Morningstar DBRS Downgrades Credit Ratings on 11 Classes of BBCMS Mortgage Trust 2018-C2, Changes Trends on 12 Classes to Stable from Negative

DBRS Limited (Morningstar DBRS) downgraded its credit ratings on 11 classes of Commercial Mortgage Pass-Through Certificates, Series 2018-C2 issued by BBCMS Mortgage Trust 2018-C2 as follows:

-- Class A-S to AA (sf) from AAA (sf)
-- Class B to A (high) (sf) from AA (high) (sf)
-- Class C to A (low) (sf) from AA (low) (sf)
-- Class D to BBB (low) (sf) from A (sf)
-- Class E to BB (sf) from BBB (sf)
-- Class F to B (sf) from BB (high) (sf)
-- Class G to B (low) (sf) from B (high) (sf)
-- Class X-B to A (sf) from AA (sf)
-- Class X-D to BB (high) (sf) from BBB (high) (sf)
-- Class X-F to B (high) (sf) from BBB (low) (sf)
-- Class X-G to B (sf) from BB (low) (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-5 at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class H-RR at B (low) (sf)
-- Class X-A at AAA (sf)

Morningstar DBRS changed the trends on Classes A-S, B, C, D, E, F, G, H-RR, X-B, X-D, X-F, and X-G to Stable from Negative. The trends on all remaining Classes are Stable.

During the prior credit rating action in October 2023, Morningstar DBRS placed Negative trends on Classes A-S through H-RR because of concerns related to the high concentration of loans secured by office properties (which represent 36.1% of the pool balance as of the most recent remittance), most of which are located in noncore suburban markets. Since that time, the performance of the underlying collateral securing several of those loans has remained stagnant, or in some cases, has further deteriorated. In general, Morningstar DBRS analyzed loans that have exhibited increased credit risks with elevated probability of default penalties and/or stressed loan-to-value ratios (LTVs), resulting in expected losses that were between 1.8 times (x) and 3.3x greater than the pool average. As a result, the pool's overall adjusted expected loss has increased by more than 10.0% since the previous credit rating action, with the resulting downward pressure implied by the model results supporting the credit rating downgrades with this review.

Morningstar DBRS changed the trends on the Classes noted above to Stable from Negative, as the analysis considered stressed scenarios for those loans exhibiting increased risks from issuance. As such, the resulting credit rating downgrades accurately reflect the current outlook for those affected classes. Should there be unforeseen circumstances¿which further increase the risks for the underlying loans in question¿Morningstar DBRS notes that trends could change and/or credit ratings could be subject to further downgrades.

Overall, the pool continues to exhibit healthy credit metrics, as evidenced by the weighted-average (WA) debt service coverage ratio (DSCR) of 1.8x, based on the most recent financial reporting. In addition, the capital stack includes a sizeable $79.2 million balance insulating the investment-grade credit rated classes; further supporting the credit rating confirmations higher in the capital stack with this review. As of the September 2024 remittance, all of the original 44 loans remained in the pool with a trust balance of $868.2 million, representing a collateral reduction of 2.7% since issuance. There are no specially serviced or delinquent loans; however, seven loans, representing 14.8% of the pool balance, are on the servicer's watchlist. In addition, three loans, representing 4.5% of the pool balance, are fully defeased.

Since the prior credit rating action, The Fair Oaks Mall loan (Prospectus ID#30, 1.1% of the pool), which is secured by an approximately 780,000-square-foot (sf) portion of a 1.5 million-sf regional mall in Fairfax, Virginia, was returned to the master servicer in May 2024. The loan initially transferred to special servicing in February 2023 for imminent monetary default after the borrower was unable to secure replacement financing ahead of the loan's maturity date in May 2023. The sponsors, Taubman Realty Group Limited Partnership and Morton Olshan, initially agreed to a six-month extension with a revised maturity date in November 2023; however, the loan failed to mature and was ultimately extended for an additional three years to November 2026, with two one-year extension options. While occupancy has remained relatively stable over the past few years, the property's net cash flow (NCF) has declined year over year, with the annualized NCF for the trailing three-month period ended March 31, 2024, reported at $16.3 million (an A note DSCR of 1.7x), less than the YE2023 and Morningstar DBRS figures of $17.7 million (a DSCR of 1.8x) and $24.2 million (a DSCR of 2.4x), respectively. The loan's expected loss is almost 2.0x greater than the pool average.

