DBRS Morningstar Confirms Ratings on GS Mortgage Securities Trust 2013-G1 with Negative Trends, Removes from Under Review with Negative Implications

DBRS, Inc. (DBRS Morningstar) confirmed the ratings on the following classes of the Commercial Mortgage Pass-Through Certificates, Series 2013-G1 issued by GS Mortgage Securities Trust 2013-G1:

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class X-A at AAA (sf)
-- Class B at AA (sf)
-- Class C at A (sf)
-- Class D at BBB (low) (sf)
-- Class DM at BB (sf)

All trends are Negative because the underlying collateral continues to face performance challenges associated with the Coronavirus Disease (COVID-19) global pandemic. The ratings have been removed from Under Review with Negative Implications, where they were placed on April 24, 2020.

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 collateral consists of three fixed-rate loans that are secured by two outlet malls and one regional mall—Great Lakes Crossing Outlets, Deptford Mall, and Katy Mills—located in established suburban markets outside of Detroit, Philadelphia, and Houston. Combined, the three senior pooled mortgage loans total $544.0 million and are not cross-collateralized or cross-defaulted. The three 10-year loans carry a weighted-average interest rate of 3.619% with Great Lakes Crossing Outlets and Deptford Mall amortizing on 30-year schedules while Katy Mills is interest only (IO) for the entire loan term. A $25.1 million subordinate rake bond secured by the Deptford Mall is included for a total security balance of $568.97 million.

Great Lakes Crossing Outlets, financed with a $224.6 million senior trust loan, is a 1.12 million-square-foot (sf) outlet center in Auburn Hills, Michigan, built in 1998 and renovated in 2010 by the sponsor, Taubman Centers, Inc., a publicly traded real estate investment trust headquartered in Bloomfield Hills, Michigan. A Taubman affiliate manages the center. The 30-year loan matures in January 2023 and amortizes according to a 30-year schedule. In May 2020, the sponsor requested hardship related to coronavirus, which was later withdrawn. AMC Theatres, which reopened recently after a prolonged closure in response to the pandemic, and Bass Pro Shops are noncollateral anchors at the center. The largest collateral tenants at the property are Burlington Coat Factory (7.2% of net rentable area (NRA), lease expires in January 2024), Round 1 Bowling & Amusement (Round 1; 5.2% of the NRA, lease expires September 2027), Forever 21 (4.2% of NRA, lease expires in January 2025), and Bed Bath & Beyond (3.9% of NRA, lease expires in January 2020). Other prominent tenants include T.J. Maxx, Marshalls, Lord & Taylor Outlet, Nike Factory, H&M, Planet Fitness, and Art Van Furniture/Pure Sleep Clearance Center.

As of September 2020, the subject was 94.2% occupied. Overall, the mall reported YE2019 sales of $345 psf, which is a slight decline from the YE2018 sales figure of $357 psf and YE2017 sales figure of $354 psf, but an improvement over the YE2013 sales figure of $325 psf. As of June 2020, the subject reported year-to-date (YTD) sales of $95 psf compared with $154 psf over the same period in 2019.

The Deptford Mall loan is secured by 343,910 sf of in-line space within a 1.0 million-sf regional mall located in Deptford, New Jersey, within the Philadelphia metropolitan statistical area. Loan proceeds of $205 million are being used to refinance a previously existing loan of $173.3 million; pay title and escrow charges of approximately $381,000; pay closing costs of $814,000; fund upfront reserves totaling $230,000; and return approximately $30.3 million of equity to the sponsor. The loan has been bifurcated into a $179.4 million senior pooled amount and a $25.1 million subordinate nonpooled rake bond. There is no additional debt in place and none allowed in the future.

The mall is owned and operated by Macerich and is anchored by Boscov’s, Macy’s, JCPenney (JCP), and Dick’s Sporting Goods (Dick’s), which took part of the former Sears space and opened in August 2020. Sears closed in late 2018, and the Dick’s lease signing was announced shortly thereafter. In 2019, it was announced that the remainder of the Sears space would be taken by Round 1, which was in the final stages of construction as of July 2020. As of August 2020, the subject’s JCP location has not been listed for closure in any of the court filings or announcements made by the company as part of its May 2020 bankruptcy filing. Forever 21 recently renewed its lease which now expires in January 2023. The mall is shadow anchored by Target, BJ’s Wholesale Club, and Lowe’s Home Improvement, with several surrounding hotels. The loan sponsor, Macerich, is a real estate investment trust that is the third-largest owner and operator of shopping centers in the country. The mall is managed by a sponsor affiliate. In June 2020, the loan was transferred to the special servicer because of requested coronavirus-related relief but was returned to the master servicer in July 2020 without modification.

