DBRS Morningstar Confirms All Classes of Morgan Stanley Capital I Trust 2018-BOP

DBRS Limited (DBRS Morningstar) confirmed its 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 D at A (low) (sf)
-- Class X-EXT at A (sf)
-- Class E at BBB (low) (sf)
-- Class F at BB (sf)

All trends are Stable. The rating confirmations reflect the overall stable performance of the transaction.

At issuance, the loan was 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. Built between 1970 and 2007, the predominantly Class B office properties benefit from diverse tenancy across many sectors as evidenced by the portfolio’s granularity, with no tenant representing more than 3.0% of the net rentable area (NRA). Nine of these properties are concentrated in the Washington, D.C., metro area, with seven properties in suburban Maryland (72.8% of the initial loan balance) and two properties in northern Virgina (11.3% of the initial loan balance). Of the remaining three assets, two are located in Orlando, Florida (12.7% of the initial loan balance) and one in Alpharetta, Georgia (5.7% of the initial loan balance).

In June 2020, the smallest property by allocated loan balance, Prince Street Plaza, located in Arlington, Virginia, was released from the portfolio for $8.1 million, with a concurrent mezzanine debt payment of $2.0 million received.

The mortgage loan was structured with an initial two-year term and three one-year extension options and is interest only (IO) through its fully extended loan term. The borrower may release properties from the loan at a repayment amount of 105.0% of the allocated loan balance for the first 20% of the initial loan balance with a 110.0% release price thereafter, subject to a debt yield requirement of 12.5% following the release of the property along with other criteria.

Initial proceeds of $278.4 million, including $55.0 million of mezzanine debt, were used to refinance $259.4 million of existing debt, fund upfront reserves of $8.3 million, and cover $9.5 million in closing costs. Upfront reserves primarily included $4.7 million for existing tenant improvement/leasing commission (TI/LC) 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 loan was also structured with an annual TI/LC collection of $1.50 psf or approximately $2.6 million based on the portfolio’s current square footage. Per the May 2021 loan level reporting, there was a disbursement of $5.9 million from the leasing reserve. According to the servicer, these funds were released to the borrower as reimbursement for leasing expenses associated with roughly 120 leases executed since the loans closing. The leasing reserve has a remaining balance of $1.6 million.

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 (low) with a Stable trend by DBRS Morningstar). Brookfield acquired the assets through two separate transactions between 2016 and 2017 with a purchase price of $341.1 million and prior to the issuance of the subject transaction invested $8.6 million into select properties to improve their competitive positions and to stabilize below-market level occupancy.

Based on the Q3 2020 reporting, portfolio occupancy has fallen to approximately 74.0% from the issuance figure of 78.9%. At issuance, the portfolio’s largest six tenants represented a combined 16.2% of the portfolio’s NRA. While the most recent rolls received are dated (March 2019), DBRS Morningstar was able to view a number of the properties from their respective listings and confirm that five of these tenants, representing a combined 12.7% of the portfolio’s NRA, have either vacated or have spaces listed as available for lease in the near term. While this will most likely have some effect on the portfolio’s performance during the near term, the pool benefits from granularity, with over 240 tenants in occupancy at issuance on short to medium terms, and, as noted above, there has been significant leasing activity since issuance, which should help to mitigate some of the noted tenant rollover.

According to the borrower’s Q3 2020 operating statement, the loan had an annualized net operating income of $26.7 million, slightly above the DBRS Morningstar figure after considering the partial collateral release. The loan was added to the servicer’s watchlist in April 2021 pending the upcoming August 2021 maturity date; however, the borrower has not yet indicated if it intends to exercise its second extension option or repay the loan in full. DBRS Morningstar has requested an update on the upcoming maturity plans, along with updated rent rolls and financials.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Class X-EXT is an interest-only (IO) certificate that references 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.

The DBRS Viewpoint platform provides additional information on this transaction and underlying loans including DBRS Morningstar metrics, commentary, servicer-reported cash flows, and other performance-related data.

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com. The platform includes issuer and servicer data for most
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Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is North American CMBS Surveillance Methodology (March 26, 2021), 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 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@dbrsmorningstar.com.

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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