DBRS Morningstar Downgrades Two Classes and Changes Trends to Negative from Stable on Three Classes of CSAIL 2018-CX11 Commercial Mortgage Trust

DBRS, Inc. (DBRS Morningstar) downgraded the credit ratings on two classes of Commercial Mortgage Pass-Through Certificates, Series 2018-CX11 issued by CSAIL 2018-CX11 Commercial Mortgage Trust as follows:

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

In addition, DBRS Morningstar confirmed the following credit ratings:

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

The trends on Classes E-RR, F-RR, and G-RR were changed to Negative from Stable. The trends on all remaining classes are Stable.

The credit rating downgrades and Negative trends reflect the increased risks to the pool since DBRS Morningstar’s last review in November 2022, with a total of five loans transferred to special servicing since that time, three of which were liquidated in the analysis for this review. In addition, several performing office loans are exhibiting increased risks that resulted in a stressed analysis and increased expected losses that were generally above the pool average, as further described below. Although there are select loans showing increased risks from issuance, the transaction does benefit from several large loans shadow-rated investment grade by DBRS Morningstar and the overall stable performance since issuance of most of the loans in the pool.

As of the October 2023 remittance, 49 of the original 56 loans remain in the pool. The initial pool balance of $952.87 million has been reduced by 13.4% to $824.83 million, which includes $8.23 million of losses from loan liquidations. In addition, 5.2% of the pool is defeased. The pool is concentrated by property type, with loans backed fully or partly by office properties or mixed-use properties with an office component representing just under 40% of the transaction balance. Loans representing 15.5% of the pool balance are on the servicer's watchlist, and five loans, representing 7.1% of the pool, are in special servicing. In the analysis for this review, DBRS Morningstar assumed a liquidation scenario for three of the five loans in special servicing, resulting in a loss forecast of $14.1 million that would further erode the unrated first-loss Class N-RRR certificate balance and reduce the cushion against liquidated losses for the classes downgraded with this review.

The credit rating confirmations reflect the overall stable performance of the non-defeased loans in the pool, which reported a weighted-average debt service coverage ratio (DSCR) of 2.53 times (x) as of the most recent year-end reporting for each. Although the pool’s office concentration is significant, it is worth noting that two of those loans—GNL Portfolio (Prospectus ID #1; 6.7% of the pool) and The SoCal Portfolio (Prospectus ID #2; 5.6% of the pool)—are among the top five loans in the pool and are secured by portfolios that also contain other property types, diversifying the risk. The second-largest office loan, One State Street (Prospectus ID #3; 6.0% of the pool), is part of a pari passu loan secured by an office property in the Financial District of New York City and has shown some performance declines from issuance, but the low trust exposure and significant subordinate debt component are noteworthy mitigating factors. Two large hotel loans in Hilton Clearwater Beach Resort & Spa (Prospectus ID #2; 6.6% of the pool) and Melbourne Hotel Portfolio (Prospectus ID #8; 3.8% of the pool) have both reported consistently higher cash flows compared with the respective issuance figures in recent years, supporting probability of default adjustments in the analysis for this review to slightly lower the expected losses for each.

All three loans liquidated in the analysis are secured by office properties, the largest of which is Penn Center West (Prospectus ID #14; 2.5% of the pool). That loan is secured by a three-building office complex located outside of Pittsburg and was transferred to special servicing in November 2022 for imminent default. The loan had a five-year term that was scheduled to mature in February 2023. The borrower’s difficulty in securing a refinance was generally a product of performance declines from issuance over the last few years, with the YE2022 DSCR of 0.88x) and an occupancy rate reported at 72.0%, down from 97.0% at issuance. An updated appraisal as of March 2023 shows an as-is value of $20.1 million, down from the issuance valuation of $29.5 million. A receiver was installed after discussions with the borrower regarding a loan modification fell apart, and the special servicer appears to be pursuing foreclosure as part of the resolution strategy. Given the location within a secondary market, as well as the low in-place occupancy rate and the soft submarket (Reis projects the subject’s Southwest submarket will reach an overall vacancy rate of approximately 20% by 2028, up from the Q2 2023 figure of 13.8%), a stressed haircut was applied to the March 2023 value in the liquidation scenario, resulting in a loss severity of 31.0%.

