DBRS Morningstar Downgrades Credit Raings on Two Classes of Morgan Stanley Capital I Trust 2019-L2, Changes Trends on Eight Classes to Negative From Stable

DBRS Limited (DBRS Morningstar) downgraded the credit ratings on two classes of Commercial Mortgage Pass-Through Certificates, Series 2019-L2 issued by Morgan Stanley Capital I Trust 2019-L2 as follows:

-- Class F-RR to B (low) (sf) from BB (sf)
-- Class G-RR to CCC (sf) from B (high) (sf)

In addition, DBRS Morningstar confirmed the following credit ratings:

-- 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-S at AAA (sf)
-- Class X-A at AAA (sf)
-- Class X-B at AA (high) (sf)
-- Class B at AA (sf)
-- Class C at A (sf)
-- Class D at BBB (high) (sf)
-- Class X-D at BBB (sf)
-- Class E at BBB (low) (sf)

The trends on Classes A-S, B, C, D, E, F-RR, X-B, and X-D were changed to Negative from Stable. All other classes have Stable trends, except for Class G-RR, which has a credit rating that generally does not carry trends in commercial mortgage-backed securities (CMBS) credit ratings.

The credit rating downgrades and Negative trends reflect the increased risk surrounding the loans in special servicing. As of the October 2023 remittance, five loans, representing 10.8% of the pool balance, are in special servicing, two of which have foreclosure as the workout strategy and one loan is real estate owned. These loans were liquidated from the pool in the analysis, resulting in a combined loss in excess of $20.0 million, which is expected to be contained to the nonrated Class H-RR. The remaining two specially serviced loans continue to exhibit increased credit risk from issuance and were analyzed with stressed scenarios to increase the expected loss. In addition, the transaction is concentrated by property type with loans backed by office properties, representing nearly 40.0% of the pool. The office sector has been challenged considering the rise in vacancy rates in many submarkets and decrease in investor appetite for that property type. Several performing office loans in the trust exhibited increased risks that resulted in a stressed analysis and increased expected losses that were generally above the pool average expected loss. The loss projections from the liquidation scenario and stressed analysis applied for several office and specially serviced loans support the credit rating downgrades and Negative trends. Additional loan details are highlighted below.

The credit rating confirmations is reflective of the overall stable performance of the pool, which reported a weighted-average (WA) debt service coverage ratio (DSCR) of more than 2.0 times (x) based on the most recent year-end financials. As of the October 2023 remittance, 49 of the original 50 loans remain in the pool, with an aggregate trust balance of $915.3 million, representing a collateral reduction of 2.1% since issuance. Four loans, representing 9.1% of the pool balance, are fully defeased, including the largest loan in pool, Ohana Waikiki Malia Hotel & Shops (Prospectus ID#1, 6.9% of the pool balance). Nine loans, representing 16.4% of the pool balance, are on servicer’s watchlist and five of which (10.8% of the current pool balance) are being flagged for noncredit related reasons and the others are monitored for servicing trigger event and low DSCRs.

The specially serviced loans with the largest loss forecast, State of Kentucky Portfolio (Prospectus ID#16, 2.4% of the pool balance), is secured by five government-occupied office buildings, located throughout Frankfort, Kentucky. The buildings include Millcreek Office Park, First City Complex, Hudson Hollow, Court of Appearls, and Capital City. The loan transferred to special servicing in August 2022 for imminent monetary default and was last paid through July 2023. The largest tenant, Cabinet for Health & Family Service, occupies the entire building at First City Complex and majority of the space at Millcreek Office Park. The tenant had terminated its lease at Millcreek Office Park in March 2023 and as a result, the tenant’s portfolio net rentable area (NRA) was reduced to 26.3% from 52.3%. In addition, the tenant’s lease at First City Complex had expired in June 2023. Details surrounding the termination fee and a leasing update was requested from the servicer. According to the March 2023 rent roll, the occupancy rate was reported at 81.2%; however, when incorporating the for Cabinet for Health & Family Service’s reduced footprint, occupancy is estimated to have dropped to about 55.0%. Currently LoopNet is marketing 172,380 square feet (sf) of space (49.1% of the NRA) as available for lease at the subject. According to Reis, office properties in the Southeast submarket reported a Q2 2023 rate of 28.3%, compared with the Q2 2022 figure of 28.3% and the forecast rate of 23.4% by 2028.

The loan has been cash managed since June 2022 and approximately $0.5 million is held in the cash management account. While financial reporting has been limited for this loan since issuance, the servicer provided borrower financials for the trailing 12 months ended March 31, 2023, showing a net operating income (NOI) of $2.6 million, relatively in line with the DBRS Morningstar NOI of $2.5 million but is expected to drop considering the decline in occupancy. According to the servicer, the borrower intends to transition ownership to the trust. A receiver was appointed in April 2023 and the servicer continues to work through foreclosure proceedings. Based on the April 2023 appraisal, the subject was valued at $15.8 million, a significant decline from the issuance value of $34.4 million. With this review, DBRS Morningstar analyzed the loan with a liquidation scenario, resulting in a loss severity in excess of 50.0%.

A loan of concern is CompuCom World Headquarters (CompuCom; Prospectus ID#11, 2.7% of the pool balance), which is secured by a three-story office building located in Fort Mill, South Carolina. At issuance, the entire building was solely occupied by CompuCom, as the subject serves as the tenant’s global headquarters on a lease through October 2032,with four five-year extension options and no early termination options. However, the entire space was advertised as available on LoopNet, suggesting CompuCom has gone dark. The loan was structured with a cash trap in the event CompuCom goes dark; however, the loan documents at issuance also allowed for the cash flow sweep requirement to be waived if the DSCR exceeds 1.25x for two consecutive calendar quarters. Since the YE2022 DSCR was reported at 1.41x and has consistently reported a coverage above the threshold, it is unlikely that excess cash is currently being reserved. DBRS Morningstar has requested additional information regarding CompuCom’s departure and the cash management status. According to the Q2 2023 Reis report, office properties in the York County of Charlotte reported an average vacancy rate of 4.4%, compared with the Q2 2022 figures of 4.6%. The issuance appraisal noted a dark value of $25.4 million, which results in a loan-to-value ratio (LTV) approaching 100%. Considering the subject is likely dark, coupled by the generally challenged office sector and lack of meaningful cash to be yielded from the cash trap provision, DBRS Morningstar analyzed this loan with a stressed LTV and applied a probability of default penalty, resulting in an expected loss nearly 1.5x the pool average.

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, and X-D 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 B, D, and E materially deviate 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 rating 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 analysis for this review included stressed scenarios for several loans backed by office properties given the general challenges facted in that sector. The results of the analysis suggested downward pressure through the middle of the bond stack following the credit ratings downgrades, thereby supporting the Negative trends. However, DBRS Morningstar recognizes the overall stable performance of the pool based on the healthy WA DSCR of more than 2.0x.

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. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The DBRS Morningstar Long-Term Obligation Rating Scale definition indicates that credit ratings of CCC or lower are assigned when the bond is highly likely to default or default is imminent, thereby prevailing over a sensitivity analysis.

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
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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/North American CMBS Insight Model Version 1.1.0.0 (March 16, 2023) 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 analyzes 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].