DBRS Assigns Provisional Ratings to CSMC Trust 2016-MFF

DBRS, Inc. (DBRS) has today assigned provisional ratings to the following classes of Commercial Mortgage Pass-Through Certificates, Series 2016-MFF (the Certificates) to be issued by CSMC Trust 2016-MFF. The trends are Stable.

-- Class A at AAA (sf)
-- Class X-CP at AAA (sf)
-- Class X-EXT at AAA (sf)
-- Class B at AAA (sf)
-- Class C at AAA (sf)
-- Class D at A (high) (sf)
-- Class E at BB (low) (sf)
-- Class F at B (sf)

All classes will be privately placed.

The Class X-CP and Class X-EXT balances are notional and interest accrual will be calculated based on the balance of the A-2 portion of the Class A certificates. DBRS ratings on interest-only (IO) certificates address the likelihood of receiving interest based on the notional amount outstanding. DBRS considers the IO certificates’ position within the transaction payment waterfall when determining the appropriate rating.

The collateral for the transaction consists of the fee interest in 27 single-tenant retail stores across Wisconsin, Minnesota and Iowa that are subject to one Master Lease. The properties are wholly occupied by Mills Fleet Farm (MFF), the farm goods and home improvement retail chain. The MFF portfolio contains 27 locations and the properties vary in age – construction dates range from 1958 to 2013 – but have an average vintage of roughly 26 years. All properties that were built before 2000 have since been renovated. The properties range in size from 110,291 square feet (sf) to 292,774 sf. MFF was acquired by an affiliate of KKR & Co. L.P. (KKR) in February 2016 for a purchase price of roughly $1.6 billion. KKR currently has approximately $600.0 million of equity invested in the company.
At loan closing, MFF entered into a 25-year Master Lease with a sponsor-affiliate that is structured with four five-year extension options. Rent increases throughout the portfolio by 2.0% annually. The Master Lease rent payment of $42,875,000 equates to a lease in place (LIP) of $7.21 per square foot (psf) triple net. The Master Lease rent of $7.21 psf is supported by Cushman & Wakefield’s weighted-average (WA) market-rent determination of $6.83 psf. The allocated individual properties LIP rental rates range from $4.00 psf to $11.26 psf, which is similar to the appraiser’s market-rent rental range for the portfolio from $4.00 psf to $10.75 psf. Based on a CoStar query conducted on September 20, 2016, for retail rental rates within a ten-mile radius around the property, the WA net rentable area by property CoStar rental rate of $10.09 psf is higher than the $7.21 psf LIP for the portfolio. CoStar also purported a WA vacancy rate of 7.2%, which is in line with the DBRS-underwritten economic vacancy figure of 7.5%, but above the in-place vacancy rate of 0.0%.

DBRS identified 16 properties located in either rural or tertiary markets, accounting for 46.0% of the total allocated senior loan balance. Properties located in tertiary and rural markets are disadvantaged by access to liquidity, especially in times of economic stress, relative to properties located in core suburban and urban markets. When determining the cap rate, DBRS applied a 10.5% cap rate to properties located in tertiary markets and an 11.5% cap rate to properties located in rural markets, which is 100 basis points (bps) and 200 bps higher than the 9.5% cap rate applied to suburban properties, respectively. DBRS noted during the site inspection that the majority of properties located in tertiary and rural markets were well positioned off their city’s respective primary commercial thoroughfares and near local highways. Many of the older MFF properties were the first to-market big-box retailers in their respective markets and helped to establish the local retail corridors. According to the current management at MFF, the original founders sought out locations in Wisconsin with the highest density of cows when choosing store locations to be near farming communities. Since the first MFF was constructed in 1959, MFF – Marshfield, big-box competitors such as Walmart, Target, The Home Depot, Cabela’s, Lowe’s Home Improvement Warehouse, Menards and Tractor Supply Company (Tractor) have leased big-box locations near MFF. The stores’ steady growth and limited operation volatility have benefited from a diverse product mix, business lines and loyal customer base. While the portfolio’s average sales of $333.00 psf are below competitive big-box retailers such as Walmart at $423.00 psf and Cabela’s at $349.00 psf, the portfolio’s sales compare favorably with competitors such as Target at $303.00 psf and Tractor at $258.00 psf. For the trailing 12 months (T-12) ending June 2016 period, total portfolio sales were $1.13 billion, $189.00 psf based on total square footage and $333.00 psf based on selling square footage. Throughout the recession in 2007 to 2009, MFF outperformed its retail peers and demonstrated positive EBITDA growth in each of those years and only one year with same-store decline (-1.2%) in 2009. The properties exhibit a favorable EBITDAR-to-Master Lease rent ratio of 3.90 times for the T-12 ending June 2016 period.

Loan proceeds, mezzanine debt and sponsor cash equity financed the acquisition of real estate collateral that was previously unencumbered with real estate debt and had not been securitized. Cushman & Wakefield has determined the as-is fee-simple value of the property to be $496.0 million ($83.44 psf) using an 8.2% cap rate. The DBRS-concluded value of $343.3 million ($57.76 psf) equates to a 30.8% discount to the appraiser’s value and is based on a WA portfolio 10.0% cap rate. The resulting DBRS loan-to-value ratio of 81.6% is indicative of leverage that is considered to be very favorable and is further supported by the loan’s strong 12.3% DBRS Debt Yield. Cushman & Wakefield has determined the dark value for the portfolio to be $258,700,000 ($43.52 psf) based on a WA 7.94% cap rate. The loan proceeds of $43.23 psf for Class E of the capital structure are noted to be in line with the appraiser’s dark value estimate of $43.52 psf. The two-year initial term and three one-year extension terms are IO throughout.

The ratings assigned to the Certificates by DBRS are based exclusively on the credit provided by the transaction structure and underlying trust assets. All classes will be subject to ongoing surveillance, which could result in upgrades or downgrades by DBRS after the date of issuance.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The applicable methodology is North American CMBS Rating Methodology, which can be found on our website under Methodologies.

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

With regard to due diligence services, DBRS was provided with the Form ABS Due Diligence-15E (Form 15-E) which contains the description of the information that the third party reviewed in conducting the due diligence services and a summary of the findings and conclusions. While DBRS did not rely on the due diligence services outlined in Form 15-E, DBRS did use the Data File outlined in the Independent Accountant’s Report in its analysis to determine the ratings.

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