Morningstar DBRS Downgrades 10 Credit Ratings on Morgan Stanley Capital I Trust 2018-L1, Confirms Credit Ratings on Remaining Classes

DBRS, Inc. (Morningstar DBRS) downgraded its credit ratings on 10 classes of Commercial Mortgage Pass-Through Certificates, Series 2018-L1 issued by Morgan Stanley Capital I Trust 2018-L1 as follows:

-- Class A-S to AA (sf) from AAA (sf)
-- Class B to A (sf) from AA (sf)
-- Class C to BBB (high) (sf) from A (sf)
-- Class D to BBB (low) (sf) from BBB (high) (sf)
-- Class E to BB (sf) from BBB (low) (sf)
-- Class F-RR to B (sf) from BB (high) (sf)
-- Class G-RR to B (low) (sf) from BB (sf)
-- Class H-RR to B (low) (sf) from B (sf)
-- Class X-B to A (high) (sf) from AA (high) (sf)
-- Class X-D to BB (high) (sf) from BBB (sf)

In addition, Morningstar DBRS confirmed the following credit ratings:

-- 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 X-A at AAA (sf)

Morningstar DBRS changed the trends on Classes B, X-B, and C to Negative from Stable. Morningstar DBRS maintained the Negative trends on Classes D, X-D, E, F-RR, G-RR, and H-RR. All other trends remain Stable.

The credit rating downgrades and Negative trends reflect Morningstar DBRS' increased loss expectations for the largest loan in special servicing, Regions Tower (Prospectus ID#11, 3.5% of the pool) and concerns over the pool's significant concentration in the office sector. Loans representing 36.8% of the pool are secured by office properties or mixed-use properties with office components, with exposure to more challenged secondary markets including Bloomington and Indianapolis, Indiana, and Rochester, New York. With this review, Morningstar DBRS analyzed Regions Tower with a liquidation scenario, resulting in implied losses approaching $10.0 million, which would be contained to the unrated Class J-RR. Morningstar DBRS also increased the probability of default (POD) penalties and/or stressed loan-to-value ratios (LTV) for other loans exhibiting increased risks since issuance, as applicable. Given the credit erosion towards the bottom of the capital stack, Morningstar DBRS downgraded the eight most-junior certificates and changed the trends to Negative on classes exhibiting downward pressure implied by Morningstar DBRS' Insight Model results.

The credit rating confirmations reflect the otherwise stable performance for the remainder of the transaction, which remains in line with Morningstar DBRS' expectations as exhibited by the pool's weighted-average (WA) debt service coverage ratio (DSCR) of 1.84 times (x) and a WA debt yield of 11.2% based on the most recent year-end financials. As of the August 2024 reporting, 46 of the original 47 loans remain in the pool, with an aggregate principal balance of $867.1 million, representing a collateral reduction of 3.7% since issuance. Two loans, representing 2.7% of the pool, are secured by collateral that has been defeased. Three loans, representing 7.2% of the pool, are in special servicing and nine loans, representing 19.9% of the pool, are on the servicer's watchlist; however, over half of these loans are being monitored for non-credit-related reasons, namely deferred maintenance.

The largest loan in special servicing, Regions Tower (Prospectus ID#11, 3.5% of the pool balance), is secured by a 687,237-square-foot (sf) Class A office property in Indianapolis, originally built in 1969. The pari passu loan transferred to the special servicer in August 2023 for imminent monetary default and is also in maturity default because it was not repaid ahead of its scheduled October 2023 maturity. A receiver was appointed in March 2024 and the special servicer is pursuing foreclosure. According to the June 28, 2024, rent roll, the property was 71.9% occupied, down from 85% at issuance. Net cash flow (NCF) also declined, although it continues to cover debt service, likely contributing to the borrower's inability to refinance the loan. Morningstar DBRS expects that the weakened submarket fundamentals have made retaining tenants and backfilling vacant space challenging. According to Reis, Indianapolis' Central submarket is experiencing high vacancy for office space, averaging 23.1% as of Q2 2024. Given these metrics, the property's declining performance, maturity default, and foreclosure proceedings, Morningstar DBRS' analysis for this loan included a liquidation scenario based on a conservative haircut to the issuance appraisal that resulted in an implied loss severity exceeding 30%.

Alex Park South (Prospectus ID#13, 3.1% of the pool), is secured by nine mixed-use buildings, totaling 353,000 sf, in Rochester. The loan has been monitored on the watchlist since August 2022 as a result of low occupancy and DSCR. As of the March 31, 2024, rent roll, the property was 31.6% occupied, considerably lower than the 94.0% occupancy figure at issuance. While market conditions remain soft, with the Inner Loop East submarket reporting a vacancy rate of 19.9% according to Reis Q2 2024 data, tenant rollover in the next 12 months is limited and servicer commentary indicates that the borrower has signed a 15-year lease with Popli Design Group (9.1% of net rentable area) while continuing to actively market the property. As of Q1 2024, the loan reported a trailing 12-month DSCR 0.79x, which may see some improvement in the near term, but is well below the issuance figure of 1.32x. Given the performance declines and 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 expected loss that was more than triple the pool average.

At issuance, Morningstar DBRS assigned investment-grade shadow ratings to three loans: Aventura Mall - Trust (Prospectus ID#1, 6.9% of the pool), Millenium Partners Portfolio - Trust (Prospectus ID#3, 6.4% of the pool), and The Gateway (Prospectus ID#6, 4.6% 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 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).

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.

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.

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, Inc.
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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)
-- Legal Criteria for U.S. Structured Finance (April 15, 2024; https://dbrs.morningstar.com/research/431205)

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.