Morningstar DBRS Downgrades Five Classes of DBGS 2018-C1 Mortgage Trust

DBRS Limited (Morningstar DBRS) downgraded the credit ratings on five classes of Commercial Mortgage Pass-Through Certificates, Series 2018-C1 issued by DBGS 2018-C1 Mortgage Trust as follows:

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

In addition, Morningstar DBRS confirmed its credit ratings on the remaining classes as follows:

-- 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-M at AAA (sf)
-- Class X-A at AAA (sf)
-- Class B at AA (sf)
-- Class X-B at A (high) (sf)
-- Class C at A (sf)
-- Class D at BBB (sf)

Morningstar DBRS changed the trends on Classes B, X-B, and C to Negative from Stable and maintained Negative trends on Classes D, X-D, E, X-F, and F. The trend for Class G-RR was removed as it now carries a credit rating that does not typically carry a trend in commercial mortgage-backed securities (CMBS). All other trends are Stable.

During previous credit rating actions, Morningstar DBRS had assigned Negative trends to Classes D through G-RR because of concerns related to the loans in special servicing, as well as the high concentration of loans secured by office properties, which, as of the most recent reporting, represents 39.5% of the pool balance. Since the most recent action in September 2023, performance of the underlying collateral securing several of those loans has deteriorated further, with the concentration of loans in special servicing rising to 11.6% as of the most recent reporting, and, as such, Morningstar DBRS is projecting an increase in the expected loss to the trust, supporting the credit rating downgrades and Negative trends with this review.

With this review, Morningstar DBRS used liquidation scenarios for three of the five loans in special servicing: Time Square Office Renton (Prospectus ID#4, 5.4% of the current pool balance), MSR Holdings Portfolio (Prospective ID#26, 1.6% of the pool), and GSK North American HQ (Prospectus ID#32, 1.0% of the pool). These liquidations resulted in implied losses of nearly $29.0 million, which would write down the principal balance of Class H-RR by more than 90.0% and significantly reduce the credit support to the lower-rated bonds in the transaction.

Outside of the specially serviced loans, there are several loans which are secured by office properties, continuing to exhibit increased credit risk with exposure to near-term lease roll-over and softening submarket fundamentals, most notably 90-100 John Street (Prospectus ID#7, 4.2% of the pool), Summit Office Park (Prospectus ID#15, 2.6% of the pool), and Chase Bank Tower (Prospectus ID#19, 2.0% of the pool). Morningstar DBRS analyzed those loans, in addition to select others exhibiting increased credit risk with elevated probability of default penalties and/or loan-to-value ratios, resulting in weighted-average (WA) expected loss that was 3.4 times (x) greater than the pool average.

The credit rating confirmations reflect the otherwise overall stable performance of the remaining loans in the pool, which reported a WA debt service coverage ratio (DSCR) of higher than 2.00x and WA debt yield higher than 10.0% based on the most recent year-end financials. The transaction also benefits from a concentration of loans that are shadow-rated investment-grade, representing 30.3% of the pool, and six years of amortization since issuance.

As of the August 2024 remittance, 35 of the original 37 loans remained in the trust, with an aggregate balance of $996.1 million, representing a collateral reduction of 6.4% since issuance. Two loans, representing 4.3% of the pool, are secured by collateral that has been fully defeased. There are six loans, representing 21.8% of the pool, on the servicer's watchlist primarily being monitored for low DSCRs, declines in occupancy, and deferred maintenance. Excluding collateral that has been fully defeased, the pool is most concentrated by loans that are secured by office and retail properties, representing 39.5% and 26.7% of the pool balance, respectively.

The largest contributor to the increase in expected loss to the trust is Time Square Office Renton loan, which is secured by a 323,737-square-foot (sf), Class B suburban office property in Renton, Washington. The loan transferred to special servicer in July 2024 for imminent monetary default. The loan was previously on the servicer's watchlist as a result of low occupancy and DSCR. As of Q1 2024, the loan reported a DSCR of 0.67x, compared with the YE2023 of 0.96x and the Issuer's underwritten figure of 1.22x. Per the March 2024 rent roll, the property was 77.8% occupied, consistent with the previous year's reporting, but significantly less than the issuance level of 90.6%, primarily stemming from the departure of Integra Telecom (formerly 14.1% of the net rentable area (NRA)) in June 2021. In addition to the declining cash flow, rollover risk is also significant, with leases representing 35.7% of the NRA that have already expired or will expire in the next 12 months, including the second-largest tenant, Microscan Systems (12.7% of the NRA), which had a lease expiration in May 2024. The sponsor is currently advertising 267,544 (82.6% of the NRA) as available for leasing at an average rental rate of $20.00 psf, which is higher than the current average in-place rental rate of $15.42 psf, according to the March 2024 rent roll. As of Q2 2024, Reis reported that office properties in the Renton/Kent/Southend submarket reported an average vacancy rate of 25.1%, an average asking rental rate of $29.13 per sf (psf), and an average effective rental rate of $22.98 psf.

