DBRS Morningstar Confirms Credit Ratings on All Classes of Key Commercial Mortgage Trust 2019-S2

DBRS Limited (DBRS Morningstar) confirmed its credit ratings on all classes of the Commercial Mortgage Pass-Through Certificates, Series 2019-S2 issued by Key Commercial Mortgage Trust 2019-S2 as follows:

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

All trends are Stable.

The credit rating confirmations reflect the pool’s stable performance since the last credit rating action in November 2022. Reported year-end financials indicate a weighted-average (WA) pool debt service coverage ratio (DSCR) of 1.87 times (x) compared with the WA DBRS Term DSCR of 1.37x at issuance. There are no delinquencies; no loans in special servicing; and six loans, representing 16.6% of the pool, are on the servicer’s watchlist—three of which (9.8% of the pool) are being monitored for nonperformance-related concerns. Although there are some loans exhibiting increased credit risk, particularly those backed by office properties, the pool overall is performing in line with DBRS Morningstar’s expectations.

As of the September 2023 reporting, 27 of the original 29 loans remain in the pool, with an aggregate trust balance of $137.0 million, representing a collateral reduction of approximately 12.6% since issuance because of scheduled loan amortization and repayment. Since the last credit rating action, there have been no defaults, delinquencies, and no additional defeasance. Two loans representing 10.3% of the pool are defeased. There have also been no loan payoffs since the last credit rating action. The pool is most concentrated by loans secured by office and self-storage properties, which represent 19.8% and 16.8% 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 two of the six loans backed by office and mixed-use properties with office components that exhibited declines in performance with stressed loan-to-value (LTV) ratios, resulting in a WA expected loss (EL) that was more than triple the pool’s WA figure.

The largest office loan in the pool, 180 North Wacker Drive (Prospectus ID#2, 8.0% of the pool), is secured by the leasehold interest in a 72,088-square-foot (sf) office building in the West Loop submarket of Chicago. Although the loan is not currently on the servicer’s watchlist, the DSCR remains below breakeven at 0.99x as of YE2022. The loan has experienced fluctuations in occupancy and cash flow since 2020 when occupancy declined to 77.4% in September 2020 from 97.3% at issuance. Occupancy fell further still to 65.5% at YE2021, rebounding to 78.8% at YE2022. Four tenants, representing approximately 20.0% of net rentable area (NRA), signed new leases at the property throughout 2022. Rollover risk is concentrated in the near term, with four leases, representing 21.3% of NRA, scheduled to expire in the next 12 months.

The YE2022 reported net cash flow (NCF) of $0.55 million represents an 48.6% improvement over the YE2021 NCF of $0.37 million, attributable to increases in expense reimbursements and other income, but remains well below the issuance figure of $0.88 million. The loan is subject to ground rent payments, which started at $300,000 at issuance with scheduled annual increases of 1.5% until expiration in 2118. For Q2 2023, Reis reported average asking and effective rental rates of $43 per sf (psf) and $34 psf, respectively, for office properties within a 1-mile radius of the subject, compared with the property’s in-place average rental rate of $33 psf. Vacancy for the same period was reported at 10.0%, notably lower than that of the subject. Given the concerns with the property type, the subject’s decline in performance since issuance, upcoming rollover, and soft submarket conditions, DBRS Morningstar applied a stressed LTV scenario in its analysis for this review. The resulting EL exceeded that of the pool by approximately 200.0%.

Another large loan of concern is 415 McFarlan Road (Prospectus ID#17, 3.4% of the pool), which is secured by a 43,951-sf suburban office building in Kennett Square, Pennsylvania. The loan was added to the watchlist in August 2023 for low occupancy following the departure of the second-largest tenant C-Power (previously 11.1% of NRA) following its lease expiration in March 2023. As a result, occupancy declined to 71.2% as of the July 2023 rent roll, down from 92.5% at issuance. The July 2023 rent roll reported a total annualized base rent of $729,566 (which excluded C-Power’s rent), implying a 16.8% decline from reported base rent at YE2022. The average in-place rental rate at the property was reported at $24 psf, compared with the Q2 2023 average average asking and effective rental rates within a 5-mile radius of $28 psf and $24 psf, respectively, according to Reis. Vacancy for the same period was reported at 21.0%. As a result of increased vacancy, expected decline in cash flow and soft submarket conditions, DBRS Morningstar applied a stressed LTV scenario in its analysis. The resulting EL exceeded that of the pool by approximately 240.0%.

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).

Class X is an interest-only (IO) certificate that references 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 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.

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 v 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 22, 2023; https://www.dbrsmorningstar.com/research/420982)

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].