The largest loan on the servicer's watchlist, GNL Portfolio (Prospectus ID#3, 6.2% of the pool), is secured by three office buildings (406,590 sf; 62.8% of the net rentable area (NRA)), three industrial/warehouse buildings (151,223 sf; 23.3% of the NRA), and one research and development lab (89,900 sf; 13.9% of the NRA), all of which are occupied by single tenants and are located across Texas, Missouri, Montana, California, Kentucky, and Pennsylvania. The largest tenant, Nimble Storage (25.4% of the NRA), a wholly owned subsidiary of HP Inc. vacated the property upon its lease expiration in October 2021. At issuance, Nimble Storage accounted for approximately 35.0% of the portfolio's underwritten base rent and as such, the property has been the primary contributor to the portfolio's increased vacancy and suppressed cash flow. The borrower has reportedly secured a contract for the sale of the Nimble Storage property with an estimated closing date in December 2024 and a request for partial release and prepayment has been sent to the special servicer. Property releases are permitted, provided certain conditions are met and with at least 115.0% of principal paydown of the allocated loan amount. Although the other properties in the portfolio remain fully occupied, rollover risk is elevated as tenants representing more than 25.0% of the NRA have leases that expire within the next 18 months.

Another noteworthy development since the last review has been Centene Management's (39.0% of the NRA) decision to vacate the majority of their space at the Tempe, Arizona, office building backing part of the Liberty Portfolio loan (Prospectus ID#4, 5.8% of the pool). While the immediate term risk is moderate, as the tenant is signed to a long-term lease through December 2028 with no contraction or termination options, physical occupancy is expected to fall to less than 60%, potentially complicating the borrower's refinance prospects prior to loan maturity in October 2028, should that space remain vacant. Carvana LLC (16.8% of NRA when including the space the tenant subleased from DriveTime Automotive Group Inc. (DriveTime)) had a lease expiration in February 2024. The tenant has vacated the property; however, a number of online sources indicate Dutch Bros has signed a lease for 136,426 sf and is slated to backfill the former Carvana LLC and DriveTime space. The second largest tenant at the property, Vanguard Group Inc. (15.3% of NRA) has a lease expiration in July 2026. Given the volatility surrounding the property's occupancy rate, Morningstar DBRS analyzed this loan with a stressed LTV, resulting in an expected loss that was almost 70.0% greater than the pool.

Alex Park South (Prospectus ID#24, 1.6% of the pool), is secured by nine mixed-use buildings, totaling approximately 353,000 sf, in Rochester, New York. 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. Market conditions remain soft, with the East Monroe County submarket reporting a vacancy rate of 14.8% according to Q2 2024 Reis data. As of Q1 2024, the loan reported a trailing 12-month DSCR of 0.79x, significantly lower than the issuance figure of 1.26x. 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 three times the pool average.

At issuance, four loans, representing 12.6% of the pool balance, were shadow-rated investment grade. With this review, Morningstar DBRS confirms that the performance of three of those loans¿Christiana Mall (Prospectus ID#2, 6.3% of the pool); Moffett Towers-Buildings E,F,G (Prospectus ID#12, 2.9% of the pool); and Moffett Towers II-Building 1 (Prospectus ID#16, 2.5% of the pool)¿remain consistent with investment-grade characteristics. This assessment continues to be supported by the strong credit metrics, experienced sponsorship, and the historically stable performance for all four collateral properties.

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 at https://dbrs.morningstar.com/research/437781 (August 13, 2024).

Classes X-A, X-B, X-D, X-F, and X-G 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.

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 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 (September 19, 2024), https://dbrs.morningstar.com/research/439702
-- 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 (July 17, 2023).

For more information on this credit or on this industry, visit https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.