Morningstar DBRS Downgrades Credit Ratings on Eight Classes of Morgan Stanley Capital I Trust 2019-L2

DBRS Limited (Morningstar DBRS) downgraded the credit ratings on eight classes of Commercial Mortgage Pass-Through Certificates, Series 2019-L2 issued by Morgan Stanley Capital I Trust 2019-L2 as follows:

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

In addition, Morningstar DBRS confirmed the following credit ratings:

-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class X-A at AAA (sf)
-- Class G-RR at CCC (sf)

Morningstar DBRS changed the trends on Classes A-S, B, C, D, E, X-B, and X-D to Stable from Negative. There are no trends on Classes F-RR and G-RR, which have credit ratings that do not typically carry trends in commercial mortgage-backed securities (CMBS) credit ratings. All other classes have Stable trends.

The credit rating downgrades are reflective of the increased loss projections for three of the loans in special servicing. According to the October 2024 remittance, there are six specially serviced loans, representing 13.8% of the pool balance. Morningstar DBRS' analysis included a liquidation scenario for three of these loans, resulting in implied losses of approximately $30 million, an increase from the $20.0 million in modelled implied losses at the time of the last credit rating action in October 2023. The primary contributor to the increase in Morningstar DBRS' loss projections is the liquidation scenario for the State of Kentucky Portfolio (Prospectus ID#16; 2.5% of the current pool balance), which received an updated appraisal in December 2023, valuing the property approximately 10% below the previous valuation, and 60% below the issuance appraisal. The loan is secured by five government-occupied office buildings throughout Frankfort, Kentucky. The portfolio reported a consolidated occupancy rate of 51.1% as of the September 2023 rent roll, with leases representing 38.6% of the net rentable area (NRA) scheduled to roll in the next 12 months. Morningstar DBRS liquidated the loan as part of the analysis, resulting in implied losses of approximately $15.0 million. The total implied losses from the liquidation scenarios are contained to the nonrated Class H-RR, but reduce credit enhancement to the junior bonds, supporting the credit rating downgrades on Classes E, X-D, and F-RR.

Morningstar DBRS' expected loss (EL) for the remaining loans in the pool has continued to increase from the last credit rating action. Outside of the liquidated loans in special servicing, Morningstar DBRS has identified an additional nine loans, representing 23.1% of the pool balance, primarily backed by office properties, that continue to exhibit performance declines. Excluding the defeased loans, the pool is most concentrated by office properties, which represent approximately 40.0% of the pool balance. Eight office loans (22.6% of the pool) are secured by properties with concentrated tenancy, where either a single tenant or the two largest tenants collectively represent more than 50.0% of the net rentable area (NRA). While most of the leases in place at these properties extend beyond the respective loan maturity dates, Morningstar DBRS notes specific concern about CompuCom World Headquarters (Prospectus ID#11; 2.7% of the pool), which is secured by an office property in Fort Mill, South Carolina. The subject is fully leased to CompuCom on a lease through October 2032, but the tenant is actively advertising the entirety of its space for sublease on Loopnet. The tenant has no termination options, and a cash trap will be triggered in the event that the tenant goes dark. Morningstar DBRS inquired about the tenant's status at the subject but has not received a response as of this commentary. The issuance appraisal noted a dark value of $25.4 million, which results in a loan-to-value ratio (LTV) approaching 100%. Though the borrower has been trapping excess cash since 2021 and CompuCom is obligated to uphold its contractual payments until lease maturity, given the generally challenged suburban office submarket and the concentrated tenancy at the subject, Morningstar DBRS analyzed this loan with a stressed LTV and applied a probability of default (POD) penalty, resulting in an EL that is double the pool average.

Where applicable, Morningstar DBRS increased PODs, and, in certain cases, applied stressed LTVs for loans that have exhibited increased risks from issuance. The resulting weighted-average (WA) EL for these loans is 60% higher than the pool's average and suggests negative pressure toward the top of the capital stack, supporting the credit rating downgrades on Classes A-S, B, C, D, and X-B. Morningstar DBRS notes that the credit deterioration and increased term default risk in the pool, mainly attributable to loans noted above, has increased the overall credit risk of the pool from issuance; thus, the current credit ratings are now reflective of the updated credit profile of the transaction. As a result, Morningstar DBRS has changed the trends on all classes to Stable from Negative with this credit rating action as the modelled risk in the transaction is reflective of any near to medium term risk.

As of the October 2024 remittance, 48 of the original 50 loans remain in the trust with an aggregate balance of $892.5 million, representing a collateral reduction of 4.5% since issuance. The pool also benefits from four fully defeased loans, representing 9.3% of the current pool balance. Eight loans, representing 11.8% of the pool, are on the servicer's watchlist being monitored primarily for performance-related concerns.

The largest loan in special servicing is Le Meridian Hotel Dallas (Prospectus ID#4; 4.6% of the current pool balance), which is secured by a 258-key full-service hotel in Dallas, approximately 12.0 miles north of the central business district. The loan transferred to the special servicer at the onset of the pandemic as per the borrower's request. The borrower filed for bankruptcy in April 2022 and, according to the servicer, the borrower appears to be in compliance with the payment plan structured in the bankruptcy proceedings. However, Morningstar DBRS notes that the loan is delinquent on its September 2024 payment, which could pose foreclosure risk for the asset and breach the borrower's payment plan. According to the provided STR report, the subject reported an occupancy rate, average daily rate, and revenue per available room (RevPAR) of 63.5%, $150.75, and $95.70, respectively, for the trailing 12 months ended March 31, 2024. Though the loan has been reporting below breakeven DSCRs for the past few years, the property is outperforming its competitive set with a RevPAR penetration of 167.5%. The property was reappraised in December 2023 at $62.0 million, which is in line with the issuance appraised value of $61.2 million. Morningstar DBRS adjusted the LTV to reflect the most recent appraisal, resulting in an EL that is in line with the pool's average 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 Multi-Borrower Rating Methodology (March 01, 2024), https://dbrs.morningstar.com/research/428797.

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 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.

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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.

-- 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

-- Rating North American CMBS Interest-Only Certificates (June 28, 2024), https://dbrs.morningstar.com/research/435294

-- North American CMBS Multi-Borrower Rating Methodology (March 01, 2024) / North American CMBS Insight Model v 1.2.0.0, https://dbrs.morningstar.com/research/428797

-- 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.