Morningstar DBRS Downgrades Credit Ratings on Two Classes of Key Commercial Mortgage Trust 2018-S1, Changes Trend on One Credit Rating to Stable From Negative

DBRS Limited (Morningstar DBRS) downgraded its credit ratings on two classes of Commercial Mortgage Pass-Through Certificates, Series 2018-S1 issued by Key Commercial Mortgage Trust 2018-S1 as follows:

-- Class E to B (high) (sf) from BB (sf)
-- Class F to CCC (sf) from B (sf)

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

-- Class A-3 at AAA (sf)
-- Class A-S at AAA (sf)
-- Class X at AA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (sf)

Morningstar DBRS also changed the trend on Class E to Stable from Negative. All other trends are Stable, with the exception of Class F, which has a credit rating that does not typically carry a trend in commercial mortgage-backed securities (CMBS) credit ratings.

The credit rating downgrades on Classes E and F reflect an increase in Morningstar DBRS' loss projections, attributable to the one loan in special servicing, 775 West Jackson Boulevard (Prospectus ID#25, 2.6% of the pool), and St. Charles Executive Center (Prospectus ID#11, 5.7% of the pool), which Morningstar DBRS considers to be at high risk for near-term default. Although St. Charles Executive Center has not yet transferred to special servicing, Morningstar DBRS believes that the property's value has declined significantly from issuance because of performance challenges that are not expected to improve ahead of the loan's maturity, as further described below. Losses from these loans' liquidation scenarios would erode the majority of the Class G certificate balance. Morningstar DBRS notes that the capital structure provides limited cushion to the junior bonds in the event of increased losses, given the very thin tranching supporting the credit rating downgrades on Classes E and F.

Morningstar DBRS changed the trend on Class E to Stable from Negative with this review, which is supported by the punitive analysis for the two loans noted above. Although the performance of those two loans is worrisome, Morningstar DBRS' liquidation scenarios adequately capture the ongoing credit risk and, in the event performance and value deteriorate further, Class E's current credit rating reflects a high level of uncertainty. All other trends remain Stable, with the exception of Class F as noted above.

The remaining credit rating confirmations and Stable trends reflect the performance of the remaining loans in the pool, which remains in line with Morningstar DBRS' expectations at issuance evidenced by a weighted-average debt service coverage ratio (DSCR) of 1.90 times (x) at YE2023. This is further supported by the favorable property type concentration in loans backed by retail and self-storage properties, which collectively represent 43.1% of the pool.

The pool's continued deleveraging also helps to offset concerns regarding the capital structure. As of the September 2024 remittance, the pool had experienced 43.2% collateral reduction since issuance, with 21 of the original 31 loans remaining in the pool with an aggregate principal balance of $75.1 million. Three loans are fully defeased, representing 13.5% of the pool balance. Only two loans, representing 14.4% of the pool balance, are secured by office properties and, where applicable, Morningstar DBRS increased the probability of default penalties (and, in certain cases, applied stressed loan-to-value ratios) for office loans exhibiting performance concerns.

There is one loan in special servicing, 775 West Jackson Boulevard, which is secured by a mixed-use property comprising retail and office space in Chicago's Greektown neighborhood. The loan transferred to the special servicer in May 2020 for monetary default related to performance declines stemming from the effects of the coronavirus pandemic. In December 2020, the borrower filed for bankruptcy; however, the court dismissed the bankruptcy claim in August 2023 and the special servicer resumed foreclosure proceedings. There is now a receiver in place, though updated financials have not been made available since March 2022. According to the August 2023 rent roll, the subject appears to be 100% occupied by four tenants. The property was reappraised in October 2023 at $2.2 million compared with the January 2021 appraised value of $2.0 million and the issuance appraised value of $3.5 million. In its analysis for this review, Morningstar DBRS liquidated this loan from the trust using a haircut on the most recent appraised value, resulting in an implied loss approaching $1.0 million, or a loss severity in excess of 45.0%.

St. Charles Executive Center is secured by two suburban office properties (one low-rise office and one medical office) in St. Charles, Illinois, approximately 40 miles west of downtown Chicago. The troubled loan remains on the servicer's watchlist because of its low occupancy and DSCR. According to the April 2024 rent roll, the subject was 66.3% occupied, down from 85% at issuance. Average vacancy for the submarket was reported to be 31.7% as of Q2 2024, according to Reis. The largest tenant, RS&H, Inc., represents 11.0% of net rentable area (NRA) and has a near-term lease expiration in August 2025. In total, leases representing approximately 20% of the NRA are scheduled to expire in the next 12 months. The subject's declined occupancy has also stressed revenue. Although the reported YE2023 net cash flow (NCF) is an improvement over YE2022, DSCR remains low at 0.80x, and Morningstar DBRS expects performance to remain depressed given upcoming rollover and high submarket vacancy. Given these concerns, Morningstar DBRS expects that the property's value has likely declined significantly from issuance and expects it to remain depressed as maturity approaches in 2028, supporting the liquidation analysis. Morningstar DBRS derived an updated value based on in-place performance using the YE2023 NCF of $253,595 and applying a stressed capitalization rate. The resulting value of $2.5 million represents an approximate decline of 70% from the issuance appraisal of $8.1 million. The implied loss to the trust in this year's review was in excess of $2.0 million, or a loss severity approaching nearly 50%.

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.

Class X is an interest-only (IO) certificate 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 ratings assigned to Class B materially deviate 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 material deviation is warranted given concerns about Green Bay Plaza (Prospectus ID#1, 12.7% of the pool) and Constellation Brands (Prospectus ID#4, 8.7% of the pool), both of which continue to perform based on the most recent reporting but could pose additional risk to the transaction as the loans approach maturity in 2028.

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 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. 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.

DBRS Limited
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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.

-- 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
-- North American CMBS Multi-Borrower Rating Methodology/North American CMBS Insight Model version 1.2.0.0 (March 1, 2024), https://dbrs.morningstar.com/research/428797
-- Rating North American CMBS Interest-Only Certificates (June 28, 2024), https://dbrs.morningstar.com/research/435294
-- 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.