DBRS Confirms All Classes of CSMC Trust 2016-MFF

DBRS Limited (DBRS) confirmed all classes of Commercial Mortgage Pass-Through Certificates, Series 2016-MFF 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, which remains in line with DBRS’s expectations at issuance. The loan is 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 LP. The transaction consists of a $280.0 million floating rate first mortgage loan and there is also a subordinate loan of $38.5 million held outside the trust. The trust loan is interest-only (IO) and was structured with an initial two-year term and three one-year extension options, the first of which was recently exercised by the borrower.

This loan was put on the watchlist in July 2018, due to the October 2018 maturity date; however, as the first one-year maturity extension through October 2019 has been exercised and all servicer approvals have been completed, the loan is expected to be removed from the watchlist in the near term.

The loan was structured with a lockout period, allowing the borrower to only prepay up to 10% of the principal balance without penalty before July 2018. Since the end of the lockout period, the borrower has paid the loan down by $18.5 million, representing a collateral reduction of 6.6%. There have been no property releases in conjunction with the paydown and as of the October 2018 remittance, all of the original stores continue to secure the trust loan. According to servicer commentary, the borrower intends to repay the loan in full well before the new maturity date.

The portfolio has remained 100% occupied since issuance. The 27 stores are subject to a master lease on an absolute-net basis for 25 years, with MFF guaranteeing all operating and capital expenditures at the property level. The master lease has four extension options of five years each and 2.0% annual rent escalations. As of October 2018, the rental rate is $7.50 per square foot (psf), up from $7.36 psf in October 2017, and $7.21 psf at issuance. Based on the rental rate paid as at October 2018, the annual rent figure is $44.6 million.

Kohlberg, Kravis, Roberts & Co. (KKR) acquired MFF in February 2016, and according to announced plans for the acquisition, expects to consolidate the company’s distribution and inventory management while also increasing store footprints. MFF has benefitted from being the first major retailer in smaller submarkets and has a history of steady growth and limited operational volatility. At issuance, the portfolio reported average sales for the last 12 months (T-12) ending June 2016 of $333 psf based on selling square footage. DBRS requested updated T-12 sales reports for the 27 properties and the servicer’s response is pending. According to an article posted on July 31, 2018, by “Journal Sentinel” (a subsidiary of “USA Today”), MFF plans to double the store count to 70 in the next four or five years. Since issuance, seven new stores have opened, bringing the chain’s total to 42 locations across the Upper Midwest. Overall, DBRS believes these new store openings are indicative of KKR’s commitment to the growth of the MFF brand.

The servicer is reporting an in-place debt service coverage ratio (DSCR) of 2.91 times (x) for the senior loan as of YE2017. Based on the DBRS Term net cash flow figure derived at issuance and a stressed debt service figure, the implied DBRS Term DSCR is 2.09x for the senior note, with a DBRS Refi DSCR of 1.28x. These figures represent slight declines from issuance, due to interest rate increases since issuance.

Classes X-CP and X-EXT are IO certificates that reference 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 will be subject to ongoing surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed or discontinued by DBRS.

As part of this review, DBRS has provided 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.dbrs.com. The platform includes loan level-data for the entire commercial mortgage-backed securities (CMBS) universe, as well as deal and loan-level commentary for all DBRS rated transactions.

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

The principal methodology is North American CMBS Surveillance Methodology, 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.

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@dbrs.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS 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.

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