DBRS Confirms All Classes of CSMC Trust 2016-MFF with Stable Trends

DBRS Limited (DBRS) confirmed all classes of Commercial Mortgage Pass-Through Certificates, Series 2016-MFF (the Certificates) issued by CSMC Trust 2016-MFF as follows:

-- 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 (high) (sf)
-- Class F at BB (low) (sf)

All trends are Stable.

The rating confirmations reflect the overall stable performance of the transaction since issuance. The transaction consists of a $280.0 million first-mortgage loan secured by a portfolio of 27 single-tenant retail stores located across Wisconsin, Minnesota and Iowa. The transaction represents a sale and leaseback from Mills Fleet Farm Group, LLC (MFF) to the current loan sponsor, Davidson Kempner Capital Management L.P. MFF was founded in 1955 and began as a membership-based wholesale retailer. The loan has approximately one year left remaining on the original two-year term, followed by three one-year extension options available to the borrower.

MFF benefits from being the first major retailer in smaller submarkets and has a history of steady growth and limited operational volatility. The loan sponsor contributed $181.7 million of equity to the transaction, representing 36.6% of the total $500.2 million acquisition cost. In addition, KKR & Co. L.P. (KKR) invested approximately $800.0 million of equity in its acquisition of MFF in 2016, while MFF retained $100 million of preferred equity. At issuance, the portfolio reported average sales of $333 per square foot based on selling square footage. DBRS has requested an updated sales report from the servicer and is awaiting those documents. Historically, the tenant has reported stables sales despite store locations within a few miles of major competitors. Overall, portfolio health is determined by each store’s four-wall EBITDAR ratio. Although updated documents were not readily available, the portfolio reported a healthy ratio of 3.90 times (x) at DBRS’s original analysis. In addition, it was observed that the portfolio’s EBITDAR was stable and growing as it was reported at $170.2 million in 2015, $168.9 million in 2014 and $163.9 million in 2013. At issuance, the rent structure resulted in EBITDAR coverage of 3.74x across the portfolio with individual stores ranging from 1.97x to 6.82x. The absolute-net master lease across the portfolio has an initial 25-year term, followed by four five-year extension options. The master lease carries contractual 2.0% annual rental rate increases.

KKR acquired MFF in February 2016 and plans to consolidate the company’s distribution and inventory management while also increasing store footprints. These changes are growth-oriented and, as the transaction recently closed, some of the proposed changes are yet to be fully implemented into the organization. According to an article posted by “DeForest Times Tribune” on October 12, 2017, MFF has four additional stores planned for Wisconsin and one for Iowa. An additional seven and ten stores are planned for 2019 and 2020, respectively. Also, “StarTribune” reported on November 5, 2017, that KKR aims to double its suburban farm-supply stores in the next five years, while a new distribution center will be opening in Chippewa Falls, Wisconsin, next year. This will allow goods to flow more quickly to stores with less need for inventory on hand. Overall, these changes are positive signs of KKR’s commitment to the growth of the Mills Fleet Farm brand.

Classes X-CP and X-EXT are interest-only (IO) certificates that reference a single rated tranche or multiple rated tranches. The IO rating mirrors the lowest-rated reference tranche adjusted upward by one notch if senior in the waterfall.

All ratings will be subject to ongoing surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed or discontinued by DBRS.

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

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 to the right under Related Research or by contacting us at info@dbrs.com.

The principal methodology is CMBS North American Surveillance, which can be found on dbrs.com under Methodologies. For a list of the Structured Finance related methodologies that may be used during the rating process, please see the DBRS Global Structured Finance Related Methodologies document on www.dbrs.com. 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.

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

The rated entity or its related entities did participate initially in the rating process. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.