DBRS Morningstar Assigns Ratings to CGMS Commercial Mortgage Trust 2017-MDDR

DBRS, Inc. (DBRS Morningstar) assigned ratings to the Commercial Mortgage Pass-Through Certificates (the Certificates) issued by CGMS Commercial Mortgage Trust 2017-MDDR as follows:

-- Class A-FX at AAA (sf)
-- Class A-FL-PB at AAA (sf)

The trend on Class A-FL-PB is Stable. Class A-FX carries a Negative trend because the underlying collateral continues to face performance challenges associated with the Coronavirus Disease (COVID-19) global pandemic.

These certificates are currently also rated by DBRS Morningstar’s affiliated rating agency, Morningstar Credit Ratings, LLC (MCR). In connection with the ongoing consolidation of DBRS Morningstar and MCR, MCR previously announced that it had placed its outstanding ratings of these certificates Under Review–Analytical Integration Review and that MCR intended to withdraw its outstanding ratings; such withdrawal will occur on or about October 13, 2020. In accordance with MCR’s engagement letter covering these certificates, upon withdrawal of MCR’s outstanding ratings, the DBRS Morningstar ratings will become the successor ratings to the withdrawn MCR ratings. Information about the MCR ratings, including the history of the MCR ratings, can be found at www.morningstarcreditratings.com.

On March 1, 2020, DBRS Morningstar finalized its “North American Single-Asset/Single-Borrower Ratings Methodology” (the NA SASB Methodology), which presents the criteria for which ratings are assigned to and/or monitored for North American single-asset/single-borrower (NA SASB) transactions, large concentrated pools, rake certificates, ground lease transactions, and credit tenant lease transactions. For further information on the NA SASB Methodology, please see the press release dated March 1, 2020, at www.dbrsmorningstar.com. On April 24, 2020, DBRS Morningstar placed the ratings on its outstanding SASB transactions secured by retail properties Under Review with Negative Implications while MCR placed the ratings on its outstanding SASB transactions secured by retail properties Under Review Negative as the global shelter-in-place and mandatory retail closures related to the coronavirus have contributed to retail bankruptcies and anticipated vacancies in retail centers. For further information on these rating actions, please see the DBRS Morningstar press release dated April 24, 2020, at www.dbrsmorningstar.com and the MCR press release dated April 24, 2020, at www.morningstarcreditratings.com.

To assign ratings to this transaction, DBRS Morningstar considered both the impact of the updated NA SASB Methodology and its scenarios attributable to the ongoing coronavirus pandemic on the ratings.

Because of the coronavirus’ significant impact on retail performance, DBRS Morningstar first considered the application of the updated NA SASB Methodology in conjunction with the “North American CMBS Surveillance Methodology” to arrive at a baseline result, which incorporated qualitative assumptions, capitalization rates, and loan-to-value (LTV) ratio sizing benchmark quality/volatility adjustments and excluded any potential changes in current or future expected asset performance resulting from the coronavirus.

DBRS Morningstar then overlaid scenarios incorporating additional reductions in net cash flow (NCF) to account for exposure to bankrupt or closed tenants. This resulted in stressed collateral value declines consistent with the projections in its “Global Macroeconomic Scenarios: September Update” published on September 10, 2020, on top of the baseline result to determine the impact of coronavirus-related changes in asset performance on the subject transaction on a tranche-by-tranche basis. For more information on these stress scenarios, please refer to the Coronavirus Impact Analysis section of this document. The global macroeconomic scenarios include a moderate decline of 15% for all commercial real estate (CRE), which acts as an average for all CRE property types. However, DBRS Morningstar expects a greater range of value decline for retail properties, ranging from 10% to 45% based on the type of tenant composition, exposure to bankrupt or challenged retailers, asset sponsorship, and asset location. DBRS Morningstar expects that lower-tier regional malls with in-line sales generally less than $300 per square foot (sf) will be the most affected.

LOAN/PROPERTY OVERVIEW
The Certificates are backed by two separate first-mortgage loans and two pools (Pool A and Pool B) of retail properties encompassing 34 properties across nine states, totaling 5.1 million sf, at issuance. DBRS Morningstar analyzed and valued each pool separately.

At issuance, Pool A and Pool B were secured by 24 grocery-anchored centers and 10 centers power centers. Publix anchored seven of the 24 grocery-anchored centers while Harris Teeter and Kroger anchored some of the other centers. Other stores and anchors at various centers include Ross Dress for Less; Bealls; Dollar Tree; Michaels; Bed Bath & Beyond; Kohl’s; and the UPS Store. Most properties are in secondary or tertiary locations with low barriers to entry and the threat of more competition; however, the individual pools have granular rent rolls with properties in Pool A leased to 338 tenants and properties in Pool B occupied by 340 retailers. According to the servicer, the borrower has not requested any relief related to the coronavirus pandemic in terms of forbearance or loan modification as of September 2020.