The second-largest specially serviced loan is 600 Vine (Prospectus ID #19; 1.9% of the pool), secured by an office tower in the Cincinnati central business district. The trust loan is a pari passu portion of the $52.8 million whole loan contributed to the subject and the CSAIL 2017-CX10 Commercial Mortgage Trust transaction (DBRS Morningstar rates loan-specific rake bonds in that transaction only). There is also mezzanine debt in place with a balance of $5.9 million. The subject loan transferred to special servicing in June 2023 for delinquency and the special servicer has been negotiating with the mezzanine lender since the transfer. The occupancy rate at issuance was 80%, but that has since declined to 71% as of Q1 2023, with a DSCR of 1.06x. DBRS Morningstar located a JLL listing for the property showing an availability rate of approximately 42.0% as of October 2023. The servicer has confirmed the largest tenant, First American Bank (10.6% of the net rentable area (NRA)) is vacating at lease expiry in March 2024. An updated appraisal has not been obtained yet, but DBRS Morningstar expects the as-is value has declined significantly since issuance given the location and high availability rate. In the liquidation scenario for this review, a 50% haircut to the issuance value of $71.0 million was applied, with a loss severity of 40.2%.

The Northrup Grumman loan (Prospectus ID #11; 2.7% of the pool) was shadow-rated investment grade by DBRS Morningstar at issuance given the low leverage and overall desirability of the collateral properties: two data centers leased to single tenants at issuance and located in Chester and Lebanon, Virginia. Chester is relatively close to Richmond and Lebanon is in the far western portion of the state; both locations are considered rural. Both single tenant leases expired in the last 18 months, both tenants vacated, and both the properties have both been vacant since June and October 2022. The Lebanon property is a 102,842-square foot (sf), one-story structure with a 19,525-sf Tier III data center and 71,175 sf of traditional office space. The Chester facility consists of a 127,795-sf office and a 49,500 sf Tier III data center. The borrower has been marketing both properties for lease, with a listing located online by DBRS Morningstar suggesting the Chester property is also being marketed for sale. The loan remains current, with $5.2 million in reserve as a result of a cash trap that was initiated when the leases weren’t renewed.

Although DBRS Morningstar maintains the desirability of the data center property type, the extended vacancy and lack of traction on the borrower’s efforts to re-lease the space are concerns, and for those reasons, the shadow rating was removed with this review. The loan-to-value (LTV) ratio, based on the issuance appraisals totaling $77.0 million and current loan balance of $22.4 million, is quite low at 29.0% with additional collateral in the collected reserves bringing that figure even lower. However, given the increased risks noted above, the analysis for this review considered a more conservative approach with an LTV ratio of 75.0% on the issuance balance and an exit LTV ratio of 61%, with the resulting expected loss slightly higher than the deal average.

DBRS Morningstar also assigned investment-grade shadow ratings at issuance to three additional loans—One State Street, Moffett Towers II Building 2 (Prospectus ID #9; 3.6% of the pool), and Lehigh Valley Mall (Prospectus ID #12; 3.0% of the pool)—all of which were maintained with this review. As noted, the performance of the One State Street collateral property has declined slightly since issuance, but the overall credit profile remains stable given the low LTV ratio on the senior debt of 21.8%, based on the appraised value of $560 million and the senior debt balance of $122.0 million. When accounting for the full debt stack, the LTV ratio remains healthy at 64.3%. In addition, at issuance, the DBRS Morningstar value of $270.7 million considered a cap rate of 7.5%, which would likely be closer to market cap rates today rather than the appraiser’s issuance cap rate of 5.0%. The Moffett Towers and Lehigh Valley Mall metrics remain in line with issuance expectations.

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. At closing, DBRS Morningstar noted that the transaction pricing resulted in no excess interest proceeds from the Class C Certificate being available to contribute to the Class X-B Certificates and as such, only excess interest proceeds from the Class B Certificate will be contributed.

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 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.
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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/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 (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].