DBRS Morningstar Confirms All Classes of CSMC 2018-SITE and Removes Six Classes from Under Review with Negative Implications

DBRS Limited (DBRS Morningstar) confirmed the ratings on the Commercial Mortgage Pass-Through Certificates, Series 2018-SITE issued by CSMC 2018-SITE as follows:

-- Class A at AAA (sf)
-- Class X at AAA (sf)
-- Class B at AAA (sf)
-- Class C at AA (sf)
-- Class D at A (sf)
-- Class E at BB (high) (sf)
-- Class HRR at BB (sf)

The ratings of Classes X, B, C, D, E, and HRR have been removed from Under Review with Negative Implications, where they were placed on October 6, 2020. In addition, the trend for the Class A certificate has been changed from Negative to Stable. All other trends are Stable. The rating confirmations and removal of six classes from Under Review with Negative Implications reflects the overall stable performance of the transaction, which is secured by a portfolio of retail properties as further described below. In October 2020, DBRS Morningstar noted Coronavirus Disease (COVID-19) pandemic-driven concerns for retail property types as the driver for the Under Review with Negative Implications rating actions; however, in general, the underlying properties have shown resilience to the effects of the pandemic and the most recently reported occupancy rates remain in line with DBRS Morningstar’s expectations for the portfolio as a whole.

The collateral for the trust is provided by a portion of the first-lien mortgages on a portfolio of 10 cross-collateralized and cross-defaulted retail properties located across nine states, encumbering the fee-simple interest of the borrower on each of the properties. The properties include a mix of seven power centers and three community centers in 10 distinct markets. The retail properties total 4.1 million square feet (sf), of which approximately 3.4 million sf is collateral for the underlying mortgages.

The trust loan is part of a split loan structure and includes a $170.0 million senior promissory A note and a $144.3 million subordinate promissory B note. The mortgage whole loan includes an additional $50.0 million (non-trust) senior pari passu promissory A note contributed to the DBRS Morningstar rated CSAIL 2019-C15 transaction. The whole loan is evidenced by a 64-month, interest-only (IO), fixed-rate mortgage loan totaling $364.3 million in financing, with a maturity date in April 2024. The sponsor and nonrecourse carveout guarantor is Dividend Trust Portfolio JV LP, a joint venture among wholly owned subsidiaries of SITE Centers Corp. (SITE; 20% ownership) and subsidiaries of China Merchants Group Limited and China Life Insurance Company Ltd. (80% ownership). DDR Property Management (rebranded as SITE on October 12, 2018) manages the properties.

While servicer reporting for year-end (YE) 2020 showed performance declines across all 10 of the properties in the portfolio as a result of the coronavirus pandemic, the loan was still covering debt service with a net cash flow (NCF) and weighted-average (WA) debt service coverage ratio (DSCR) of $36.6 million and 2.06 times (x), respectively, compared to $38.8 million and 2.19x at issuance. Only one property reported a DSCR below 1.78x. It is likely the in-place cash flow dip for the portfolio in 2020 was driven by lower rent collections, but revenues are trending up thus far in 2021 and are expected to continue to stabilize as vaccination rates increase across the country and social distancing restrictions are relaxed or eliminated. The loan has never been delinquent since the onset of the pandemic and, to date, no relief request has been submitted by the sponsor.

The portfolio loan benefits from its highly granular rent roll, geographic diversity, and strong tenant mix.
Based on the servicer’s reporting of a March 2021 Lease Rollover Review, the collateral occupancy rate was 93.0%, which compares with the issuance occupancy rate of approximately 90.4% and the servicer-reported YE2020 occupancy rate of 88.2%. The tenant roster includes over 180 unique tenants across 250 tenant spaces, with no single tenant accounting for more than 7.6% of the portfolio’s net rentable area (NRA), and no single tenant space accounting for more than 4.0% of portfolio NRA. Each of the properties is located in a different market, with the greatest market exposure to the Phoenix (20.2% of NRA and 25.6% of the allocated loan amount (ALA)), Hartford (16.6% of NRA and 15.3% of ALA), and Kansas City (11.3% of NRA and 11.8% of ALA) markets. Seven properties have grocery store anchors or shadow anchors.

The five largest tenants are Lowe’s (7.6% of collateral NRA); Kohl’s (7.0% of NRA); AMC Theatres (6.8% of NRA); The TJX Companies, Inc. (6.0% of NRA); and Dick’s Sporting Goods (5.4% of NRA). The tenant mix for the portfolio consists of a number of credit-rated tenants, including Lowe’s; Kohl’s; TJX; Ross Stores, Inc.; and Best Buy Co., Inc. Major shadow anchors include Target (three properties), Sam’s Club (one property), and Kohl’s (one property). A benefit of the rent roll diversification is that tenants’ lease expirations are staggered over the loan term with the portfolio’s average lease rollover being 11.6% per year, which the property manager has successfully managed thus far with several new leases and renewals signed since issuance.

While the portfolio has limited exposure to some of the high-profile retail bankruptcies over the past 12 months, it is perhaps most noteworthy that the portfolio does have exposure to AMC Theatres (AMC) (6.8% of collateral NRA and 10.2% of the DBRS Morningstar base rent) via leases at three properties (Ahwatukee Foothills Towne Center, Connecticut Commons, and Independence Commons) that expire in December 2031, December 2029, and October 2034, respectively. In a positive development, AMC recently renewed its lease at Independence Commons; however, in recent news articles, AMC has continued to report concerns about its operations amid the pandemic with statements noting severe cash flow impairments as all locations were closed beginning in March 2020. As of July 2021, all AMC Theatres had reopened with varying levels of restrictions based on local guidelines, including the three locations included in this transaction, but attendance numbers remain well below pre-pandemic levels.

In its analysis, DBRS Morningstar applied a nominal haircut to the servicer’s reported YE2020 NCF. The resulting NCF figure was $35.8 million, to which a capitalization rate of 8.29% was applied, resulting in a DBRS Morningstar value of $432.3 million, a variance of 30.3% from the issuance appraised value of $620.0 million. The DBRS Morningstar value implies a loan-to-value (LTV) ratio of 84.3% compared with the LTV of 58.8% based on the issuance appraised value.

The cap rate DBRS Morningstar applied is in the middle of the range of DBRS Morningstar Cap Rate Ranges for retail properties, reflecting the subjects’ location, property quality, and market position.

DBRS Morningstar made positive qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis, totaling 1.5% to account for cash flow volatility, property quality, and market fundamentals. DBRS Morningstar also made other positive adjustments to account for the portfolio’s diversity and other negative adjustments to account for the portfolio’s high total secured debt LTV.

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.

Class X 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 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 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.

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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