DBRS Morningstar Assigns Ratings to Morgan Stanley Capital I Trust 2013-ALTM, Places Ratings Under Review with Negative Implications

DBRS Limited (DBRS Morningstar) assigned ratings to the Commercial Mortgage Pass-Through Certificates, Series 2013-ALTM (the Certificates) issued by Morgan Stanley Capital I Trust 2013-ALTM as follows:

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class X-A at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (low) (sf)
-- Class E at BB (sf)

DBRS Morningstar has also placed all classes Under Review with Negative Implications, given the negative impact of the Coronavirus Disease (COVID-19) on the underlying collateral.

These certificates are currently also rated by DBRS Morningstar’s affiliated rating agency, Morningstar Credit Ratings, LLC (MCR). In connection with the ongoing consolidation of DBRS Morningstar and MCR, MCR previously announced that it had placed its outstanding ratings of these certificates Under Review–Analytical Integration Review and that MCR intended to withdraw its outstanding ratings; such withdrawal will occur on or about October 13, 2020. In accordance with MCR’s engagement letter covering these certificates, upon withdrawal of MCR’s outstanding ratings, the DBRS Morningstar ratings will become the successor ratings to the withdrawn MCR ratings. Information about the MCR ratings, including the history of the MCR ratings, can be found at www.morningstarcreditratings.com.

On March 1, 2020, DBRS Morningstar finalized its “North American Single-Asset/Single-Borrower Ratings Methodology” (the NA SASB Methodology), which presents the criteria for which ratings are assigned to and/or monitored for North American single-asset/single-borrower (NA SASB) transactions, large concentrated pools, rake certificates, ground lease transactions, and credit tenant lease transactions. For further information on the NA SASB Methodology, please see the press release dated March 1, 2020, at www.dbrsmorningstar.com. On April 24, 2020, DBRS Morningstar placed the ratings on its outstanding SASB transactions secured by retail properties Under Review with Negative Implications while MCR placed the ratings on its outstanding SASB transactions secured by retail properties Under Review Negative as the global shelter-in-place and mandatory retail closures related to the coronavirus have contributed to retail bankruptcies and anticipated vacancies in retail centers. For further information on these rating actions, please see the DBRS Morningstar press release dated April 24, 2020, at www.dbrsmorningstar.com and the MCR press release dated April 24, 2020, at www.morningstarcreditratings.com.

To assign ratings to this transaction, DBRS Morningstar considered both the impact of the updated NA SASB Methodology and its scenarios attributable to the ongoing coronavirus pandemic on the ratings.

Because of the coronavirus’ significant impact on retail performance, DBRS Morningstar first considered the application of the updated NA SASB Methodology in conjunction with the “North American CMBS Surveillance Methodology” to arrive at a baseline result, which incorporated qualitative assumptions, capitalization rates, and loan-to-value (LTV) ratio sizing benchmark quality/volatility adjustments and excluded any potential changes in current or future expected asset performance resulting from the coronavirus.

DBRS Morningstar then overlaid scenarios incorporating additional reductions in net cash flow (NCF) to account for exposure to bankrupt or closed tenants. This resulted in stressed collateral value declines consistent with the projections in its “Global Macroeconomic Scenarios: September Update” published on September 10, 2020, on top of the baseline result to determine the impact of coronavirus-related changes in asset performance on the subject transaction on a tranche-by-tranche basis. For more information on these stress scenarios, please refer to the Coronavirus Impact Analysis section of this document. The global macroeconomic scenarios include a moderate decline of 15% for all commercial real estate (CRE), which acts as an average for all CRE property types. However, DBRS Morningstar expects a greater range of value decline for retail properties, ranging from 10% to 45% based on the type of tenant composition, exposure to bankrupt or challenged retailers, asset sponsorship, and asset location. DBRS Morningstar expects that lower-tier regional malls with in-line sales generally less than $300 per square foot (psf) will be the most affected.

LOAN/PROPERTY OVERVIEW
The Certificates are backed by a $160.0 million first-mortgage loan secured by the fee-simple interest in the Altamonte Mall in Orlando. The 12-year, fixed-rate loan is interest only (IO) for the first five years then amortizes on a 30-year schedule for the remainder of the loan term. As of the September 2020 remittance, the loan balance has amortized down to $152.6 million. The loan is scheduled to mature in February 2025 and is not subject to subordinate debt or mezzanine financing.

The Altamonte Mall is a two-storey, enclosed, super-regional mall with a total of 1.61 million sf built in 1974 and renovated and expanded from 2003 through 2006. The collateral for the loan totals 641,199 sf and is anchored by JCPenney, representing 24.7% of net rentable area (NRA) with a lease expiry in January 2024 (not identified for closure in bankruptcy reorganization plan), and AMC Theatre, representing 11.6% of NRA with a lease expiry in June 2023), with approximately 403,471 sf of in-line and outparcel space. There are also three noncollateral anchor spaces for Dillard’s, Macy’s, and a Sears that closed in 2018, with redevelopment plans for the space underway.