As of September 2020, the subject has an occupancy of 91.2%, which is down from a very consistent occupancy in the high 90s since origination. Net operating income for 2018 had increased 14.6% over the issuance figure. The subject reported total sales from July 2019 to June 2020 of $403 psf. The provided report does not break out sales for tenants less than 10,000 sf; the most recent sales figures for those tenants was provided for the trailing 12 months ended September 2018 at $530 psf. Per the servicer’s commentary, the property is currently collecting approximately 68% of monthly billed rents and is working with tenants who are requesting rent deferral.

Katy Mills is secured by the fee-simple interest in an indoor 1.2 million-sf mall that has a mixture of traditional and outlet retail stores. Built in 1999 and renovated in 2004, the center completed another major interior and exterior renovation in 2019. Anchors at the center include AMC Theatres, Bass Pro Shops, Burlington Coat Factory, and H&M—all of which are owned and part of the loan collateral. The subject is shadow anchored by a Walmart Supercenter. An affiliate of the loan sponsor, Simon Property Group, operates the property. The center was developed by The Mills Corporation and is now 62.5% owned by Simon Property Group. Loan proceeds of $140 million ($117 psf) will be used to refinance previously existing debt totaling $136.5 million, pay closing costs of nearly $1.4 million, as well return approximately $2.1 million of equity to the sponsors. The loan is interest only (IO) and is on a 10-year loan term. There is no subordinate debt nor is there any permitted per the loan documents. The loan matures in December 2022.

As of September 2020, the subject was 88.3% occupied. Updated sales reports have been requested but have not been provided to date. According to the November 2018 tenant sales report previously on file with DBRS Morningstar, in-line tenants occupying less than 10,000 sf reported November 2018 YTD sales of $357.08 psf, which was a 7.5% increase over the November 2017 YTD sales of $332.20 psf. The YE2017 and YE2016 sales figures for these tenants were $420.75 psf and $427.15 psf, respectively. In-line tenants occupying more than 10,000 sf reported a November 2018 YTD sales figure of $395.51 psf, which is a 3.2% increase from the November 2017 YTD sales figure of $383.24 psf. The YE2017 and YE2016 sales figures for these tenants were $447.56 psf and $454.80 psf, respectively. Generally, sales have been trending downward in the past few years and the servicer has advised that the main drivers were low oil prices and microeconomic conditions in the oil industry, leading to a spike in unemployment. According to the servicer’s commentary, the sponsor is working with various tenants who have requested relief and has had a rent collections of approximately 72%, 68%, and 66% for July, August, and September, respectively.

At Great Lakes Crossing, more than 100 of the stores and restaurants have reopened with the lessening of the coronavirus pandemic regulations. Certain health and safety measures have been implemented, such as face coverings, social distancing, special hours, and limited occupancy. The Deptford Mall was closed for three months from March 2020 because of the pandemic. The mall has reopened, and health and safety measures have been implemented, such as face coverings, social distancing, limited occupancy, modified store hours, upgraded air filtration systems, special sanitation procedures, some curbside pickup, and other requirements for employees and customers. Some stores have not yet reopened. Katy Mills was temporarily closed and has reopened with safety precautions. The coronavirus pandemic created a severe financial problem for all the centers. Even so, the sponsors have supported the centers’ operating costs and debt service payments, with all loans current and no delinquencies reported since the start of the pandemic.

DBRS Morningstar derived the NCF using the latest reported servicer NCF with an adjustment, considering ongoing collateral performance including tenant movement and sales performance. The resulting NCF figure was $75.9 million and DBRS Morningstar applied a weighted-average cap rate of 8.23%, which resulted in a pre-coronavirus DBRS Morningstar Value of $918.2 million, a variance of 12.8% from the appraised value of $1.05 billion at issuance. The pre-coronavirus DBRS Morningstar Value implies an LTV of 73% compared with the LTV of 54% on the appraised value at issuance.

The cap rate DBRS Morningstar applied is at the higher end of the range of DBRS Morningstar Cap Rate Ranges for regional mall properties, reflecting the market positioning, location, and quality of the assets.

DBRS Morningstar made negative qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis, totaling 0.5% to account for cash flow volatility, 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% 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 Class D. The variation is warranted due to going concerns with the impact of the coronavirus pandemic on the collateral assets.

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.

At issuance, DBRS Morningstar shadow-rated all three loans investment grade. With this review, DBRS Morningstar has confirmed that the performance of these loans remains consistent with investment-grade loan characteristics. Overall, the collateralized properties are well established in their respective markets and have satisfactory in-line sales performance, high-quality sponsorship, and low-leverage financing.

Class X-A is an 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.

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

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