DBRS Morningstar Changes Trends on Two Classes of Key Commercial Mortgage Trust 2018-S1 to Negative from Stable, Confirms Credit Ratings on All Classes

DBRS Limited (DBRS Morningstar) confirmed its credit ratings on the Commercial Mortgage Pass-Through Certificates, Series 2018-S1, issued by Key Commercial Mortgage Trust 2018-S1 as follows:

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

DBRS Morningstar also changed the trends on Classes E and F to Negative from Stable. All other trends are Stable.

The Negative trends reflect the increased loss expectations for the sole specially serviced loan, 775 West Jackson Boulevard (Prospectus ID#25; 2.2% of the pool), as well as the ongoing concerns related to St. Charles Executive Center (Prospectus ID#11; 5.1% of the pool), both of which are discussed in detail below. In addition, the capital structure of the transaction is noteworthy as the junior tranches carry small balances, providing less cushion to mitigate against any additional loss and/or performance volatility for the remaining loans in the pool, supporting the Negative trends on the most at-risk certificates.

The credit rating confirmations reflect the otherwise stable performance of the remaining loans in the pool, which remain in-line with DBRS Morningstar’s expectations, reflecting healthy performance metrics as evidenced by the pool’s weighted-average (WA) debt service coverage ratio (DSCR) of nearly 2.00 times (x) based on the most recent year-end financials available. The pool also benefits from diversity by property type, with retail and self-storage properties making up the largest concentrations and each representing less than 20.0% of the pool balance. Lastly, the pool benefits from principal paydown as five loans repaid from the trust since last review. As of the September 2023 remittance, 23 of the original 31 loans remain in the pool, representing a collateral reduction of 35.1% since issuance. Two loans are fully defeased, representing 6.5% of the pool balance. Four loans, representing 22.5% of the pool balance, are on the servicer’s watchlist being monitored for a variety of reasons, including low DSCRs, tenant rollover risk, and/or deferred maintenance items.

The 775 West Jackson Boulevard loan is secured by a mixed-use property comprising retail and office space in Chicago’s Greektown neighborhood. The loan transferred to the special servicer in May 2020 for monetary default related to performance decline stemming from the effects of the Coronavirus Disease (COVID-19) pandemic, with the borrower’s last debt payment made in January 2021. In December 2020, the borrower declared bankruptcy and was initially working toward a loan modification; however, the court dismissed the bankruptcy claim in August 2023 and the special servicer resumed foreclosure proceedings. The property was most recently valued at $2.0 million based on the January 2021 appraisal, which represents a 44.3% decline from the issuance value of $3.5 million. Since last review, total loan exposure has grown by nearly $0.5 million to $2.7 million as of the September 2023 reporting, indicating a loan to value ratio above 130% based on total loan exposure. In its analysis for this review, DBRS Morningstar liquidated this loan from the trust with an implied loss of nearly $1.2 million, or a loss severity in excess of 60.0%.

The St. Charles Executive Center loan is secured by two suburban office properties (one low-rise office and one medical office) in St. Charles, Illinois, approximately 40 miles west of downtown Chicago. The loan was added to the watchlist in November 2021 for low occupancy, resulting in a low DSCR. As of June 2023, the property was 63.7% occupied with the YE2022 DSCR reported at 0.57x, which remains relatively unchanged since last year and well below the DBRS Morningstar DSCR figure of 1.22x derived at issuance. According to Reis, office properties in the Northwest Suburbs submarket reported an average vacancy rate of 29.3% as of Q2 2023, with a future forecast of around 30% for the next five years. Given the poor operating performance, high vacancy rate, and soft submarket conditions, the value of the property has likely declined significantly from issuance. As such, DBRS Morningstar analyzed the loan with a stressed loan-to-value ratio, resulting in an expected loss that was nearly four times the pool WA figure.

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 (July 4, 2023) https://www.dbrsmorningstar.com/research/416784.

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 the 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.

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 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].