The loans have exhibited steadily improving NCFs since issuance as occupancy rates have remained flat and the pools remain stabilized. The YE2019 NCF for Pool A was 10.6% higher than the issuer’s underwritten NCF at issuance. The YE2019 NCF for Pool B increased by 3.8% since issuance when comparing the 14 properties that remain in the pool. The collateral benefits from the high concentration of grocery-anchored properties as grocery stores were deemed essential businesses throughout the coronavirus pandemic. However, many small retailers were forced to close and recently started to reopen as certain virus recovery phases begin in each location and state. The pools benefit from geographic diversity as local governments mandate different social guidelines throughout the pandemic.

Pool A consists of two trust promissory notes with a total mortgage balance of $218.7 million and is secured by 13 retail properties totaling 2.3 million sf. Ten of the 13 retail properties are grocery anchored and the portfolio had been historically well occupied, averaging 92.9% occupancy since 2011. The scheduled rollover of three Publix stores in the first two years of the loan term was concerning; however, two of the Publix stores renewed for an additional five years while the Publix at Skyview Plaza in Orlando vacated in April 2018. The other notable lease rollover was Kohl’s at Apple Blossom Corners in Winchester, Virginia, whose lease expired in February 2018 and ultimately renewed for an additional five years. Pool A is relatively unchanged and had been performing above the issuer’s underwritten expectations from issuance through YE2019. As of August 31, 2020, Pool A was 86.0% physically occupied, which is in line with the occupancy rate of 85.8% at issuance.

Pool B consists of two trust promissory notes with a total mortgage balance of $274.8 million and is secured by 21 retail properties totaling 2.8 million sf at issuance. Per the September 2020 remittance, 14 properties remained in the trust with a total trust balance of $178.8 million, representing a collateral reduction of 34.9% since issuance. The remaining pool consists of nine remaining grocery-anchored retail centers and five power centers. As of August 31, 2020, Pool B was 91.6% occupied, which is in line with the occupancy rate of 90.2% at issuance. DBRS Morningstar was monitoring the upcoming January 2021 lease expiration for Kohl’s at Highland Grove Shopping Center in Indianapolis and the servicer reported that Kohl’s exercised its five-year renewal option, which will extend the lease to January 2026.

The sponsor for this transaction is Madison International Realty, LLC (Madison International), founded in 2002 by president Ronald M. Dickerman. Madison Real Estate Liquidity Fund VI LP (Madison Real Estate) owns an 80% interest in the borrowers through DDR Manatee Master REIT, Inc. while SITE Centers Corp. (SITE) owns the remaining 20% interest. According to the company’s website, Madison Real Estate is an investment fund of Madison International. The fund has invested in retail and office properties in the United States and Ireland. SITE, headquartered in Beachwood, Ohio, was formerly known as Developers Diversified Realty Corp. The company, listed on the New York Stock Exchange, was incorporated in 1992 and changed its name to DDR Corp. in 2011. In October 2018, the company changed its name again to SITE Centers Corp. Through DDR Domestic Retail Fund I, SITE has owned the 33 assets in both portfolios for over 10 years. At closing, Madison International Realty acquired an 80% interest in this fund through the transfer of limited partnership interests. DDR Property Management LLC has managed the portfolio since 2007.

DBRS Morningstar derived the NCF for each pool using the latest reported servicer NCF with an adjustment, considering ongoing collateral performance including tenant movement and sales performance. The resulting NCF figure for Pool A was $22.0 million and DBRS Morningstar applied a cap rate of 8.50%, which resulted in a pre-coronavirus DBRS Morningstar Value of $259.1 million, a variance of -28.8% from the appraised value of $364.2 million at issuance. The resulting NCF figure for Pool B was $18.5 million and DBRS Morningstar applied a cap rate of 8.25%, which resulted in a pre-coronavirus DBRS Morningstar Value of $223.8 million, a variance of -28.0% from the appraised value of $310.9 million at issuance.

The cap rates DBRS Morningstar applied are at the middle end of the range of DBRS Morningstar Cap Rate Ranges for retail properties, reflecting the suburban locations and market positions of the portfolio assets.

DBRS Morningstar made positive qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis, totaling 1.50% to account for cash flow volatility, given the granular and diverse tenant base.

CORONAVIRUS IMPACT ANALYSIS
DBRS Morningstar overlaid various scenarios incorporating higher NCF declines, resulting in stressed collateral value declines consistent with the projections in the “Global Macroeconomic Scenarios: September Update” (https://www.dbrsmorningstar.com/research/366542) to estimate the impact of coronavirus-related changes in asset performance on a tranche-by-tranche basis for the subject transaction. The scenarios included deducting cash flow for bankrupt retailers and/or increased vacancy expected at the asset to arrive at a coronavirus DBRS Morningstar Value under the moderate scenario, a 15.0% reduction from the pre-coronavirus DBRS Morningstar Value. Because of the more permanent value impairment resulting from the lost tenancy revenue stream, DBRS Morningstar’s analysis considered this value when assigning ratings.

Under the moderate scenario, the cumulative rated debt was insulated from loss.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

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

DBRS Morningstar provides 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.dbrsmorningstar.com. The platform includes loan-level 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 methodologies are the North American Single-Asset/Single-Borrower Ratings Methodology (March 1, 2020) and North American CMBS Surveillance Methodology (March 6, 2020), which can be found on www.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 www.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 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.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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