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

DBRS, Inc. (DBRS Morningstar) confirmed its ratings on all classes of the 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 (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (low) (sf)

All trends are Stable.

The rating confirmations reflect the overall stable performance of the transaction, which remains in line with DBRS Morningstar’s expectations. Although the collateral for the underlying loan is located in a somewhat challenged office market in Chicago, the subject property is a high-quality office tower well located along Wacker Drive in the West Loop submarket, one of the most desirable areas in Chicago’s central business district. Further, the transaction benefits from a strong sponsor that has recently invested heavily in upgrades for the building and is well equipped to address recent declines in occupancy and softer demand in the market compared with pre-Coronavirus Disease (COVID-19) pandemic levels.

The $1.3 billion transaction is backed by the borrower’s fee-simple interest in Willis Tower, a 3.9 million square foot (sf), Class A office building in the West Loop submarket of Chicago. Loan proceeds were used to pay off existing debt and fund reserves of $86.9 million. The sponsor cashed out $240.0 million as part of the transaction. The tower has four income-generating components consisting of office, retail, the Skydeck, and antenna revenue streams. While there was no additional debt at issuance, future mezzanine debt up to $150.0 million is permitted, subject to hurdles. The loan had an initial term of two years with five 12-month extension options. The borrower has exercised three of its extension options, most recently extending the maturity date to March 2023. The interest-only loan has a floating interest rate based on Libor plus 1.380%, but DBRS Morningstar notes that the commencement of the fourth extension option is subject to a permanent spread increase equal to 0.150%. The loan documents also stipulate that the borrower maintain an interest rate cap agreement with a strike price equal to the greater of (1) 4.00% and (2) the amount that would result in a debt service coverage ratio (DSCR) no less than 1.10 times (x).

The loan is sponsored by an affiliate of Blackstone Group L.P. At issuance, the sponsor planned to spend an additional $498.6 million in capital expenditures (capex) on the office, retail, and Skydeck components through March 2022. The sponsor had already incurred $199.3 million in capex and leasing costs on these components before the subject loan closed.

The majority of the planned renovations have been completed. In Q4 2019, the 300,000-sf retail and entertainment annex known as the Catalog opened. The Catalog is at the south entrance of the building and provides access to the Skydeck observation deck. The Skydeck reopened in April 2021 after undergoing an extensive redevelopment of its lower level, which features an interactive museum that celebrates 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.

According to the YE2021 financials, the loan reported a net cash flow (NCF) of $81.5 million and DSCR of 4.09x compared with the YE2020 figures of $37.6 million and 1.38x, respectively. Cash flows in 2020 were negatively affected by the long-term closure of the Skydeck attraction amid the pandemic. At issuance, it was noted that the Skydeck generated $36.5 million in revenue and approximately $30.7 million in net operating income (NOI) in 2017, equal to about 28% of the issuer’s underwritten NOI. In 2021, the servicer reported a 24.8% increase year over year in rental revenue, paired with a 23.7% increase in expense reimbursements. The jump in DSCR can also be explained by the low interest rate environment for this floating-rate loan over the last year, which resulted in a debt service obligation that represents a -52.6% variance from the issuer’s underwritten figure. Using the stressed debt service figure that DBRS Morningstar assumed when it assigned the ratings, the implied DSCR for 2021 would be 2.49x, generally in-line with the DBRS Morningstar analysis performed when ratings were assigned.

The largest tenant by square footage is United Airlines Inc. (United), which represents 24.3% of the office portion’s net rentable area (NRA) and 22.2% of the property’s total square footage as of the December 2021 rent roll. The subject location serves as United’s headquarters and has a scheduled lease expiration in March 2033 and two five-year or 10-year extension options. The property’s overall occupancy rate declined to 86.0% as of the March 2021 rent roll after United terminated its lease on 150,000 sf (three floors) of space. That lease termination reduced the building’s office component occupancy rate to 88.6% from 91.8% as of September 2020. United has an additional right to terminate its lease effective December 31, 2023, with 24 months’ notice and the payment of a termination fee. The remaining tenancy is quite granular, with the second-largest office tenant representing less than 6.0% of the NRA. According to Reis, the property is in the West Loop office space submarket, which as of Q4 2021 had an average vacancy rate of 12.8% and effective rent of $32.76 compared with the subject’s office component, which had a vacancy rate of 11.4% and average base rent of $26.54. Reis expects approximately 1.7 million sf of new office space to be delivered to the submarket during 2022 and 2023, but only 976,000 sf to be absorbed during that time. The vacancy rate is projected to increase to 13.3% by YE2022, but to decline annually thereafter to as low as 11.7% by 2027. Asking rents are expected to increase annually from $42.94 as of Q4 2021 to as much as $47.85 by YE2027. The market trends suggest that, should United vacate any more space, the borrower could face moderate near-term headwinds in finding replacement tenants, particularly as the fully extended loan maturity date in March 2025 coincides with a still-elevated vacancy rate in the submarket.

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.

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.

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.

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

The principal methodology is the North American CMBS Surveillance Methodology (March 4, 2022), 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.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482.

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.

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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