DBRS Morningstar Provides Update on Review of 577 Classes Within 158 U.S. CMBS Transactions Previously Placed Under Review With Negative Implications in August 2020

On August 6, 2020, DBRS, Inc. (DBRS Morningstar) placed its ratings for 577 classes within 158 U.S. commercial mortgage-backed securities (CMBS) transactions Under Review with Negative Implications: <a href="https://www.dbrsmorningstar.com/research/365359/" target="blank">”DBRS Morningstar Places Ratings for 577 Classes Within 158 U.S. CMBS Transactions Under Review with Negative Implications”</a>. These rating actions were the result of DBRS Morningstar’s stress analysis as outlined in its June 29, 2020, commentary entitled <a href="https://www.dbrsmorningstar.com/research/363212/" target="blank">”CMBS Conduit Exposure to Coronavirus Disease (COVID-19) Implications”</a>. For a full description of the ratings rationale, as well as a listing of affected classes and transactions, please see the press release dated August 6, 2020, on the DBRS Morningstar website at www.dbrsmorningstar.com.

In the press release outlining these rating actions, DBRS Morningstar noted that, while it typically endeavors to resolve an Under Review rating action within 90 days, these rating actions would likely be resolved over a prolonged period given the circumstances driving the increased stress for these transactions, the length of time expected for some of the issues to bear out, and the necessary support information to become available. As of the date of this press release, the bulk of the classes placed Under Review with Negative Implications in August 2020 remain Under Review. We are continuing to gather information as many of these transactions have a higher concentration of loans in special servicing and/or on the servicer’s watchlist, with the primary issues most often tied directly to the impacts of the Coronavirus Disease (COVID-19) pandemic.

We continue to monitor these affected transactions as pandemic-driven events unfold and concrete information becomes more widely available. We will address the classes and transactions affected by these Under Review rating actions on a deal-by-deal basis, with individual press releases outlining the ratings rationale for each transaction released as those reviews are complete. In addition, we aim to post updated loan-level commentary for the ones deemed most pivotal on the DBRS Viewpoint platform, both on a rolling basis and in conjunction with the press releases as rating actions occur.

DBRS Morningstar conducts monthly surveillance checks on its rated CMBS deals. As part of that process, we have been monitoring the affected transactions closely for developments including, but not limited to, changes in special servicing and/or delinquency concentrations, updated values for the collateral backing defaulted loans, and updates on the status of performing loans that requested coronavirus related relief. We have also been monitoring the updated quarterly financial reporting for the underlying loans to identify those most hard hit amid the effects of the pandemic. As expected, we are seeing significant drops in cash flow for most hotel and many retail properties, with the most drastic declines at hotels in fly-to markets or markets heavily dependent on business travel and convention traffic and at retail properties in secondary markets. In general, office and industrial properties have reported stable performance metrics, but there have been instances of outliers in the case of office properties that have suggested increased risks to the respective trusts. Trends suggest increases in sublease space across most major markets and a change in the worker/workplace dynamic now that many office workers and their employers are fully familiar with the technology that makes working from home possible. We are seeing some pockets of stress for multifamily properties as well, particularly with student housing, and expect those trends to pick up speed as eviction moratoriums expire in the coming months.

In addition, because the onset of the pandemic in the U.S. occurred in March 2020, the 60-day delinquency mark for those loans most immediately affected came in June and July 2020, with special servicers typically ordering appraisals at or even before that mark. As such, appraisals for the most distressed assets in these pool began trickling in slowly over August and September 2020, before the volume became noticeably higher during the October and November 2020 reporting cycles. We are working to obtain copies of these new appraisals as they come in, particularly for larger assets, and seeking to identify the impacts of this new information to the overall risk profile for both the loan and the respective trusts. As we expected, most valuations are coming in lower than the issuance figures. However, in many cases, the values remain above the loan balances because the underlying collateral benefits from stable performance prepandemic and/or cash flow growth over the life of the loan. Either result would offsets higher capitalization rates and/or the appraiser’s more conservative inputs for occupancy and rent, for example.

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