Morningstar DBRS Downgrades Credit Ratings on Two Classes of Morgan Stanley Capital I Trust 2018-H3

DBRS Limited (Morningstar DBRS) downgraded its credit ratings on two classes of Commercial Mortgage Pass-Through Certificates, Series 2018-H3 issued by Morgan Stanley Capital I Trust 2018-H3 as follows:

-- Class G-RR to B (low) (sf) from B (high) (sf)
-- Class H-RR to CCC (sf) from B (low) (sf)

In addition, Morningstar DBRS confirmed the following credit ratings:

-- Class A-SB at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-5 at AAA (sf)
-- Class X-A at AAA (sf)
-- Class A-S at AAA (sf)
-- Class X-B at AA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class X-D at BBB (high) (sf)
-- Class D at BBB (sf)
-- Class E-RR at BBB (low) (sf)
-- Class F-RR at BB (low) (sf)

Morningstar DBRS also changed the trends on Classes D, E-RR, F-RR, G-RR, and X-D to Negative from Stable. The trend for Class H-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.

The credit rating downgrades are reflective of Morningstar DBRS' increased loss expectations for the Westbrook Corporate Center loan (Prospectus ID#7; 4.0% of the pool), which recently transferred to special servicing in September 2024. Given the property's low occupancy rate and suburban location, Morningstar DBRS believes the property's value has declined significantly. In the event that this loan is liquidated, losses could erode a significant portion of the $25.6 million unrated Class J-RR, supporting the downgrades to the two most junior bonds in the transaction. The Negative trends reflect Morningstar DBRS' concerns for further value declines to the loans in special servicing as well as concerns with the large concentration of loans secured by office properties, which represent 35.2% of the current pool balance. Though most of these loans continue to perform, they are primarily located in suburban markets that have experienced deteriorating office fundamentals and capitalization rate expansion, suggesting that the credit risk profile for these loans has increased since issuance.

The credit rating confirmations reflect the otherwise overall stable performance of this transaction as exhibited by the healthy weighted-average (WA) debt service coverage ratio (DSCR) of approximately 1.91 times (x) based on the most recent year-end reporting. Furthermore, there have been no losses to the trust since issuance and there is also a sizable balance of $76.8 million in below-investment-grade-rated bonds, providing credit support to the senior bonds and supporting the credit rating confirmations and Stable trends. As of the September 2024 remittance, 63 of the original 66 loans remain in the trust, with an aggregate balance of $891.6 million, representing a collateral reduction of 12.9% since issuance. Four loans representing 4.8% of the pool are defeased. There are 15 loans, representing 15.3% of the pool on the servicer's watchlist, being monitored primarily for servicing trigger events, occupancy concerns, and deferred maintenance. Two loans, representing 5.3% of the pool, including the aforementioned Westbrook Corporate Center, are in special servicing. With this review, Morningstar DBRS maintained its liquidation scenario on the Prince and Spring Street Portfolio loan (Prospectus ID#30; 1.2% of the pool balance), applying a haircut to its March 2024 appraised value and resulting in an implied loss severity approaching 20%.

The transaction's largest specially serviced loan, Westbrook Corporate Center, is secured by a 1.1 million square foot Class A office complex in Westchester, Illinois, located 15 miles west of the Chicago central business district. The pari passu loan is split between the subject and the Benchmark 2018-B4 and Benchmark 2018-B5 transactions (both rated by Morningstar DBRS). The loan was previously on the servicer's watchlist as a result of low occupancy and DSCR. As of Q2 2024, the loan reported a DSCR of 0.99x, and, per the July 2024 rent roll, the property was 67.8% occupied. In addition to the declining cash flow, there is near-term rollover with tenants representing 19.7% of the net rentable area that have leases that have already expired or will expire in the next 12 months. According to Reis, office properties in the West Chicago submarket reported an average vacancy rate of 25.9%, as of Q2 2024. Morningstar DBRS expects the property value has likely declined from the issuance value of $136.0 million given the declining performance metrics coupled with weakened submarket conditions and high rollover. As such, Morningstar DBRS' analysis includes a stressed loan-to-value ratio adjustment for the loan, resulting in an expected loss (EL) that is approximately 70% higher than the pool's EL.

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) at 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 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 credit rating assigned to Class B materially deviates from the credit ratings implied by the predictive model. Morningstar DBRS typically expects there to be a substantial likelihood that a reasonable investor or other user of the credit ratings would consider a three-notch or more deviation from the credit rating stress(es) implied by the predictive model to be a significant factor in evaluating the credit ratings. The rationale for the material deviation is uncertain loan level event risk. The results of Morningstar DBRS' analysis suggested downward pressure through the middle of the bond stack, most pronounced for Class B; however, while Morningstar DBRS remains concerned about the transaction's office concentration and the resolution of the Westbrook Corporate Center loan, given the significant amount of credit support for Class B, Morningstar DBRS believes that bond remains appropriate insulated at this point in time. The Negative trends assigned to the five lowest-rated classes most exposed to loss signal Morningstar DBRS' overall concerns and suggest additional credit rating downgrades could occur as part of future review cycles.

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.

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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 version 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 Commercial Real Estate Property Analysis Criteria (September 19, 2024; https://dbrs.morningstar.com/research/439702/morningstar-dbrs-north-american-commercial-real-estate-property-analysis-criteria)
-- 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.