DBRS Morningstar Confirms Ratings and Changes Trends on Two Classes of CSWF Trust 2018-TOP to Negative from Stable

DBRS Limited (DBRS Morningstar) confirmed its ratings on the Commercial Mortgage Pass-Through Certificates, Series 2018-TOP issued by CSWF Trust 2018-TOP as follows:

-- Class G at AA (sf)
-- Class H at A (sf)

In addition, DBRS Morningstar changed the trends on Classes G and H to Negative from Stable.

As the transaction continues to wind down with the release of collateral properties, DBRS Morningstar’s analysis maintained a look to a recovery analysis for the three remaining assets in the pool. DBRS Morningstar considered go-dark values for each of the remaining properties and determined that the two rated Classes remain generally well insulated with the unrated Class HRR representing the first loss certificate, with a balance of $21.2 million as of the August 2023 remittance.

The underlying loan in this transaction was transferred to the special servicer for maturity default in August 2023, with the special servicer noting the borrower had failed to exercise the fourth one-year extension option. The largest property by allocated loan amount (ALA), Wake Forest University – Charlotte Center (Charlotte Center), was 8.0% occupied as of March 2023, after the largest tenant, Bank of America (formerly 89.9% of net rentable area (NRA)) vacated upon lease expiration. There are also challenges for the other two properties, both of which have sizable upcoming lease expirations tied to large, single-tenant exposures, as further detailed below. In addition to these challenges, DBRS Morningstar also notes that, should the loan remain in special servicing with the servicer executing a workout, there could be uncertainty with regard to the master servicer’s willingness to advance interest and/or fund leasing costs for stabilization given the concentrated nature of the remaining portfolio. Given these increased risks, Negative trends were placed on both Classes.

The underlying loan funded the collateral portfolio’s acquisition and recapitalization for the sponsor, TPG Real Estate’s TPG Real Estate Partners Fund II. The loan is secured by the fee-simple and leasehold interests in a portfolio of 15 mostly single-tenant Class A office properties totaling 3.1 million square feet (sf) in 11 states. All but three properties, totalling 807,809 sf, have been released to date, with commensurate paydown for the trust in accordance with the release provisions. The remaining collateral properties are located in secondary markets across the U.S., including Tampa; Charlotte, North Carolina; and Tempe, Arizona. The loan and deal structures include a number of features that are designed to adjust as the loan pays down. At the deal level, prepayment proceeds on the first 20.0% of the pool balance were to be distributed pro rata, with proceeds beyond that threshold to be distributed sequentially. In addition, there was a tiered property release premium that was increased from the initial requirement of 105.0% of the allocated principal balance to 115.0% of the allocated principal balance with the property releases as of April 2021. All releases since April 2021 have been processed at the higher release percentage and payments have been applied according to a sequential payment structure.

The Charlotte Center property is a five-story, 455,749-sf mixed-use complex in downtown Charlotte. The property includes a 296-room Holiday Inn hotel, which pays ground rent and a participation payment. Additionally, Wake Forest University uses its space in the building for its Charlotte Master of Business Administration outpost. As of the June 2023 rent roll, the property reported an occupancy rate of 11.3%, a significant drop from the YE2022 occupancy rate of 97.9%, following the departure of the former largest tenant, Bank of America. The current largest tenants are Wake Forest University (6.3% of the NRA, lease expiry May 2025) and Holiday Inn (3.9% of the NRA, lease expiry in September 2024). An STR report for the 292-key hotel at the subject property was not provided with this review, but according to information found online, the hotel listed available rates of $229 as of August 2023, compared with $240 per night in June 2022 and $107 per night in August 2021. Over the last three years, office vacancy rates have surged in downtown Charlotte because of tenants relocating to the South End of the city coupled with declining end-user demand amid the rise of hybrid working arrangements. Per Reis, office properties in the Uptown submarket of Charlotte have reported an average Q2 2023 vacancy rate of 21.3% compared with the Q2 2022 and Q2 2021 rates of 18.3% and 16.4%, respectively.

The second-largest property by ALA, Eisenhower Campus, consists of two office buildings (4931 George Road & 4904 Eisenhower Boulevard) in Tampa totalling 228,196 sf of NRA. E.R. Squibb and Sons, LLC occupies 100.0% of the larger building, 4931 George Road (130,091 sf), and had an initial lease expiration in June 2024; however, the servicer confirmed that the tenant has extended its lease to December 2025. Although the lease extension is noteworthy, its short-term nature may be indicative of the tenant’s lack of longer-term commitment to the space. Although a rent roll was not provided for the smaller building, 4904 Eisenhower Boulevard (98,105 sf), various online listings indicate 64,095 sf is available for lease, implying an occupancy rate of 34.7%. The third-largest property by ALA is a 123,864-sf office building in Tempe that is fully occupied by Amazon.com Services, Inc. (Amazon) on leases that run through February and March 2024. The servicer confirmed that no decisions have been made regarding a potential lease renewal for Amazon.

The special servicer has confirmed that a loan modification agreement has been conditionally agreed upon, but nothing has been finalized to date. The terms of the modification will likely include a maturity extension and, based on the information provided to date, the sponsor appears to remain committed to the subject loan.

As noted above, DBRS Morningstar conducted a dark value analysis for all three properties, with each estimating a stabilized cash flow and utilizing a capitalization rate ranging between 8.0% and 9.5%, with lease-up costs deducted in each case. Based on this analysis, DBRS Morningstar concluded an aggregate dark value of $57.7 million for the remaining properties, representing a 55.7% and 62.0% decline, respectively, from the DBRS Morningstar values derived in 2020 and the appraised values at issuance. The DBRS Morningstar dark value suggests a whole-loan loan-to-value (LTV) ratio of 89.28%. Although the LTV is high, the recovery analysis based on those values suggests the rated Classes would be recovered in a liquidation scenario, supporting the rating confirmations. However, given the unknowns with regard to the workout status and the general lack of demand for office properties, particularly in secondary markets, the Negative trends reflect DBRS Morningstar’s expectation that the credit view for this transaction could decline in the near to moderate term.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/416784 (July 4, 2023).

All credit ratings are subject to surveillance, which could result in credit ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by DBRS Morningstar.

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

The principal methodology is North American CMBS Surveillance Methodology (March 16, 2023; https://www.dbrsmorningstar.com/research/410912).

Other methodologies referenced in this transaction are listed at the end of this press release.

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 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 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.

DBRS Morningstar 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
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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://www.dbrsmorningstar.com/about/methodologies.

North American Single-Asset/Single-Borrower Ratings Methodology (February 23, 2023; https://www.dbrsmorningstar.com/research/410191)

Rating North American CMBS Interest-Only Certificates (December 19, 2022; https://www.dbrsmorningstar.com/research/407577)

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 12, 2022; https://www.dbrsmorningstar.com/research/402646)

North American Commercial Mortgage Servicer Rankings (August 23, 2023; https://www.dbrsmorningstar.com/research/419592)

Interest Rate Stresses for U.S. Structured Finance Transactions (June 9, 2023; https://www.dbrsmorningstar.com/research/415687)

Legal Criteria for U.S. Structured Finance (December 7, 2022; https://www.dbrsmorningstar.com/research/407008)

A description of how DBRS Morningstar analyzes structured finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/417279.

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