Morningstar DBRS Confirms Credit Ratings on Morgan Stanley Capital I Trust 2018-MP

DBRS Limited (Morningstar DBRS) confirmed its credit ratings on all classes of Commercial Mortgage Pass-Through Certificates, Series 2018-MP issued by Morgan Stanley Capital I Trust 2018-MP as follows:

-- Class A at AAA (sf)
-- Class B at AA (high) (sf)
-- Class C at A (high) (sf)
-- Class D at BBB (high) (sf)
-- Class E at BB (sf)

All trends are Stable.

The credit rating confirmations reflect the consistent performance of the underlying collateral, which remains in line with Morningstar DBRS' expectations. The underlying loan continues to benefit from the collateral portfolio's geographic diversity and consistent occupancy and strong sponsorship in Millennium Partners, which owns and operates a commercial real estate portfolio valued in excess of $5 billion, according to the company's website.

The loan is securitized by the fee-simple and leasehold interests in the Millennium Partners Portfolio, which includes eight properties with both office and retail components across four states and Washington, D.C. The properties are in the central hubs of New York; Boston; San Francisco; Washington, D.C.; and Miami. The collateral consists of approximately 1.55 million square feet of commercial space at the Millennium Tower Boston, the Lincoln Square Retail portfolio, the Four Seasons San Francisco, the Four Seasons Miami, the Ritz-Carlton Georgetown, and the Ritz-Carlton Washington, D.C. The subject properties are in dense, urban locations, with little room for additional developments.

The subject whole loan is interest only for the full 10-year loan term with a $710.0 million first mortgage and $280.2 million of mezzanine debt held outside the trust. Of the first mortgage amount, $225.9 million consists of non-pooled pari passu notes that were securitized in the following Morningstar DBRS-rated commercial mortgage-backed securities (CMBS) transactions: BANK 2019-BNK16, MSC 2018-L1, and BANK 2018-BNK14. The loan is also securitized in the non-Morningstar DBRS-rated transaction BANK 2018-BNK15. The borrower is permitted to release properties subject to certain conditions, including payment of a release amount that is 115% of the allocated loan amount for the released property.

According to the financial statement for the trailing nine-month period ended September 30, 2023, the collateral portfolio had an annualized net cash flow (NCF) of $55.2 million and a debt service coverage ratio (DSCR) of 1.79 times (x), a slight increase from the annualized trailing nine-month NCF and DSCR of $50.4 million and 1.63x, respectively, in September 2022, trending back in line with the Morningstar DBRS NCF of $55.9 million. The cash flow increase in 2023 was largely driven by the increased occupancy rate from the prior year. As of September 2023, the collateral was 97.8% occupied compared with the September 2022 occupancy of 93.4% and remains above the issuance figure of 95.6%. However, rollover risk is a concern for 2024, as tenants representing approximately 15% of the net rentable area (NRA) are scheduled to roll. The largest tenant set to expire in November 2024 is Havas North America, Inc., which currently occupies approximately 33.6% of NRA at the Millennium Tower property, approximately 8.0% of the portfolio NRA. Per the most recent servicer commentary, Havas North America, Inc. is expected to vacate at the lease expiry date.

Given the current environment with increased pressure on office properties and mixed-use properties with office components, Morningstar DBRS increased the capitalization rate (cap rate) to 6.97% in the analysis for this review, up from the issuance cap rate of 6.79%, resulting in an updated Morningstar DBRS value of $801.6 million, down from the previous Morningstar DBRS value of $822.7 million. The whole-loan loan-to-value (LTV), inclusive of the mezzanine debt of $280.2 million, increased to 124.1%, and the LTV based on the total mortgage debt increased to 89.0%. Morningstar DBRS maintained its qualitative adjustments, totaling 1.50% for cash flow volatility because of stable occupancy, 2.50% for property quality because of the concentration of high-end hotels and well-positioned commercial properties benefiting from high traffic, and 2.0% for market fundamentals because of the concentrations in strong submarkets.

Per the most recent financial reporting, the lowest reported occupancy as of September 2023 was 90.1% at the Four Seasons San Francisco. All other properties reported occupancies above 93.8%, with multiple properties being 100% occupied. Given the sponsor's ability to maintain high occupancy rates through the loan term thus far, as well as the stable cash flows for 2023, which returned closer to the Morningstar DBRS NCF derived at issuance, Morningstar DBRS expects the transaction to continue performing in line with issuance expectations.

The Morningstar DBRS credit rating assigned to Class B is higher than the result implied by the LTV sizing benchmarks by three or more notches. Despite the decrease in Morningstar DBRS value as a result of the increased cap rate, the variance is warranted given the increase in NCF and high occupancy across the well-positioned portfolio.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS 
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.
 
A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024) at https://dbrs.morningstar.com/research/427030.

All credit ratings are subject to surveillance, which could result in credit ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by Morningstar DBRS.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is North American CMBS Surveillance Methodology (March 1, 2024), https://dbrs.morningstar.com/research/428798.

Other methodologies referenced in this transaction are listed at the end of this press release.

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.

Morningstar DBRS 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://dbrs.morningstar.com/about/methodologies.

-- North American Single-Asset/Single-Borrower Ratings Methodology (March 1, 2024), https://dbrs.morningstar.com/research/428799
-- DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 22, 2023), https://dbrs.morningstar.com/research/420982
-- North American Commercial Mortgage Servicer Rankings (August 23, 2023), https://dbrs.morningstar.com/research/419592
-- Legal Criteria for U.S. Structured Finance (April 15, 2024), https://dbrs.morningstar.com/research/431205

A description of how Morningstar DBRS analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/417279.

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