DBRS Morningstar Upgrades Two Classes of Bancorp Commercial Mortgage 2018-CRE3

DBRS Limited (DBRS Morningstar) upgraded the following two classes of Commercial Mortgage Pass-Through Certificates issued by Bancorp Commercial Mortgage 2018 CRE3 Trust:

-- Class C to AAA (sf) from A (high) (sf)
-- Class D to BBB (high) (sf) from BBB (sf)

In addition, DBRS Morningstar confirmed the remaining classes as follows:

-- Class B at AAA (sf)
-- Class E at BB (low) (sf)
-- Class F at B (sf)

All trends are Stable.

The rating upgrades reflect the increased credit support to the bonds as a result of successful loan repayments, while the rating confirmations reflect the overall stable performance of the remaining loans in the pool. The transaction benefits from an unrated $18.3 million first loss position, which represents 20.2% of the transaction as of October 2021. In conjunction with this press release, DBRS Morningstar has published a Surveillance Performance Update report with in-depth analysis and credit metrics for the transaction and business plan updates on select loans. For access to this report, please click on the link under Related Documents below or contact us at info@dbrsmorningstar.com.

At issuance, the collateral consisted of 30 floating-rate mortgages secured by 35 transitional properties with debt commitments totalling approximately $304.3 million, including approximately $47.3 million of pari passu future funding commitments. As of the October 2021 remittance, six loans remained in the pool, representing a collateral reduction of 70.3% since issuance. All applicable future funding obligations for the remaining loans have been advanced to individual borrowers, as confirmed by the servicer. Two loans, representing 46.8% of the pool, are in special servicing and three loans, representing 38.8% of the pool, are on the servicer’s watchlist. The loans on the servicer’s watchlist are currently being monitored for upcoming maturity, a recent return to the master servicer from the special servicer, and a low debt service coverage ratio (DSCR). In general, probability of default (POD) penalties were applied to loans that exhibited higher risk profiles as a result of delays in business plan execution and refinance risk.

The largest loan in the pool, Hue at Cityplace (Prospectus ID#1; 37.6% of the pool), is secured by a 244-unit multifamily complex located in Dallas. The loan was transferred to the special servicer in May 2021 because of maturity default as the borrower was unsuccessful in selling the property prior to loan maturity in February 2021. An extension agreement had been executed providing the borrower up to 120 days to complete the sale; however, an ice storm struck the region, damaging the property and delaying the sale process. As a result, the potential buyer cancelled the sale and the loan was transferred to the special servicer. Since the transfer, the borrower has requested another extension through January 2022 in order to complete the remaining repairs and re-list the property for sale by Q4 2021. All repairs were expected to be completed by August 2021 and an update has been requested from the collateral manager.

According to the March 2021 rent roll, the property was 88.9% occupied with an average rental rate of $1,489/unit. The occupancy rate remained relatively in-line with the YE2020 occupancy rate of 87.3% but below the YE2019 rate of 95.5%. Based on the Q1 2021 financials, the loan reported a DSCR of 0.99 times (x), compared with the YE2020 DSCR of 1.01x and YE2019 DSCR of 1.03x. At issuance, the DBRS Morningstar stabilized DSCR was 1.12x. Given the challenges encountered in trying to sell the property and the general increase in refinance risk, DBRS Morningstar applied an elevated POD to increase the expected loss with this review.

The Staybridge Suites Conversion loan (Prospectus ID #16; 9.2% of the pool) is secured by a 224-key limited-service hotel in Kissimmee, Florida, and this loan was transferred to special servicing in March 2020 because of payment default directly attributable to the pandemic. As of the October 2021 reporting, the loan is more than 60 days delinquent. A short-term forbearance agreement and a one-year extension were approved, which pushed the maturity date to October 2021; however, the borrower defaulted on the terms of the forbearance agreement. As a result, the special servicer filed a foreclosure complaint in September 2021. DBRS Morningstar has requested additional details of the nature of the default and an update on the resolution strategy. The servicer’s commentary also notes that the borrower was working toward refinancing the loan with the expectation of repayment by the end of October 2021; however, the collateral manager has not confirmed a payoff.

The sponsor’s business plan centered on the conversion of the collateral from a Royale Parc Suites under the Quality Suites flag to a Staybridge Suites flag as part of a new franchise agreement with InterContinental Hotels Group. The conversion required a property improvement plan (PIP) renovation at a cost of $7.5 million. Work for the required PIP was completed in December 2019, with the hotel operating under the new flag upon completion; however, the economic slowdown arising from the pandemic severely affected the subject. As a result, the property was unable to benefit from its newly branded status.

Upon completion of the PIP, the issuance appraisal projected a value increase to $29.7 million from $13.3 million, with full stabilization achieved by July 2021 and a resulting stabilized operating value of $33.5 million, equivalent to an LTV of 46.3% on the fully funded loan amount. Based on the updated July 2020 appraisal, the property was valued at $21.3 million, above the issuance as-is value but significantly below the original stabilized figure. It is worth noting that the updated appraisal likely took into consideration the stressed environment facing hotel properties during the pandemic and the lack of historical financials available for the subject operating under its new flag. The property does benefit from its close proximity to Disney World, which remained open for the majority of 2020. There is approximately $4.8 million of market equity remaining. DBRS Morningstar recognizes that there is an increased level of default and refinance risk related to the subject loan given the ongoing depressed performance metrics. DBRS Morningstar applied an elevated POD to increase the expected loss with this review.

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.

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 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 US. dollars unless otherwise noted.

The principal methodology is the 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.

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 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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