No updated appraisal has been provided since issuance when the property was valued at $72.9 million; however, given the sponsor's inability to backfill vacant space, combined with listed availability, soft submarket fundamentals, and general challenges for office properties in today's environment, Morningstar DBRS expects that the collateral's as-is value has likely declined significantly, elevating the credit risk to the trust. Morningstar DBRS' liquidation scenario considered a conservative haircut to the property's appraised value at issuance resulting in a loss severity approaching 50.0%.

Another loan in special servicing is GSK North American HQ following the decision by the property's single tenant, GlaxoSmithKline (GSK), to vacate its space in Q1 2022. The loan transferred to special servicing for imminent maturity default in November 2022. During workout negotiations, the borrower had requested approval to terminate GSK's lease, scheduled to expire in 2028, and requested a maturity extension prior to the June 2023 maturity date; however, these proposals were rejected and the borrower agreed to a deed in lieu of foreclosure. The July 2024 servicer commentary indicates that the foreclosure sale has been completed and a receiver is in place. Per the most recent appraisal dated April 2024, the property is valued at $76.7 million, down from the August 2023 value of $89.3 million and the issuance appraised value of $132.7 million.

The subject loan is secured by a Class A office complex in Philadelphia's Navy Yard submarket. The property was built-to-suit for GSK at a cost of $80.0 million in 2013, when GSK executed a 15-year lease through September 2028 with no termination options. Although the space is dark, the former tenant will continue to make its monthly rental payments until September 2028. The loan is structured with a cash flow sweep that was activated as GSK went dark. Given the property's single-tenant nature, cash flow has historically been stable; although, Morningstar DBRS expects there will be no incoming revenue once the lease expires, unless the receiver is able to backfill the dark space. Based on a Q2 2024 Reis report, office properties in the South Philadelphia submarket reported a vacancy rate of 2.7%. The developers of Philadelphia's Navy Yard have announced a 20-year multibillion-dollar plan to revitalize and redevelop the Navy Yard site, which could potentially bring new commercial activity to the area and improve the asset's desirability in the long term.

Although there are mitigating factors to offset the subject's vacancy, including an in-place lease to 2028, and stable submarket fundamentals, Morningstar DBRS expects that the loan will take a loss at resolution given the declined value, lack of amortization, and lack of liquidity for vacant office assets in the current environment. With this review, Morningstar DBRS analyzed the loan with a liquidation scenario based on a haircut to the most recent appraised value, indicating an implied loss severity in excess of 30%.

At issuance, Morningstar DBRS assigned investment-grade shadow ratings to nine loans, of which seven remain for this review: Moffett Towers - Buildings E, F, G (Prospectus ID#1, 8.0% of the pool), Christiana Mall (Prospectus ID#5, 5.3% of the pool), Aventura Mall (Prospectus ID#6, 4.7% of the pool), The Gateway (Prospectus ID#10, 3.8% of the pool), 601 McCarthy (Prospectus ID#13, 3.1% of the pool), West Coast Albertsons (Prospectus ID#14, 2.9% of the pool), and Moffett Towers II - Building 1 (Prospectus ID#18, 2.5% of the pool). As part of this review, Morningstar DBRS confirmed that the performance of these loans remains consistent with the investment-grade loan characteristics.

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 Factors in Credit Ratings (August 13, 2024), https://dbrs.morningstar.com/research/437781.

Classes X-A, X-B, X-D, and X-F 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 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 ratings were initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for these credit rating actions.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with these credit rating actions.

These are solicited credit ratings.

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 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.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS' 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://dbrs.morningstar.com/about/methodologies.

-- North American CMBS Multi-Borrower Rating Methodology (March 1, 2024)/North American CMBS Insight Model v 1.2.0.0, https://dbrs.morningstar.com/research/428797
-- Rating North American CMBS Interest-Only Certificates, (June 28, 2024), https://dbrs.morningstar.com/research/435294
-- North American Commercial Mortgage Servicer Rankings (August 23, 2024), https://dbrs.morningstar.com/research/438283
-- Legal Criteria for U.S. Structured Finance (April 15, 2024), https://dbrs.morningstar.com/research/431205
-- Morningstar DBRS North American Commercial Real Estate Property Analysis Criteria (June 28, 2024), https://dbrs.morningstar.com/research/435293

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 https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.