DBRS Morningstar Confirms Ratings on Three Classes of MSCCG Trust 2015-ALDR, Maintains Three Classes Under Review with Negative Implications

DBRS, Inc. (DBRS Morningstar) confirmed the ratings on the Commercial Mortgage Pass-Through Certificates, Series 2015-ALDR issued by MSCCG Trust 2015-ALDR as follows:

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class X-A at AAA (sf)

The trends on Classes A-1, A-2, and X-A are Negative as the underlying collateral continues to face performance challenges associated with the Coronavirus Disease (COVID-19) global pandemic. DBRS Morningstar also removed the ratings on these classes from Under Review with Negative Implications, where they were placed on April 24, 2020.

The following ratings on Classes B, C, and D remain Under Review with Negative Implications, given the negative impact of the coronavirus on the underlying collateral:

-- Class B at AA (sf)
-- Class C at A (sf)
-- Class D at BBB (sf)

The ratings on these classes do not carry trends.

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 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.

During its review of the ratings for 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 (psf) will be the most affected.

LOAN/PROPERTY OVERVIEW
The first-mortgage loan is secured by the fee-simple interest in a 575,704-square-foot (sf) portion of the 1.1 million-sf Alderwood Mall in Lynnwood, Washington, approximately 18 miles north of the Seattle CBD. The Class A, super-regional mall was constructed in 1979 and has undergone several renovations, the last of which was a $16.5 million upgrade completed in 2013. The mall is anchored by JCPenney, Macy’s, Nordstrom, and Loews Cineplex Entertainment (Loews). Additionally, there is a vacant Sears box at the property. The JCPenney, Macy’s, Nordstrom, and vacant Sears boxes are not part of the loan collateral. The sponsor purchased the Sears store in 2017 after it became vacant and is in the early stages of a multiyear expansion and renovation plan.

The loan has a 10-year term, amortizing over a 30-year schedule with a maturity date of June 2025. The original $355.0 million first-mortgage loan consists of six separate notes, four of which are pari passu notes that comprise the trust collateral with the remaining two notes contributed to three other commercial mortgage-backed security (CMBS) transactions. As of the September 2020 remittance, the trust had a balance of $234.4 million, representing a collateral reduction via amortization of 8.3% since issuance. The loan remains current with a YE2019 NCF of $30.7 million, equating to a debt service coverage ratio of 1.61 times and representing a -4.8% variance from the 2018 NCF primarily because of a 19.7% decline in Other Income year over year (YOY).

The property is owned by a 50/50 joint venture (JV) between Brookfield Property Partners L.P. (Brookfield) and the New York State Common Retirement Fund (doing business as Homart II LLC). Brookfield assumed its ownership interest when it purchased GGP Inc. in 2018.

In response to the coronavirus outbreak, the mall closed in mid-March 2020 and reopened in June 2020. According to a July 2020 update, most tenants were operating as retail capacity was at 95.0% with 86.0% of retailers open for business. The largest collateral tenant is Loews (13.8% of the net rentable area (NRA); lease expiry in December 2025), which remains closed under Snohomish County Phase 2 restrictions with a currently unknown reopening date. Once the county enters Phase 3, the theater will be able to operate at 25.0% capacity. DBRS Morningstar did not receive information regarding the total number of tenants that requested and received rent deferrals or abatements as a result of the ongoing pandemic; however, Recreational Equipment, Inc. (REI), which represents 4.4% of the NRA and 2.7% of base rent, received a three-month rent deferral beginning in April 2020. The deferred rental payments will be repaid beginning in January 2021 in 12 monthly installments. REI’s current lease expires in January 2025 as the tenant recently executed a five-year extension option at its previous rental rate of $35.25 psf triple net.

As of March 2020 reporting, total mall occupancy was 98.0% with the collateral occupancy rate at 95.6%. The sponsor has successfully signed new in-line leases with Amazon 4-star, Bath & Body Works, and Hot Topic. Upcoming tenant rollover risk is moderate as major tenants Forever 21, which represents 4.2% of the NRA and 3.0% of base rent, and American Girl, which represents 2.2% of the NRA and 1.9% of base rent, have lease expiries in Q1 2022. Other major collateral tenants include Zara, which represents 5.1% of the NRA and 3.7% of base rent, and H&M, which represents 3.1% of the NRA and 2.4% of base rent, with lease expiries in October 2028 and January 2023, respectively.

According to the servicer, the borrower stated that the noncollateral anchors are stable and DBRS Morningstar confirmed that none are currently on any company store-closure lists. DBRS Morningstar did not receive sales reports for noncollateral anchor tenants, but did receive YE2019 sales data for the collateral tenants. According to the YE2019 sales report, tenant sales were generally stable or slightly down from the previous year. Loews reported sales of $844,000 per screen, down 2.3% YOY, while in-line stores greater than 10,000 sf reported sales of $187 psf, down 4.2% YOY, and in-line stores less than 10,000 sf reported sales of $713 psf, up 10.9% YOY. While total sales for all in-line stores less than 10,000 sf increased, the figure drops to $558 psf excluding Apple, which represents a 10.4% decline YOY.

The sponsor is in the early stages of a $179 million expansion and renovation at the property, situated at the former Sears space, which has been demolished. Construction is underway with plans including the addition of 328 multifamily units, 90,000 sf of retail, a Dave & Busters, additional restaurants, and subterranean parking. Construction was temporarily halted because of restrictions related to the pandemic, but has resumed with preliminary delivery dates beginning in late 2021 and throughout 2022. While the development will not serve as collateral for the loan, DBRS Morningstar views the sponsors’ continued investment in the property as a long-term positive for the mall as it will bring more consumers to the area and likely increase the inherent value of the collateral.

The collateral is primed to be the dominant traditional mall in the area as one of its competitors, the Simon Property Group, Inc.-owned Northlake Mall, has lost all three of its traditional anchors and is undergoing a significant renovation centered around the addition of three hockey rinks as the property will serve as the practice facility and offices for the future Seattle Kraken National Hockey League team. The development will also include two hotels, multiple multifamily buildings, and up to 350,000 sf of retail and restaurant space along with a new light-rail station. Construction on the hockey rinks began in February 2020 with the remaining development expected to begin in 2021 or 2022.

DBRS Morningstar derived the NCF using the latest reported servicer NCF with an adjustment, considering the uncertainty in the current retail landscape. The resulting NCF figure was $30.1 million and DBRS Morningstar applied a cap rate of 7.5%, which resulted in a pre-coronavirus DBRS Morningstar Value of $401.7 million, a variance of -72.6% from the appraised value of $693.5 million at issuance. The pre-coronavirus DBRS Morningstar Value implies an LTV of 79.0% compared with the LTV of 45.8% 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 subject’s location and position in the market.

DBRS Morningstar made positive qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis, totaling 4.0% to account for property quality and market fundamentals.

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 for this review.

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

After applying the Coronavirus Impact Analysis, DBRS Morningstar had variances that were generally higher than those results implied by the LTV sizing benchmarks for Classes B, C, and D. The variation is warranted due to going concerns with the impact of the coronavirus pandemic on the collateral assets and, as a result, DBRS Morningstar placed these classes Under Review with Negative Implications.

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.

Class X-A is an interest-only (IO) certificate that references 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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