DBRS Morningstar Downgrades Three Classes of COMM 2013-GAM Mortgage Trust

DBRS Limited (DBRS Morningstar) downgraded the ratings on three classes of the COMM 2013-GAM, Commercial Mortgage Pass-Through Certificates issued by COMM 2013-GAM Mortgage Trust as follows:

-- Class D to BBB (sf) from BBB (high) (sf)
-- Class E to BB (high) (sf) from BBB (sf)
-- Class F to B (high) (sf) from BB (sf)

DBRS Morningstar also confirmed the ratings on the following classes:

-- Class A-2 at AAA (sf)
-- Class X-A at AAA (sf)
-- Class B at AA (high) (sf)
-- Class C at A (high) (sf)

DBRS Morningstar changed the trend on Classes A-2 and X-A to Stable from Negative. The trends on Classes B, C, D, E, and F are Negative. The downgrades and Negative trends reflect increased risks to the trust amid the borrower’s failure to obtain takeout financing at the loan’s scheduled maturity, an updated appraisal showing a value decline from issuance, and increased vacancy at the collateral property and corresponding decline in cash flow over the last few years that will likely be more difficult to reverse given the effects of the ongoing Coronavirus Disease (COVID-19) pandemic. DBRS Morningstar also notes that the loan benefits from the collateral property’s highly desirable location within a densely populated market, relatively stable remaining tenant mix, and strong sponsorship. These factors and the proceeds implied by the DBRS Morningstar value derived as part of this review support the rating confirmations for the four classes as outlined above.

The collateral for the transaction is a loan secured by the borrower’s fee-simple and leasehold interests in the 1.8 million-square foot (sf) Green Acres Mall in Valley Stream, New York, approximately 5 miles east of the John F. Kennedy International Airport. The mall was originally built in 1956 and has been expanded and renovated many times with the last major expansion in 2007. The mall is owned and operated by The Macerich Company, which purchased the subject for $506.7 million in 2013, contributing $181.7 million of cash equity to close the transaction. The eight-year fixed-rate loan had a scheduled maturity in February 2021, which has since been extended. As of the June 2021 remittance, the loan has amortized down by 20.6% since issuance, with a balance of $257.4 million.

Because of pandemic-related state and local mandates, most tenants at the property were forced to remain closed from late March to early July 2020. The loan was transferred to the special servicer for review of proposed relief requests in March and May 2020, but the sponsor ultimately rescinded both requests. The loan transferred to special servicing again in December 2020, ahead of the pending February 2021 loan maturity, with the special servicer ultimately approving a loan modification to extend the maturity date. The loan was returned to the master servicer in April 2021. The approved loan modification included a 12-month maturity date extension to February 2022, with an option for an additional 12-month extension to February 2023. The terms of the extension also included a $9 million curtailment of the loan’s principal balance and temporary cash management, subject to certain cure provisions. The loan has remained current throughout the various stints in special servicing and is currently being monitored on the servicer’s watchlist as part of the standard procedure following a return from the special servicer.

The mall has lost several large tenants since 2019, including anchors Kohl’s (6.5% of net rentable area (NRA)), and JCPenney (5.3% of NRA), Century 21 (4.0% of NRA), Modell’s Sporting Goods (1.7% of NRA), and a number of in-line tenants. The April 2021 rent roll indicated an occupancy rate of 77.1%; however, the third-largest tenant Sears (8.0% of NRA) announced plans to close its store as of April 2021, suggesting the physical occupancy rate fell to 69.1% at that time. Sears continues to pay rent through its lease expiration in October 2023.

Despite the occupancy declines and challenges related to the coronavirus pandemic, there have been reports of leasing momentum. The servicer commentary and press announcements indicated that the 97,213-sf former JCPenney space was expected to be redeveloped and fully leased to a collection of tenants including Primark, though the tenant is not expected to take occupancy until September 2022 at the earliest. Additionally, it has been reported that Shoppers World had agreed to backfill the 72,266-sf former Century 21 space, though occupancy dates have not been released. The five largest tenants currently in place at the property include Macy’s (14.8% of NRA); Walmart (9.6% of NRA); Macy’s Men’s/Furniture (6.9% of NRA); BJ’s Wholesale Club (6.8% of NRA); and Best Buy (2.5% of NRA), which recently extended its lease to January 2027.

While the loan has historically been a consistent performer with debt service coverage ratios (DSCR) ranging from 1.79 times (x) to 1.85x since issuance through YE2019, the servicer reported YE2020 financials which showed that net cash flow (NCF) and DSCR had fallen to $23.8 million and 1.37x, respectively.

An updated appraisal was produced in August 2020, but was not made available until March 2021, which estimated the as-is value of the property at $357.0 million, with the appraiser using an 8.5% cap rate.

The DBRS Morningstar NCF was derived using the servicer’s reported YE2019 NCF with a haircut to account for the occupancy declines and general disruption to leasing momentum that is expected given the effects of the coronavirus pandemic. The resulting NCF figure was $24.7 million. In addition, DBRS Morningstar assumed a cap rate of 8.5%, an increase of 50 basis points from the figure assumed when the DBRS Morningstar ratings were assigned, that resulted in a DBRS Morningstar value of $291.2 million, a variance of -18.4% from the August 2020 appraised value of $357.0 million. The DBRS Morningstar value implies a loan-to-value ratio (LTV) of 88.4% compared with the LTV of 72.1% based on the August 2020 appraised value.

The cap rate DBRS Morningstar applied is at the midrange of its cap rate ranges for retail properties, reflecting the suburban location and market position of the asset on Long Island.

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

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.

The DBRS Morningstar rating on Class B varies by three or more notches from the results implied by the LTV Sizing Benchmarks. The variance is warranted due to the desirable location within a densely populated market, relatively stable remaining tenant mix, and strong sponsorship.

Class X-A is an interest-only (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.

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 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 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.

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.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.

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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