Morningstar DBRS Downgrades Three Classes of BBCMS Trust 2018-CBM

DBRS Limited (Morningstar DBRS) downgraded the credit ratings on the Commercial Mortgage Pass-Through Certificates, Series 2018-CBM issued by BBCMS Trust 2018-CBM as follows:

-- Class D to BB (high) (sf) from BBB (low) (sf)
-- Class E to CCC (sf) from BB (low) (sf)
-- Class F to C (sf) from B (high) (sf)

In addition, Morningstar DBRS confirmed the credit ratings on the following classes:

-- Class A at AAA (sf)
-- Class B at AA (high) (sf)
-- Class C at A (high) (sf)

Morningstar DBRS also changed the trend on Class D to Stable from Negative. The trends on all remaining classes are Stable, with the exception of Classes E and F, as the credit ratings assigned typically do not carry trends in commercial mortgage-backed securities (CMBS) ratings.

The credit rating downgrades are reflective of the increased loss expectations of the loan, which is currently in special servicing, and the special servicer has indicated a foreclosure may be pursued. The $415.0 million floating-rate underlying loan is secured by a portfolio of 30 Courtyard by Marriott select-service hotels, totaling 4,379 rooms across 15 states. There is also $135.0 million of mezzanine debt held outside of the trust.

With the last credit rating action, Morningstar DBRS changed the trends on Classes D through F from Stable to Negative because net cash flows (NCFs) have consistently been below pre-pandemic levels, of particular concern given the inability to refinance or meet the requirements for an extension at the July 2023 maturity date. At the time, the borrower was in discussions with the servicer regarding a modification on the loan terms to effectuate its fourth one-year extension option; however, the debt yield hurdle of 9.0% was ultimately not able to be met to exercise the option and the loan was then transferred to special servicing. The loan was last paid through February 2024 and the servicer is currently dual tracking two resolution strategies in a foreclosure and a loan modification. Based on the October 2023 appraisal, the portfolio was valued at $506.1 million, which results in a loan-to-value ratio (LTV) of 96.5%. In comparison, the July 2020 appraised value and issuance appraised value were $533.7 million and $675.0 million, respectively. At last review, Morningstar DBRS considered a stressed as-is value of $331.5 million, based on the YE2022 NCF of $30.1 million with a capitalization rate of 9.06%. The results of that scenario suggested negative credit ratings pressure throughout the stack; however, given cash flows were trending up and the sponsor appeared committed to achieving a maturity extension and continuing to work to stabilize the portfolio, the credit ratings were confirmed, but with Negative trends on the bottom three classes, to signal concerns with the continued lag in performance overall.

In line with trends observed at the last credit rating action, the portfolio NCF has been trending upwards year over year (YOY) with the trailing 12-month (T-12) period ended September 30, 2023, figure at $33.8 million, up from the YE2022 figure of $30.1 million but still below the Morningstar DBRS NCF of $47.6 million derived in 2020 when credit ratings were assigned. Based on the T-12 ending February 29, 2024, STR report, the portfolio reported a weighted-average (WA) occupancy, average daily rate (ADR), and revenue per available room (RevPAR) of 62.8%, $142.98, and $92.32, respectively, which is in line with the prior year's RevPAR and only slightly below the issuance RevPAR of $93.73.

However, given the significant delta that persists between the pre-pandemic cash flows and the 2023 figures, Morningstar DBRS believes it is unlikely that performance will ultimately improve back to issuance expectations, a factor that could limit the sponsor's ultimate commitment and/or willingness to come out of pocket as part of a modification strategy. As such, a liquidation scenario was considered in the analysis for this review, based on a haircut to the October 2023 appraised value and estimated servicer advances and liquidation expenses, which suggested a loss of just under $28.0 million would be incurred. That loss would be contained to Classes E and F, supporting the credit rating downgrades for those classes, as well as for Class D, which would lose significant credit support as compared with the issuance structure. In addition, the estimated loss scenario suggested the top classes remain well insulated against liquidated losses, with $186.3 million now in below-investment-grade principal, supporting the credit rating confirmations for Classes A, B, and C with this review.

Morningstar DBRS' credit ratings on the applicable classes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. Where applicable, a description of these financial obligations can be found in the transactions' respective press releases at issuance.

Morningstar DBRS' long-term credit ratings provide opinions on risk of default. Morningstar DBRS considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued. The Morningstar DBRS short-term debt rating scale provides an opinion on the risk that an issuer will not meet its short-term financial obligations in a timely manner.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS   
There were no Environmental/Social/Governance factor(s) 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 info-DBRS@morningstar.com.

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.

The credit ratings of this transaction are highly subject to the asset's liquidation value. As a result, a sensitivity whereby Morningstar DBRS stresses the Morningstar DBRS Cap Rate and Morningstar DBRS NCF to evaluate the impact of a Morningstar DBRS value decline based on the LTV sizing benchmarks was not completed. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The Morningstar DBRS 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.

DBRS Limited
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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 (July 11, 2024; https://dbrs.morningstar.com/research/436004)
-- Interest Rate Stresses for U.S. Structured Finance Transactions (February 26, 2024; https://dbrs.morningstar.com/research/428623)
-- Morningstar DBRS North American Commercial Real Estate Property Analysis Criteria (June 28, 2024; https://dbrs.morningstar.com/research/435293)
-- 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/legal-criteria-for-us-structured-finance)

A description of how Morningstar DBRS analyzes 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 info-DBRS@morningstar.com.