DBRS Morningstar Assigns Provisional Ratings to CSMC 2020-TMIC

DBRS, Inc. (DBRS Morningstar) assigned provisional ratings to the following classes of Commercial Mortgage Pass-Through Certificates to be issued by CSMC 2020-TMIC:

-- Class A at AAA (sf)
-- Class X-CP at AAA (sf)
-- Class X-NCP at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (sf)
-- Class D at A (low) (sf)
-- Class HRR at BBB (high) (sf)

All trends are Stable.

The Class X-CP and Class X-NCP Certificates are interest-only (IO) classes whose balances are notional.

The CSMC 2020-TMIC single-asset/single-borrower transaction is collateralized by the borrowers’ fee-simple interest in The Mall in Columbia, a 1.4 million-square-foot (sf) regional mall located in Columbia, Maryland. The former GGP Inc.-owned property is well located in an affluent area between Baltimore and Washington, D.C., and had relatively strong in-line sales (excluding Apple) of approximately $523 per square foot (psf) in 2019. The sponsor has invested $68.6 million into the property since 2014, adding a 70,000-sf open-air lifestyle center and successfully repositioning the former Sears box, which included backfilling the space with leases to the German supermarket chain Lidl and an entertainment offering known as Main Event.

Predictably, the property has been significantly affected by the mitigation strategies and the economic fallout attributable to the ongoing Coronavirus Disease (COVID-19) pandemic. Collections dropped to a low of 43.8% in April and a number of tenants, including two of the anchors, have filed for bankruptcy or have gone dark. The property will likely continue to experience stress in the short and medium term until the pandemic abates and the economy recovers. However, like most regional malls, the property will need to contend with the secular headwinds facing brick-and-mortar retailers in the long run. DBRS Morningstar views Brookfield Property Partner’s short-duration, low-leverage refinancing of the asset as a logical strategy to buy time and allow operations to stabilize. The sponsor's $77.4 million equity contribution to the transaction along with execution of a debt service guaranty that will remain in place during the entire term of the mortgage loan demonstrates a reassuring level of commitment to the property.

More broadly, investors should carefully consider the risks associated with investing in securities backed by regional mall properties; DBRS Morningstar published research on November 17, 2020, highlighting that regional mall delinquencies are approaching $10 billion with an overall delinquency rate of 18.7%. For additional information, please refer to the commentary entitled “CMBS Mall Delinquencies Approach $10 Billion, as the Pandemic Heightens Risk for Upcoming Maturities” on DBRS Morningstar's website.

The mortgage loans benefit from a conservative all-in DBRS Morningstar loan-to-value ratio of 68.88%, which is well below the leverage point of other recently analyzed single-asset transactions. Furthermore, the $250 million mortgage loan would be able to withstand an implied market value decline of over 57% based on the appraised value of $594 million.

The property is well located on the Columbia Pike in Howard County and benefits from its position in an affluent trade area between Baltimore and Washington, D.C. According to EASI Demographics, the median household income within a one-, three-, and five-mile radius of the property is $103,000, $123,000, and $141,000, respectively. Additionally, the appraisal notes that the closest truly competitive mall is the Arrundel Mills Mall, which is a 15- to 25-minute drive from the subject.

BPR Nimbus LLC, the guarantor and an unrated affiliate of Brookfield, has executed a debt service shortfall guaranty for the benefit of the mortgage loan during its entire three-year fully extended term. The guarantor is required to maintain a minimum net worth of $600 million and liquidity of $100 million during the loan term. Furthermore, the loan is structured with extremely strict cash management provisions. All rent and other revenue is required to be deposited directly into a lockbox account under the exclusive control of the lender and no cash will be returned to the sponsor (all excess cash flow will be swept into a lender controlled account).

Consistent with the ongoing stress in the brick-and-mortar retail sector, the property has experienced a downward trend in comparable in-line sales (excluding Apple), falling from $543 psf in 2015 to $523 psf by YE2019. On a comparative basis, however, the property's absolute sales numbers prior to the onset of the coronavirus pandemic were still relatively strong.

Collections at the property have been significantly affected by the coronavirus pandemic and have averaged just 63.4% since April 2020. Furthermore, despite rebounding to 77.2% in September from a low of 43.8% in April, collections have begun to decline again, slipping to 72.2% in October. The sponsor has also converted a number of struggling tenants to percent-in-lieu (PIL) lease structures, whereby tenants simply pay a percentage of their gross sales rather than a fixed rental rate (typically without a floor). DBRS Morningstar views increasing PIL conversions, especially those made on a permanent basis, as an ominous sign of declining health in a regional mall.

The average occupancy cost for in-line tenants is approximately 17.6% based on 2019 sales figures; however, 33 in-line or junior anchor tenants, representing approximately 17% of gross rent at the property, have occupancy costs that exceed 30%. Additionally, nine tenants are leased by retailers that have filed for bankruptcy protection, including anchors JCPenney and Lord & Taylor (which has closed all of its stores), as well as in-line tenants Aldo, Ascena Group, J. Jill, J Crew, GNC, Lucky, NY & Co., The Walking Co., and theatre operator AMC.

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-CP and Class X-NCP are IO certificates that reference a single rated tranche. 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.

For supporting data and more information on this transaction, please log into www.viewpoint.dbrsmorningstar.com. DBRS Morningstar provides analysis and in-depth commentary in the DBRS Viewpoint platform.

Notes:
All figures are in U.S. dollars unless otherwise noted.

With regard to due diligence services, DBRS Morningstar was provided with the Form ABS Due Diligence-15E (Form-15E), which contains a description of the information that a third party reviewed in conducting the due diligence services and a summary of the findings and conclusions. While due diligence services outlined in Form-15E do not constitute part of DBRS Morningstar’s methodology, DBRS Morningstar used the data file outlined in the independent accountant’s report in its analysis to determine the ratings referenced herein.

The principal methodology is the North American Single-Asset/Single-Borrower Ratings Methodology (March 1, 2020), which can be found on 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 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.

The full report providing additional analytical detail is available by clicking on the link under Related Documents below or by contacting us at [email protected].

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

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