Morningstar DBRS Confirms Credit Ratings on All Classes of BBCMS 2018-TALL Mortgage Trust

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

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

All trends are Stable.

The credit rating confirmations and Stable trends reflect the overall stable performance of the underlying loan, which is secured by the Willis Tower, a 3.9 million-square-foot (sf), Class A office building situated along Wacker Drive in the West Loop submarket of Chicago's central business district. Although there has been some occupancy volatility after the largest tenant, United Airlines, Inc. (United), downsized its space, recent leasing momentum at the property has been positive and cash flow trends have consistently improved, surpassing both Morningstar DBRS' and the issuer's underwritten figures, as of the most recent financial reporting.

The collateral includes a 300,000-sf retail and entertainment annex known as the Catalog, which provides access to the Skydeck Observation Deck (the Skydeck). The Skydeck features an interactive museum celebrating the history of Chicago's neighborhoods and historical sites. The observation deck, situated on the 103rd floor, features four glass-floor balconies extending from the tower called The Ledge, which attracts more than 1.7 million visitors annually. At issuance, Morningstar DBRS noted that the Skydeck generated approximately 20% of the property's total effective gross income.

The transaction benefits from strong sponsorship provided by The Blackstone Group L.P. (Blackstone), which has invested upward of $490 million toward upgrading the office, retail, and Skydeck space at the property. In addition, the asset has multiple and diverse income-generating components, including office, retail, Skydeck, and antenna revenue streams. Loan proceeds were used to pay off existing debt and fund reserves of $86.9 million, with the sponsor cashing out $240.0 million of equity as part of the transaction. The interest-only floating-rate loan had an initial term of two years with five 12-month extension options. The loan transferred to special servicing in February ahead of its fully extended maturity date in March 2025. The servicer has noted that preliminary terms of a modification, which would facilitate an extension of the loan, have been agreed upon. A number of online sources indicate that terms of the modification include extending the loan for three years, through March 2028, with two additional one-year extension options to follow. Morningstar DBRS has requested confirmation of these terms and additional details from the servicer; however, as of the date of this press release, a response remains pending.

According to the September 2024 rent roll, the property was 85.3% occupied. The largest tenants at the property are United (19.3% of the net rentable area (NRA); lease expiration in 2033), Morgan Stanley Barney Financing LLC (Morgan Stanley; 5.4% of the NRA; lease expiration in 2037), and Seyfarth Shaw LLP (5.4% of the NRA; lease expiration in 2032). Seyfarth Shaw LLP has both a termination option and contraction option for one full floor with a notice date in June 2026 and an effective date the following year. The law firm has been a tenant at the subject property since 2017 and the city of Chicago has been home to its largest office since the firm's founding in 1945.

United gave back more than 100,000 sf of space across three floors in 2021, paying a termination fee of $26.7 million that, according to the loan documents, the borrower was not required to remit to the lender, given the loan was not in a trigger period. The subject property serves as United's headquarters with its current in-place lease scheduled to expire in March 2033. United had an option to terminate its lease effective December 31, 2023, with 24 months' notice and the payment of a termination fee; however, this option was not exercised. United does not have any additional termination options available; however, the tenant does have a contraction option for up to three full floors (approximately 154,000 sf of NRA) with a notice date in March 2027 and an effective date the following year. Various online sources have suggested that United's recent purchase of a 113-acre parcel of land near Denver International Airport may signal the company is contemplating a relocation of the airline's headquarters, but nothing has been confirmed by the company to date.

Blackstone has reportedly signed leases for more than 400,000 sf (between renewals and new contracts) since completing its renovation of the building in 2022; including lease renewal and expansion contracts with IMC Financial Markets and Morgan Stanely and the execution of a new lease with Adtalem Global Education for 84,000 sf in 2024. According to the annualized financial reporting for the trailing nine-month period ended September 30, 2024, the property generated $116.8 million of net cash flow (NCF), reflecting a debt service coverage ratio (DSCR) of 1.25 times (x), compared with the YE2023 and Morningstar DBRS figure (derived during the prior credit rating action in April 2024) of $110.8 million (a DSCR of 1.27x) and $82.8 million, respectively. The improvement in NCF is largely due to increases in base rent and expense reimbursements. According to Q4 2024 Reis, Inc. data, the West Loop submarket had an average vacancy rate of 13.7%, relatively in line with the subject's vacancy rate for the office component. The West Loop submarket's vacancy rate is projected to remain elevated, at above 12.0%, through to 2027.

In the analysis for this review, Morningstar DBRS maintained the Morningstar DBRS NCF (as noted above) and the 7.5% cap rate applied at the previous credit rating action in April 2024, resulting in a Morningstar DBRS value of $1.2 billion (including $144.7 million of value attributed to the stabilization of the retail and Skydeck components and outstanding office stabilization costs in conjunction with a 75.0% credit applied to the sponsor guarantees), a variance of -29.9% from the as-is appraised value at issuance of $1.8 billion and a -48.8% variance from the projected as-stabilized value for the property of $2.44 billion. The Morningstar DBRS value implies a loan-to-value ratio (LTV) of 106.1% compared with the LTV of 74.4% on the as-is appraised value at issuance and the LTV of 54.2% on the projected as-stabilized value. In addition, Morningstar DBRS maintained positive qualitative adjustments totaling 3.0% in the LTV sizing benchmark to reflect the low cash flow volatility and Class A property quality.

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

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 (February 28, 2025): https://dbrs.morningstar.com/research/448963.

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.

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 (February 28, 2025): https://dbrs.morningstar.com/research/448962

-- 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 (December 3, 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

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.