Morningstar DBRS Confirms All Credit Ratings of Key Commercial Mortgage Trust 2019-S2

DBRS, Inc. (Morningstar DBRS) confirmed its credit ratings on all classes of the Commercial Mortgage Pass-Through Certificates, Series 2019-S2 issued by Key Commercial Mortgage Trust 2019-S2 (the Issuer) as follows:

-- Class A-2 at AAA (sf)
-- Class A-3 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 (low) (sf)
-- Class E at BB (sf)
-- Class F at B (sf)
-- Class X at A (sf)

All trends are Stable

The credit rating confirmations reflect the overall stable performance of the pool in the five years since issuance, with only a small concentration of loans on the servicer's watchlist for credit-related reasons and no specially serviced or delinquent loans as of the August 2024 reporting. Cash flows overall are stable, with the 15 largest loans in the pool generally reporting increased cash flows compared with the issuance figures.

As of the August 2024 reporting, 25 of the original 29 loans remain in the pool, with an aggregate principal balance of $120.8 million, representing a 22.9% collateral reduction since issuance. Two loans, representing 11.5% of the pool, are secured by collateral that has been defeased. The pool is relatively diverse by property type, with the largest concentrations secured by self-storage, retail, and office properties at 18.8%, 16.0%, and 16.0%, respectively. There are six loans, representing 20.5% of the pool, being monitored on the servicer's watchlist; however, only four loans, representing 10.7% of the pool, are being monitored for credit-related reasons. In its analysis for this review, Morningstar DBRS adjusted two of the three loans backed by office collateral exhibiting declines in performance since issuance with stressed loan-to-value (LTV) ratios, resulting in a weighted-average (WA) expected loss (EL) that was approximately triple the pool's WA figure.

The largest office loan in the pool, 180 North Wacker Drive (Prospectus ID#2, 9.0% of the pool), is secured by the leasehold interest in a 72,088-square-foot (sf) office building in the West Loop submarket of Chicago. The loan is not currently on the servicer's watchlist, but has been monitored in the past given fluctuations in tenancy and cash flows. As of YE2023, the loan reported a debt service coverage ratio (DSCR) of 1.50 times (x), an improvement from the YE2022 figure of 0.99x and exceeding the Morningstar DBRS figure of 1.25x derived at issuance. Occupancy was reported to be 81.0% as of YE2023, well above the YE2021 low of 66.0%, and approaching its issuance level of 86.0%. Despite the improved performance, rollover risk remains a concern as five tenants, representing 28.0% of the net rentable area (NRA), have either had lease expirations in the last six months, or have scheduled lease expirations prior to YE2025. According to Reis, the West Loop submarket reported a Q2 2024 vacancy rate of 12.0% and an effective rent per sf (psf) of $32.8, which is in line with the property's average rental rate of $31.3. Given the near-term tenant rollover risk and headwinds facing the office sector, Morningstar DBRS analyzed the loan using a stressed LTV, resulting in an EL almost triple the pool average.

The largest watchlisted loan of concern is 415 McFarlan Road (Prospectus ID#17, 3.8% of the pool), which is secured by a 43,951-sf suburban office building in Kennett Square, Pennsylvania. The loan was added to the watchlist in August 2023 because of a low DSCR, most recently reporting a DSCR of 0.98x as of YE2023, below the YE2022 figure of 1.48x as a result of increased vacancy. As of Q1 2024, the property was 76.3% occupied, down from 84.6% at YE2022 and 92.5% at issuance. During the next 12 months, three tenants, with leases representing 11.8% of NRA, have scheduled lease expirations. According to the most recent servicer commentary, American Tanker (4.5% of NRA) vacated at its lease expiry in April 2024, but Assist Wireless (10.7% of NRA) is currently in discussions to renew its lease, which is scheduled to expire in December 2024. According to Reis, the South Chester submarket reported a Q2 2024 vacancy rate of 20.5%, an effective rental rate of $24.1, in line with the subject's average rental rate of $23.8. Given the performance declines since issuance and the soft submarket conditions, Morningstar DBRS notes that the collateral's as-is value has likely declined, elevating the credit risk to the trust. As such, Morningstar DBRS applied a stressed LTV scenario in its analysis, resulting in an EL greater than triple the pool average.

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

Class X is an interest-only (IO) certificate that references 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 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, Inc.
22 West Washington Street
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://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)

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, 2024; https://dbrs.morningstar.com/research/438283/north-american-commercial-mortgage-servicer-rankings)

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