DBRS Morningstar Confirms All Ratings on Morgan Stanley Capital I Trust 2018-BOP, Removes UR-Dev. Status

DBRS, Inc. (DBRS Morningstar) confirmed the ratings on the following classes of the Commercial Mortgage Pass-Through Certificates, Series 2018-BOP issued by Morgan Stanley Capital I Trust 2018-BOP:

-- Class A at AAA (sf)
-- Class B at AA (high) (sf)
-- Class C at A (high) (sf)
-- Class X-EXT at A (sf)
-- Class D at A (low) (sf)
-- Class E at BBB (low) (sf)
-- Class F at BB (sf)

All trends are Stable. The ratings have been removed from Under Review with Developing Implications, where they were placed on November 14, 2019.

The Class X-EXT balance is notional.

On March 1, 2020, DBRS Morningstar finalized its “North American Single-Asset/Single-Borrower Ratings Methodology” (the NA SASB Methodology), which presents the criteria for which ratings are assigned to and/or monitored for North American single-asset/single-borrower (NA SASB) transactions, large concentrated pools, rake certificates, ground lease transactions, and credit tenant lease transactions. For further information on the NA SASB Methodology, please see the press release dated March 1, 2020, on the DBRS Morningstar website at www.dbrsmorningstar.com.

Prior to the finalization of the NA SASB Methodology, the DBRS Morningstar ratings for the subject transaction and all other DBRS Morningstar-rated transactions subject to the methodology in question were previously placed Under Review with Developing Implications, as the proposed methodology changes were material.

The subject rating actions are the result of the application of the NA SASB Methodology in conjunction with the “North American CMBS Surveillance Methodology,” as applicable. Qualitative adjustments were made to the final loan-to-value (LTV) sizing benchmarks used for this rating analysis.

The subject loan is secured by the fee-simple interest in a portfolio of 12 suburban office properties comprising nearly 1.8 million square feet (sf) of office space located in four different states on the east coast of the United States. Nine properties within the portfolio (81.7% of the net rentable area (NRA); 82.6% of the loan) are primarily concentrated in the Washington, D.C., metro area, which is composed of the District of Columbia, Northern Virginia (two properties), and suburban Maryland (seven properties), and total 1.3 million sf (81.0% of DBRS Morningstar Base Rent). The three remaining portfolio properties are located in Florida (two properties) and Georgia (one property) and total 330,907 sf in the Orlando (13.5% of DBRS Morningstar Base Rent) and Atlanta (5.5% of DBRS Morningstar Base Rent) metro areas. Built between 1970 and 2007, the portfolio properties are positioned in markets that are beginning to benefit from an expansion away from government demand, which has steadily been generated by diverse thriving local economies. Moreover, the portfolio benefits from tenant diversity across the government, legal, technology, healthcare, financial services, education, and research and development sectors as evidenced by its granular rent roll. Although none of the subject properties are centered in what DBRS Morningstar would consider urban markets, these assets are generally located within dense suburban markets that benefit from favorable vehicular accessibility, public transportation availability, and favorable proximity to their respective central business districts.

The loan is sponsored by Brookfield Strategic Real Estate Partners II (BSREP II), a large-scale global real estate opportunity fund with $9.0 billion of committed capital to invest in a diversified portfolio of high-quality assets in North America, Europe, Australia, Brazil, and other select markets. BSREP II is the second private fund investment vehicle of its kind created by the owner-operator, Brookfield Property Partners L.P. (Brookfield; rated BBB with a Negative trend by DBRS Morningstar). Brookfield acquired the portfolio through two separate transactions: the WRIT Montgomery County Portfolio in 2016 for $234.1 million and the TA Realty Portfolio in 2017 for an allocated purchase price of $107 million. The WRIT Montgomery Portfolio comprises the Wayne Plaza, 6110 Executive Blvd, Jefferson Plaza, West Gude Office Park, One Metro Square, and One Central Plaza properties. The TA Realty Portfolio comprises the University Corporate Center I, University Corporate Center III, Winward Concourse, Montrose Metro I, Arlington Square, and Prince Street Plaza properties. The Sponsor has already invested a total of approximately $8.6 million ($4.78 per sf (psf)) into select properties to improve their competitive position and to and to help with their leasing efforts. As an example, the United States Fish and Wildlife Service occupied 100.0% of Arlington Square prior to relocating in 2014. Since acquiring the property in 2017 and after the previous owner renovated the lobby into an open two-story design, the sponsor invested an additional $2.3 million into the property to attract new tenants with above-market rents. These efforts have increased occupancy to 30.7% from 0.0%.

