DBRS Morningstar Confirms Credit Ratings on All Classes of BBCMS Mortgage Trust 2018-C2, Changes trend to Negative from Stable on 12 Classes

DBRS, Inc. (DBRS Morningstar) confirmed its credit ratings on all classes of Commercial Mortgage Pass-Through Certificates issued by BBCMS Mortgage Trust 2018-C2 as follows:

-- Class A-2 at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-5 at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class A-S at AAA (sf)
-- Class X-A at AAA (sf)
-- Class B at AA (high) (sf)
-- Class X-B at AA (sf)
-- Class C at AA (low) (sf)
-- Class D at A (sf)
-- Class X-D at BBB (high) (sf)
-- Class E at BBB (sf)
-- Class X-F at BBB (low) (sf)
-- Class F at BB (high) (sf)
-- Class X-G at BB (low) (sf)
-- Class G at B (high) (sf)
-- Class H-RR at B (low) (sf)

DBRS Morningstar also changed the trends on Classes A-S, B, X-B, C, D, X-D, E, X-F, F, X-G, G, and H-RR to Negative from Stable. All remaining trends are Stable.

The Negative trends reflect DBRS Morningstar’s concerns surrounding increased credit risks for this transaction, generally observed in factors for a handful of loans in the pool. Those loans are showing increased risks for various reasons, including recent or upcoming tenant rollover, exposure to softening office markets, and/or sustained performance declines. At the prior credit rating action in November 2022, DBRS Morningstar noted increased risks in the pool that were contributing to an increased expected loss for the pool as whole, with material deviations disclosed for Classes B, C, D, and F, which ranged between three and four notches, that were lower than the implied credit ratings from the North American CMBS Insight Model results for each of those classes. The rationale for the material deviations disclosed in November 2022 was uncertain loan-level event risk. Since that time, those risks have solidified and in some cases, further increased, putting additional stress on the middle and lower portions of the capital stack, as further outlined below.

The pool is concentrated by property type, with loans secured by office and retail property types representing 36.0% and 24.6% of the pool balance, respectively. The pool’s office concentration is primarily represented by collateral properties located in suburban markets—loans with those characteristics often contribute to larger expected losses in the CMBS Insight Model, and as a result, the subject transaction generally carries a higher expected loss as a whole. This concentration has become more pivotal as office sector performance has deteriorated in general following the onset of the Coronavirus Disease (COVID-19) pandemic, with elevated vacancy rates in many submarkets because of a shift in workplace dynamics that have reduced demand for space. While the majority of the office loans in the subject transaction continue to exhibit healthy performance metrics, as evidenced by the strong weighted-average (WA) debt service coverage ratio (DSCR) for office properties of 2.34 times (x), DBRS Morningstar notes some office loans are showing signs of stress. Specifically, three loans backed by office properties, representing 8.8% of the pool, are showing performance declines from issuance or otherwise exhibiting increased risks from issuance. In all cases, those loans were analyzed with stressed scenarios for this review to increase the probability of default (PD) and/or increase the loan-to-value (LTV) ratios, as applicable, resulting in WA losses that are more than 30% greater than the pool average expected loss. In addition to the stressed office loans in the pool, there are also a few loans backed by retail properties that were also analyzed with stressed scenarios given increased risks from issuance, further contributing to the pool’s increased expected loss with this review.

At issuance, the collateral for the trust consisted of 44 loans secured by 87 commercial and multifamily properties, with a cut off balance of $891.9 million. As of the September 2023 remittance, all 44 loans remain in the pool, with a current balance of $877 million and nominal collateral reduction since issuance. One loan, representing 1.1% of the pool, is with the special servicer and no loans are delinquent. There are eight loans, representing 19% of the pool, on the servicer’s watchlist. Three loans, representing 4.5% of the pool, have been defeased as of the September 2023 reporting.

The loans with the three largest expected-loss percentages in the analysis for this review were all backed by office properties located in suburban or tertiary markets. These loans are Southern Highlands Corporate Center (Prospectus ID#29, 1.4% of the pool), Valley Forge Corporate Center (Prospectus ID#38, 0.7% of the pool), and Westbay Office Park (Prospectus ID#22, 1.8% of the pool). The fourth-largest expected-loss percentage was for the Dudley Farms Plaza (Prospectus ID#15, 2.8% of the pool) loan, which is secured by a 230,000-square-foot (sf) retail shopping center in Charleston, West Virginia, and was added to the servicer’s watchlist because of upcoming tenant rollover risk. Historical performance at the property has been strong, with both the occupancy rate and DSCR as of June 2023 healthy at 99% and 2.18x, respectively. Both figures are in line with recent historical reporting; however, three of the property’s five largest tenants, representing 56.4% of net rentable area (NRA), have scheduled lease expiration dates within the next six months. One of those tenants, Office Max (10.2% of the NRA), has confirmed plans to vacate. Kohl’s, the largest tenant occupying 37.5% of NRA, has a scheduled lease expiration in February 2024 and has not yet given notice of intent to exercise its remaining five-year option. As the lease renewal was not secured within six months of the expiry date, a cash management trigger has been flipped. In addition, Books-A-Million, which represents 8.7% of NRA, has an upcoming lease expiration in January 2024 and renewal plans are unknown. Given the increased risk associated with the upcoming tenant rollover, as well as the property’s significant exposure to Kohl’s, which has been struggling for several years and could be forced to reduce store counts, DBRS Morningstar analyzed this loan with a stressed PD, resulting in an expected loss that is more than double the pool average expected loss.