The property is the dominant mall in north Orlando and caters to local shoppers while its competitors generally serve the tourist market. DBRS Morningstar notes that the Altamonte Springs market was in a mature stage of development with little available land for future development and the June 2020 site inspection reported no new construction underway in the nearby area. At loan origination, the mall collateral space was 2.8% vacant and in-line store sales (excluding the Apple store) averaged $448 psf. Total in-line store sales in 2019 were $399 psf, down from $481 psf in 2018, largely because the Apple store underwent renovations for part of 2019, which resulted in overall lower sales figures. Excluding the Apple store, total in-line tenant sales in 2019 were $332 psf, down from $349 psf in 2018. Although the parent companies for both anchor tenants have struggled in 2020, both JCPenney and the AMC Theatre remain in occupancy. As of May 2020, the collateral was 96.5% occupied.

The loan is sponsored by a joint venture between the New York State Common Retirement Fund and Brookfield Property Partners L.P. (Brookfield), which assumed the loan following Brookfield’s takeover of General Growth Properties Inc. in July 2018. Brookfield also manages the property.

In mid-March 2020 in response to the coronavirus pandemic, malls and small shops were closed statewide. The subject mall closed in March 2020 and reopened in May 2020 with restricted hours and safety precautions in place. The borrower has communicated with the servicer regarding forbearance, loan modification, and extension terms, but the parties have not executed an agreement.

The loan has remained current throughout the pandemic and mall performance has been stable since loan origination. Principal and interest payments are being remitted and no delinquencies have been sustained. As of YE2019, the collateral reported cash flow of $16.2 million, which represents a debt service coverage ratio (DSCR) of 1.82 times (x), a slight increase from the YE2018 cash flow and DSCR of $15.8 million and 1.79x, respectively.

DBRS Morningstar derived the NCF using the latest reported servicer NCF with an adjustment, considering ongoing collateral performance including tenant movement and sales performance. The resulting NCF figure was $15.8 million and DBRS Morningstar applied a cap rate of 8.0%, which resulted in a pre-coronavirus DBRS Morningstar Value of $197.9 million, a variance of 28.0% from the appraised value of $275.0 million at issuance. The pre-coronavirus DBRS Morningstar Value implies an LTV of 77.1% compared with the LTV of 55.5% on the appraised value at issuance.

The cap rate DBRS Morningstar applied is at the middle end of the range of DBRS Morningstar Cap Rate Ranges for regional mall properties, reflecting its above-average collateral quality and location in a mature retail submarket.

DBRS Morningstar made positive qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis, totalling 3.0% to account for cash flow volatility, property quality, and market fundamentals.

CORONAVIRUS IMPACT ANALYSIS
DBRS Morningstar overlaid various scenarios incorporating higher NCF declines, resulting in stressed collateral value declines consistent with the projections in the “Global Macroeconomic Scenarios: September Update” (https://www.dbrsmorningstar.com/research/366542) to estimate the impact of coronavirus-related changes in asset performance on a tranche-by-tranche basis for the subject transaction. The scenarios included deducting cash flow for bankrupt retailers and/or increased vacancy expected at the asset to arrive at a coronavirus DBRS Morningstar Value under the moderate scenario, a 15% reduction from the pre-coronavirus DBRS Morningstar Value. Because of the more permanent value impairment resulting from the lost tenancy revenue stream, DBRS Morningstar’s analysis considered this value when assigning ratings.

Under the moderate scenario, the cumulative rated debt was insulated from loss.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

After applying the Coronavirus Impact Analysis, DBRS Morningstar had higher variances from the ratings assigned to all classes to the results of its LTV sizing benchmarks. The variation is warranted due to going concerns with the impact of the coronavirus pandemic on the collateral assets and, as a result, DBRS Morningstar placed these classes Under Review with Negative Implications.

Class X-A is an IO certificate that references a single rated tranche or 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.

DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for this transaction.

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com. The platform includes loan-level 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 U.S. dollars unless otherwise noted.

The principal methodologies are the North American Single-Asset/Single-Borrower Ratings Methodology (March 1, 2020) and North American CMBS Surveillance Methodology (March 6, 2020), which can be found on www.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 www.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.

DBRS Morningstar’s North American CMBS analytical team will continue to monitor the transaction to evaluate the increased risk factors related to the coronavirus pandemic. As information (e.g., updated property-level financials, rent rolls, new valuations for specially serviced loans, and workout and/or modification specifics, if applicable) becomes available, DBRS Morningstar will address the Under Review with Negative Implications rating actions over the near to moderate term. DBRS Morningstar typically endeavors to resolve an Under Review rating action within 90 days, but the circumstances surrounding these rating actions (i.e., the unknown length of the pandemic-related downturn) may result in a prolonged resolution period.

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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