Much of the portfolio’s stable performance is attributable to its highly granular rent roll with more than 240 tenants, none of which accounts for more than 3.4% of the total NRA. The portfolio’s largest six tenants, representing a combined 16.2% of the NRA, include many large corporations, foundations, defense contractors, and government entities such as Bank of America, N.A. (rated AA (low) with a Stable trend by DBRS Morningstar); Siemens Real Estate Corporation; The Henry M. Jackson Foundation; Advanced Micro Devices, Inc.; Northrup Grumman Space & Mission Systems; Montgomery County, Maryland; and IQ Solutions, Inc. Five investment-grade-rated tenants lease 252,269 sf (14.0% of the NRA) across the entire portfolio.

Total debt proceeds (including $55.0 million of mezzanine debt) of $278.4 million ($155 psf) were used to pay off $259.4 million ($144 psf) of existing debt, fund upfront reserves of approximately $8.3 million, and cover roughly $9.5 million in closing costs. Upfront reserves included $4.7 million for existing tenant improvement/leasing commission obligations, $1.1 million for upfront real estate tax reserves, and $2.6 million for existing free rent obligations as well as deferred maintenance, insurance, environmental, and replacement reserves. The mortgage loan is interest only (IO) through its fully extended loan term.

The DBRS Morningstar net cash flow (NCF) derived at issuance was re-analyzed for the subject rating action to confirm its consistency with the “DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria.” The resulting NCF figure was $22.0 million and a cap rate of 8.0% was applied, resulting in a DBRS Morningstar Value of $275.4 million, a variance of -23.8% from the appraised value at issuance of $361.6 million. The DBRS Morningstar Value implies an LTV of 81.1% on the A note debt, as compared with the LTV on the issuance appraised value of 61.8%. The NCF figure applied as part of the analysis represents a -14.0% variance from the Issuer’s NCF, primarily driven by rent step credits, vacancy, mark-to-market adjustments, and leasing costs.

The cap rate applied is at the middle of the range of DBRS Morningstar Cap Rate Ranges for office properties, reflective of the location, quality, and market position. In addition, the 8.0% cap rate applied is above the implied cap rate of 7.1% based on the Issuer’s underwritten NCF and appraised value.

DBRS Morningstar made positive qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis totaling 1.25% to account for cash flow volatility.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

Class X is an 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 ratings are subject to surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by DBRS Morningstar.

DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for this transaction.

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com. The platform includes loan-level data for most outstanding CMBS transactions (including non-DBRS Morningstar-rated), as well as loan-level and transaction-level commentary for most DBRS Morningstar-rated and -monitored transactions.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodologies are the North American Single-Asset/Single-Borrower Ratings Methodology and North American CMBS Surveillance Methodology, which can be found on dbrsmorningstar.com under Methodologies & Criteria. For a list of the structured-finance-related methodologies that may be used during the rating process, please see the DBRS Morningstar Global Structured Finance Related Methodologies document, which can be found on dbrsmorningstar.com in the Commentary tab under Regulatory Affairs. Please note that not every related methodology listed under a principal structured finance asset class methodology may be used to rate or monitor an individual structured finance or debt obligation.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The DBRS Morningstar long-term rating scale definition indicates that 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.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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