The transaction also has exposure to two mall loans in the Christiana Mall–Trust (Prospectus ID#2, 6.3% of the pool) and Fair Oaks Mall–Trust (Prospectus ID#30, 1.2% of the pool). The more challenging of these is the Fair Oaks Mall–Trust loan, which is secured by a portion of approximately 780,000 sf of a 1.5 million-sf regional mall in Fairfax, Virginia, and is sponsored by Taubman Realty Group Limited Partnership and Morton Olshan. The pari passu loan also has pieces in the BANK 2018-BNK13 transaction, which is also rated by DBRS Morningstar. At issuance, the mall was anchored by a collateral Macy's (27.6% of the NRA, lease expiration in February 2026) and the noncollateral anchors: Macy's Furniture Gallery, Sears, JCPenney, and Lord & Taylor. While the space previously occupied by Sears has been backfilled by Dick’s Sporting Goods and Golf Galaxy, the Lord & Taylor box has remained vacant since the tenant filed for bankruptcy in 2020. The mall suffers from superior competition in the area, a factor that has contributed to performance declines since issuance.

The loan transferred to special servicing in February 2023 for imminent monetary default as the loan was not expected to repay at its May 2023 maturity. The borrower has requested a maturity extension and the terms are currently being finalized. The special servicer notes that the borrower has noted excess funds would be available for tenant improvements and capital expenditures, but has also advised willingness to contribute additional capital would be limited. The property’s occupancy rate was approximately 89% as of March 2023, with a high concentration of rollover scheduled through the next year. While occupancy has remained relatively stable over the past few years, the property’s net cash flow (NCF) has declined year over year, with the annualized NCF for the trailing nine months ended September 30, 2022, at $19.6 million (reflecting a DSCR of 1.13x). This is slightly below the YE2021 NCF of $20.1 million (reflecting a DSCR of 1.16x) and still less than the DBRS Morningstar NCF of $22.7 million (DSCR of 1.62x). According to the June 2023 sales report, the total mall sales for the YE2022 period was approximately $432 per sf (psf), inclusive of Apple sales, in comparison with the competitive set’s figure of $469 psf. Without Apple, sales averaged approximately $325 psf. At issuance, the loan was shadow rated investment grade primarily because of the low A note LTV of 32.1% and high DBRS Morningstar Term DSCR. However, given the maturity default and sponsor’s limited willingness to contribute capital to stabilize the property, DBRS Morningstar removed the shadow rating with this review and stressed the loan’s PD to increase the expected loss. The analyzed loan-level expected loss was more than 1.5x the pool’s average.

According to the March 2023 rent roll, the property was 88.7% occupied, in comparison with being 89.3% occupied at YE2021 and 91.6% occupied at issuance. Additionally, tenants occupying more than 40.0% of the NRA have leases that have expired or are scheduled to expire in the next 12 months. However, tenants occupying approximately 17.4% of the NRA that had lease expirations between January 2023 and August 2023 remain in the property’s online directory, including the second-largest tenant, Forever 21 (6.7% of the NRA). There is also concern about competition, which includes Tysons Corner Center and Tysons Galleria malls, both of which offer luxury brands that cater to higher-income demographics.

In addition to Fair Oaks Mall–Trust, at issuance, DBRS Morningstar shadow rated the following loans investment grade: Christiana Mall (Prospectus ID#2, 6.3% of the pool), Moffett Towers–Buildings E,F,G (Prospectus ID#12, 2.9% of the pool), and Moffett Towers II–Building 1 (Prospectus ID#16, 2.5% of the pool). DBRS Morningstar maintains that the performance of these three loans remains consistent with investment-grade 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, X-F, and X-G 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 ratings assigned to Classes A-S, B, X-B, C, D, X-F, and F materially deviates from the credit ratings 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 ratings would consider a three-notch or more deviation from the credit rating stress(es) implied by the predictive model to be a significant factor in evaluating the credit ratings. The rationale for the material deviation is uncertain loan-level event risk. The office concentration in this pool increases the baseline expected loss, with the adjustments as outlined elsewhere in this press release compounding those factors and driving the expected loss for the pool up even further. As the loans in question are currently performing and DBRS Morningstar is continuing to gather information on the market values for office properties in the current environment, these deviations were deemed warranted, but the Negative trends placed on all of the classes in question signal the overall concerns and suggest downgrades could be made as part of future review cycles.

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 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, Inc.
22 West Washington Street
Chicago, IL 60602 USA
Tel. +1 312 332-3429

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 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)

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