Morningstar DBRS Downgrades Credit Ratings on All Classes of Morgan Stanley Capital I Trust 2018-BOP

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

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

Class A continues to carry a Negative trend, while Classes B, C, D, E, F, and X-EXT have credit ratings that do not typically carry a trend in commercial mortgage-backed securities (CMBS) credit ratings.

The credit rating downgrades are reflective of Morningstar DBRS' increased loss expectations for the underlying loan, driven by the trust's increasing exposure as the loan continues to be in default and in special servicing and by the most recent decline in appraised value. The most recent appraisal in June 2024 valued the collateral portfolio at $125.1 million, representing a 58.1% decline from its issuance value of $298.7 million for the remaining nine collateral properties, as three properties have been released since issuance. In addition to the decline in value, outstanding advances and shortfalls continue to accrue, increasing the loan's total exposure to $166.6 million as of the January 2025 remittance. Given these factors, Morningstar DBRS considered a liquidation scenario in the analysis for this review, the results of which suggest that losses could be incurred to Class B through Class F at disposition.

In its liquidation scenario, Morningstar DBRS applied a 25.0% haircut to the June 2024 appraised value to provide cushion against the expected continued build of advances and the potential for further value decline, resulting in a liquidation value of $93.8 million (loan-to-value ratio (LTV) of 172.0%), and implying a capitalization rate of 13.5% on the YE2023 net operating income. Inclusive of a 1.0% liquidation fee, an additional year of principal and interest advances, and all current outstanding advances, Morningstar DBRS' liquidation scenario considers that the total trust exposure could reach approximately $183.8 million. Although the results of the liquidation scenario suggest that Class A is insulated from loss at this point in time, the implied LTV for that class, based on the estimated amount of proceeds available after paying all outstanding and expected future advances, has increased beyond the LTV Sizing Benchmark at the credit rating category, supporting the credit rating downgrade and Negative trend.

At issuance, the loan was secured by the fee-simple interest in a portfolio of 12 suburban Class B office properties comprising nearly 1.8 million square feet of office space in four different states. The borrower used initial proceeds of $278.4 million, including $55.0 million of mezzanine debt, to refinance existing debt of $259.4 million, fund upfront reserves, and cover closing costs. According to the January 2025 remittance, the loan had a balance of $161.4 million following the release of three properties, representing a collateral reduction of 27.6% since issuance. The portfolio now of consists of properties located across Maryland (six properties), Florida (two properties) Georgia (one property), and Virginia (one property). The interest-only (IO), five-year loan was repaid pro rata for the initial 20% of the trust amount as per the loan documents and is now paying sequentially.

The loan was transferred to special servicing in March 2023 for monetary default ahead of its August 2023 maturity date. The borrower defaulted on both the mezzanine loan and the subject loan, which is now listed as nonperforming matured balloon. According to the servicer, foreclosure is actively being pursued on two assets, with receivership pending on the remainder of the properties; however, the preferred resolution strategy is listed as receivership sales. Following the most recent appraisal reduction, monthly interest shortfalls increased to $263,000 and have been affecting Class D as of the January 2025 remittance. Morningstar DBRS expects that interest shortfalls will continue to increase as the servicer works through the disposition of the remaining nine assets with no clear timeline provided.

Based on the September 2024 rent rolls for the collateral, portfolio occupancy was 53.6%, a steep decline from 78.0% at issuance, with leases representing 16.4% of the portfolio net rentable area (NRA) scheduled to roll in 2025. In 2022, the sponsor successfully signed Eating Recovery Center, LLC (7.9% of portfolio NRA) to a 15-year lease; however, the servicer reported that the tenant has defaulted on its lease and is likely incapable of performing because of the company's financial distress. According the Q3 2024 reporting, the loan had an annualized net cash flow (NCF) of $10.8 million, a minor improvement from the YE2023 figure of $10.4 million and significantly less than the Morningstar DBRS NCF of $24.5 derived at issuance. Given the weaker market conditions coupled with the significant concentration of tenant rollover, Morningstar DBRS anticipates occupancy and NCF to further decline.

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

Class X-EXT is an interest-only (IO) certificate that references 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 (December 13, 2024), https://dbrs.morningstar.com/research/444617.

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.

The credit ratings of this transaction are highly subject to the asset's liquidation value. As a result, a sensitivity whereby Morningstar DBRS stresses the Morningstar DBRS Cap Rate and Morningstar DBRS NCF to evaluate the impact of a Morningstar DBRS value decline based on the LTV sizing benchmarks was not completed. 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.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
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 Single-Asset/Single-Borrower Ratings Methodology (December 13, 2024), https://dbrs.morningstar.com/research/444612

-- Morningstar DBRS North American Commercial Real Estate Property Analysis Criteria (September 19, 2024), https://dbrs.morningstar.com/research/439702

-- Legal Criteria for U.S. Structured Finance (December 03, 2024), https://dbrs.morningstar.com/research/444064

-- Interest Rate Stresses for U.S. Structured Finance Transactions (February 26, 2024), https://dbrs.morningstar.com/research/428623

-- North American Commercial Mortgage Servicer Rankings (August 23, 2024), https://dbrs.morningstar.com/research/438283

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.