DBRS Confirms All Classes of Morgan Stanley Bank of America Merrill Lynch Trust 2013-C7

DBRS Limited (DBRS) confirmed all classes of Commercial Mortgage Pass-Through Certificates, Series 2013-C7 issued by Morgan Stanley Bank of America Merrill Lynch Trust 2013-C7 as follows:

-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-AB at AAA (sf)
-- Class A-S at AAA (sf)
-- Class X-A at AAA (sf)
-- Class B at AA (sf)
-- Class X-B at A (high) (sf)
-- Class C at A (sf)
-- Class PST at A (sf)
-- Class D at BBB (sf)
-- Class E at BB (high) (sf)
-- Class F at BB (sf)
-- Class G at B (sf)

All trends are Stable.

The rating confirmations reflect the overall stable performance of the transaction since issuance. As of the November 2018 remittance, 55 of the original 64 loans remained in the pool with an aggregate principal balance of $1.1 billion, representing a collateral reduction of 22.7% since issuance. The bulk of the principal repayment was the result of scheduled loan amortization and successful loan repayments, but there has been one loan liquidated from the pool in Prospectus ID#25, Oakridge Office Park, which was resolved in January 2017 with a loss of $3.8 million. The loss was contained to the unrated Class H certificates. In addition, there are two loans, representing 1.6% of the pool, that are fully defeased. Although the paydown since issuance has been significant and benefits the overall credit quality of the pool, DBRS’s concerns with two loans in the top 15, Valley West Mall (Prospectus ID#7, 4.1% of the pool) and Scripps Research Building (Prospectus ID#8, 3.1% of the pool), temper those positive factors to a degree and generally limit the likelihood of ratings upgrades through the near to medium term.

Of the 53 non-defeased loans remaining in the pool, 47 loans, representing 81.4% of the pool, are reporting year-end (YE) 2017 financials, with a weighted-average (WA) debt-service coverage ratio (DSCR) and debt yield of 1.91 times (x) and 11.1%, respectively. Fourteen of the 15 largest loans reported YE2017 financials. These loans reported a WA DSCR and debt yield of 1.90x and 10.8%, respectively, representing a WA net cash flow growth of 5.5% over the DBRS issuance figures. Although there has been overall cash flow growth since issuance, the percentage is relatively low as compared with other transactions of this vintage rated by DBRS, another factor limiting the prospects for upgrades to the original ratings derived at issuance.

As of the November 2018 remittance, there are six loans, representing 7.4% of the pool, on the servicer’s watchlist and no loans in special servicing. Five of the six loans on the watchlist are being monitored for performance issues. The largest loan on the watchlist, Scripps Research Building, is secured by an office and research facility in California. The property is 100% occupied by an investment-grade tenant, Scripps Research Institute (Scripps), on a lease through June 2019. The servicer has not confirmed the renewal status for Scripps, but DBRS found listings online suggesting the space is currently being listed for lease with an asking rate of $54 per square foot (psf), compared with the rental rate of $50.78 psf Scripps is currently paying. The property is highly specialized for research tenants, which is ideal considering the surrounding area is known for its biotechnology research and learning institutions. The loan was structured with a cash flow sweep to be triggered 18 months prior to Scripps’ lease expiration if notice of renewal is not received. DBRS has requested confirmation from the servicer that the sweep is in place. For additional information on this loan, please see the loan commentary in the DBRS Viewpoint platform, for which information has been provided below.

Although not yet added to the servicer’s watchlist, the Valley West Mall (Prospectus ID#7, 4.1% of the pool) loan is being monitored by DBRS because one of the mall’s anchor tenants, Younkers (formerly 24.0% of the net rentable area (NRA)), vacated ahead of its lease expiry of January 2021 after its parent company, Bon-Ton, filed for bankruptcy and liquidated all stores. Additionally, Von Maur (21.5% of NRA; lease expires October 2022) announced in February 2018 that the chain would be building another store at the Jordan Creek Town Center mall, four miles west of the subject, in 2022. The subject mall is located in a B market in West Des Moines, Iowa, and at issuance, DBRS noted the Jordan Creek property was far superior to the subject in terms of tenancy and overall appeal. Although Von Maur has publicly affirmed the Valley West Mall location would not be impacted by these developments, DBRS believes it is unlikely both locations would ultimately be supported by this market.

When removing both Younkers’ and Von Maur’s rent, the implied DSCR is approximately 1.34x; however, DBRS believes it would fall even lower when co-tenancy clauses allowing inline tenants to vacate or modify leases kicked in for the loss of two anchors. DBRS has asked for clarification on the subject’s Von Maur’s status and plans for repurposing the vacant Younkers space from the servicer and will continue to monitor the situation. Although the near-term cash flow trends appear sufficient to cover debt service, the outlook for the mall if both anchor spaces are vacant is tenuous at best. For additional information on this loan, please see the loan commentary in the DBRS Viewpoint platform, for which information has been provided below.

At issuance, DBRS shadow-rated Sunvalley Shopping Center Fee (Prospectus ID#17, 2.0% of the pool) investment grade, based on the cash flow stability, strong exit debt yield, high quality tenancy and strong sponsorship. DBRS confirmed that performance of this loan remains consistent with investment-grade characteristics.

Classes X-A and X-B are interest-only (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 the following loans in the transaction:

-- Prospectus ID#7 – Valley West Mall (4.1% of the pool)
-- Prospectus ID#8 – Scripps Research Building (3.1% of pool)
-- Prospectus ID#15 – Concorde Green Retail (2.2% of pool)
-- Prospectus ID#17 – Sunvalley Shopping Center Fee (2.0% of pool)
-- Prospectus ID#35 – Hampton Inn – Lexington (0.8% of pool)

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrs.com. The platform includes issuer and servicer data for the entire 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, which can be found on dbrs.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 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.