x). The decline is primarily a result of increased vacancy; however, operating expenses have also experienced a moderate decline, yielding an expense ratio of 93.0% as of the Q1 2023 reporting compared with 57.0% at issuance.

The commercial portion of the collateral has experienced a precipitous decline in performance as a result of the reduction in demand coupled with the oversupply in the Manhattan office market. At issuance, commercial occupancy was reported at 96.2%; however, that figure fell to 51.4% by March 2022 and 25.2% as of March 2023, following the departure of numerous tenants. Remaining tenants reported an average rental rate of $62 psf per the March 2023 rent roll, an increase from the issuance rate of $39 psf. According to Reis, office properties in the downtown Manhattan submarket reported an average vacancy rate of 15.3%, an average effective rental rate of $49 psf, and an average asking rental rate of $61 psf, respectively.

The residential portion of the collateral fared better in the economic climate post-pandemic. While occupancy has fallen to 89.5% as of March 2023 from historical averages above 95%, rental rates have recovered to issuance levels after a slip in 2022. As of the March 2023 reporting, the property reported an average rental rate per unit of $3,356, rebounding from $2,757 per unit in March 2022, but in line with the issuance figure of $3,406 per unit. The West Village/Downtown submarket of Manhattan reported asking and effective rental rates of $5,612 and $5,341 per unit, respectively, for the period ended March 31, 2023, according to Reis.

While the loan benefits from its excellent location and strong sponsorship in The Moinian Group, performance has experienced a sharp decline. As a result, DBRS Morningstar has removed the shadow rating on the loan, as the loan’s credit metrics no longer remain consistent with investment-grade characteristics. In its analysis for this review, DBRS Morningstar also applied a stressed POD, resulting in an EL that was more than double the pool average.

At issuance, DBRS Morningstar assigned investment-grade shadow ratings to nine loans, of which seven remain for this review: Moffett Towers – Buildings E, F, G (Prospectus ID#1, 8.0% of the pool), Christiana Mall (Prospectus ID#5, 5.3% of the pool), Aventura Mall (Prospectus ID#6, 4.7% of the pool), The Gateway (Prospectus ID#10, 3.7% of the pool), 601 McCarthy (Prospectus ID#13, 3.1% of the pool), West Coast Albertsons (Prospectus ID#14, 2.9% of the pool), and Moffett Towers II – Building 1 (Prospectus ID#18, 2.5% of the pool). Since the last review in November 2022, the Carolinas 7-Eleven Portfolio loan (previously 3.9% of the pool) was paid out. With the removal of the shadow rating on 90-100 John Street with this review, the seven aforementioned loans (30.2% of the pool) remain shadow-rated. As part of this review, DBRS Morningstar confirmed that the performance of these loans remains consistent with the investment-grade loan characteristics.

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/416784 (July 4, 2023).

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 credit ratings are subject to surveillance, which could result in credit ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by DBRS Morningstar.

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

The principal methodology is North American CMBS Surveillance Methodology (March 16, 2023; https://www.dbrsmorningstar.com/research/410912).

Other methodologies referenced in this transaction are listed at the end of this press release.

The credit rating assigned to Class B materially deviates from the credit rating implied by the predictive model. DBRS Morningstar typically expects there to be a substantial likelihood that a reasonable investor or other user of the credit rating would consider a three-notch or more deviation from the credit rating stress implied by the predictive model to be a significant factor in evaluating the credit rating. The rationale for the material deviation is uncertain loan-level event risk. The analysis for this review included stressed scenarios for several office loans given the general challenges facing the office sector. The results of the analysis suggest downward pressure through the middle of the bond stack, most pronounced for Class B; however, given the most challenged loans would likely be transferred to special servicing and possibly liquidated, DBRS Morningstar believes the increased risks are most concentrated in the lowest-rated classes, supporting the Negative trend assigned with this review.

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 credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

DBRS Morningstar had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the credit rating process.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and credit ratings are monitored.

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

The credit rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

North American CMBS Multi-Borrower Rating Methodology (March 16, 2023)/North American CMBS Insight Model version 1.1.0.0 (https://www.dbrsmorningstar.com/research/410913)

Rating North American CMBS Interest-Only Certificates (December 19, 2022; https://www.dbrsmorningstar.com/research/407577)

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 12, 2022; https://www.dbrsmorningstar.com/research/402646)

North American Commercial Mortgage Servicer Rankings (August 23, 2023; https://www.dbrsmorningstar.com/research/419592)

Interest Rate Stresses for U.S. Structured Finance Transactions (June 9, 2023; https://www.dbrsmorningstar.com/research/415687)

Legal Criteria for U.S. Structured Finance (December 7, 2022; https://www.dbrsmorningstar.com/research/407008)

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/417279.

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