DBRS Morningstar Assigns Ratings to CSMC 2018-SITE

DBRS, Inc. (DBRS Morningstar) assigned ratings to the Commercial Mortgage Pass-Through Certificates, Series 2018-SITE issued by CSMC 2018-SITE as follows:

-- Class A at AAA (sf)
-- Class X at AAA (sf)
-- Class B at AAA (sf)
-- Class C at AA (sf)
-- Class D at A (sf)
-- Class E at BB (high) (sf)
-- Class HRR at BB (sf)

Class A carries a Negative trend because the underlying collateral continues to face performance challenges associated with the Coronavirus Disease (COVID-19) global pandemic. DBRS Morningstar has also placed Classes B, C, D, E, HRR, and X Under Review with Negative Implications, given the negative impact of the coronavirus on the underlying collateral.

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 20, 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upon withdrawal of MCR’s outstanding ratings, the DBRS Morningstar ratings will become the successor ratings to the withdrawn MCR ratings.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 transaction’s only loan is secured by the borrower’s fee-simple interest in the SITE JV Portfolio. The collateral comprises 10 retail centers totaling 3.4 million sf across nine different states. The loan consists of two pari passu notes: a $170.0 million A-1 note and a $50.0 million A-2 note (held outside the trust). The trust also includes a $144.3 million subordinated B note. Total loan proceeds of $364.3 million along with borrower equity of $259.3 million funded the purchase price of $607.2 million, upfront reserves of $8.4 million, and closing costs of $8.0 million. Of the $8.4 million in upfront reserves, the sponsor allocated $5.6 million to unfunded obligations and $2.6 million to the restoration of the University Centre. The 64-month loan pays interest only (IO) through the entire loan term and matures in April 2024.

Individual properties may be released from the security under certain conditions and with a payment of a release price of 110% of the allocated loan amount (ALA) for the property if released to an affiliate of the sponsor, 115% of the ALA for releases with respect to the first 30% of the original principal balance, and 115% of the ALA for releases thereafter, except to an affiliated party when the release percentage shall be 120%.

The portfolio consists of 10 retail properties in multiple markets in nine states. The largest market exposures are in Phoenix (20.2% of net rentable area (NRA) and 25.6% of the ALA), Chicago (9.3% of NRA and 9.5% of the ALA), and Atlanta (8.4% of NRA and 7.8% of the ALA). Eight properties have grocery store anchors. The three largest tenants are AMC Theatres (5.6% of total NRA); The TJX Companies, Inc. (TJX; 4.9% of total NRA); and Ross Dress for Less (4.4% of total NRA). The tenant mix for the portfolio is granular and consists of a number of credit-rated tenants, including TJX (eight properties; 5.1% of DBRS Morningstar base rent); Ross Stores, Inc. (six properties; 4.7% of DBRS Morningstar base rent); Best Buy Co., Inc. (three properties; 4.2% of DBRS Morningstar base rent); Lowe’s Companies, Inc. (two properties; 4.5% of base rent); and Kohl’s (four properties; 4.4% of base rent). No single tenant represents more than 8.4% of the total square footage. The portfolio’s average occupancy between 2014 and 2017 was 94.8%, but dipped in late 2018 to 90.9% with the bankruptcy and departure of Toys “R” Us and Babies “R” Us stores.

The sponsor and nonrecourse carveout guarantor is Dividend Trust Portfolio JV LP, a joint venture among wholly owned subsidiaries of SITE Centers Corp. (SITE; 20% ownership) and subsidiaries of China Merchants Group Limited and China Life Insurance Company Ltd. (80% ownership). DDR Property Management (rebranded as SITE on October 12, 2018) manages the properties.

Performance had been consistently strong until the coronavirus pandemic struck in mid-March 2020. The government-enforced social distancing and lockdown of nonessential businesses devastated many smaller stores. In recent months, the restrictions have relaxed. In general, restaurants and stores have been permitted to reopen with safety procedures in place, including social distancing, masking of employees and customers, and limited shopper density and interaction. The portfolio has exposure to AMC Theatres (5.6% of NRA and 10.2% of the DBRS Morningstar base rent) via three leases that expire in December 2020, 2029, and 2031, respectively. In recent news articles, AMC Theatres has publicly reported concerns about its operations amid the pandemic with statements noting severe cash flow impairments as all locations were closed beginning in March 2020. As of October 2020, AMC Theatres reopened some locations across the country, including the three locations included in this transaction.

DBRS Morningstar is still monitoring the situation and is waiting for an update from the servicer on how the coronavirus has affected rent collections. The borrower has maintained debt service payments and the servicer has not reported any delinquencies.

DBRS Morningstar reanalyzed the NCF derived at issuance for the subject rating action to confirm its consistency with the “DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria.” The resulting NCF figure was $35.4 million and DBRS Morningstar applied a cap rate of 8.29%, which resulted in a pre-coronavirus DBRS Morningstar Value of $426.7 million, a variance of 31.2% from the appraised value of $620.0 million at issuance. The pre-coronavirus DBRS Morningstar Value implies an LTV of 85.4% compared with the LTV of 58.8% on the appraised value at issuance.

The cap rate DBRS Morningstar applied is in the middle of the range of DBRS Morningstar Cap Rate Ranges for retail properties, reflecting the subjects’ location, property quality, and market position.

DBRS Morningstar made positive qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis, totaling 1.5% to account for cash flow volatility, property quality, and market fundamentals. DBRS Morningstar also made other positive adjustments to account for the portfolio’s diversity and other negative adjustments to account for the portfolio’s high total secured debt LTV.

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 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 through Class HRR exceeded the value under the Coronavirus Impact Analysis and therefore DRS Morningstar presumes that the economic stress from the coronavirus had affected the class.

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.

After applying the Coronavirus Impact Analysis, DBRS Morningstar had higher variances from the ratings assigned to Classes B, C, D, E, and HRR to the results of its LTV sizing benchmarks. The variation is warranted due to going concerns with the impact of the coronavirus on the collateral assets and, as a result, DBRS Morningstar placed these classes Under Review with Negative Implications.

Class X is an IO certificate 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 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.

DBRS Morningstar’s North American CMBS analytical team will continue to monitor the transaction to evaluate the increased risk factors related to the coronavirus pandemic. As information (e.g., updated property-level financials, rent rolls, new valuations for specially serviced loans, and workout and/or modification specifics, if applicable) becomes available, DBRS Morningstar will address the Under Review with Negative Implications rating actions over the near to moderate term. DBRS Morningstar typically endeavors to resolve an Under Review rating action within 90 days, but the circumstances surrounding these rating actions (i.e., the unknown length of the pandemic-related downturn) may result in a prolonged resolution period.

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

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