DBRS Morningstar Confirms All Classes of COMM 2013-CCRE7 Mortgage Trust

DBRS Limited (DBRS Morningstar) confirmed the ratings on the Commercial Mortgage Pass-Through Certificates, Series 2013-CCRE7 issued by COMM 2013-CCRE7 Mortgage Trust as follows:

-- Class A-4 at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class A-M at AAA (sf)
-- Class X-A at AAA
-- Class B at AA (low) (sf)
-- Class X-B at A (sf)
-- Class C at A (low) (sf)
-- Class PEZ at A (low) (sf)
-- Class D at BBB (sf)
-- Class E at BBB (low) (sf)
-- Class F at BB (low) (sf)
-- Class G at B (low) (sf)

All trends are Stable, with the exception of Class G, which has a Negative trend.

The rating confirmations reflect the overall stable performance of the transaction since issuance, when the pool consisted of 59 loans with an initial balance of $936.2 million. As of the November 2020 remittance, there has been collateral reduction of 49.2%. Twelve loans repaid in full since issuance and one loan, One West Fourth Street (Prospectus ID #4), liquidated in August 2019 with a $9.5 million loss that was contained to the unrated Class H certificates, implying a loan loss severity of approximately 18.4%. There is also a higher concentration of defeasance, with 10 loans defeased, representing 22.1% of the remaining pool balance. The remaining loans have generally performed as expected, with a weighted-average (WA) debt service coverage ratio (DSCR) of 1.79x as of the November 2020 reporting period, compared with the issuer’s WA DSCR for the pool as a whole at closing of 1.71x.

The Negative trend for the lowest-rated Class G bond reflects DBRS Morningstar’s concerns with the higher concentration of loans backed by hotel and retail properties in this pool, which were at 21.6% and 25.8% of the pool, respectively, as of the November 2020 remittance. Hotel and retail property types have been among the most significantly affected by the Coronavirus Disease (COVID-19) pandemic, a dynamic that has contributed to another area of concern for this pool in the five specially serviced loans representing 9.1% of the pool, all of which are backed by hotel and retail properties. In addition, there were 12 loans representing 41.8% of the pool on the servicer’s watchlist as of the November 2020 reporting period, with six of the largest 15 loans in the pool on the watchlist, four of which are secured by hotel and retail properties.

The largest and most pivotal loan on the servicer’s watchlist is the largest remaining loan in the pool, Lakeland Square Mall (Prospectus ID #2, 12.6% of the pool). The loan is secured by two (out of five) anchor spaces and all of the in-line space of a regional mall in Lakeland, Florida, approximately 35 miles east of Tampa. The loan sponsor at issuance was Rouse Properties, Inc., which was acquired by an affiliate of Brookfield Asset Management, Inc. (Brookfield) in 2016, with Brookfield assuming the trust loan as part of the acquisition. The loan was added to the servicer’s watchlist following the sponsor’s coronavirus relief request in June 2020. Although cash flows have been down in recent years as compared with the issuance figures, the DSCR has remained relatively healthy and was 1.55x for YE2019 and more recently, at 1.47x at the trailing six months ended June 2020, when occupancy was 94.0%.

Cash flows began to decline in 2016, followed by noncollateral anchor closures in Macy’s, which closed in 2017, and Sears, which closed in 2018, with some in-line leases likely containing provisions allowing for reduced rent if two anchors closed. The combined square footage (sf) for the closed anchors is quite substantial, at approximately 257,000 sf. The remaining anchors include a noncollateral Dillard’s, which occupies approximately 90,000 sf, and collateral anchors in JCPenney (19.4% of the collateral net rentable area (NRA) with a lease running through November 2025) and Burlington Coat Factory (15.3% of the collateral NRA on a lease ending January 2023). Other major tenants include Cinemark, Urban Air Adventure Park, and H&M, which opened at the subject in 2017.

The mall benefits from its status as the only regional mall within 30 miles, and to date, Brookfield has not expressed an unwillingness to continue investing in the property or keeping the trust loan current. However, the two closed anchors, which have been empty for years, present obvious challenges, particularly considering the challenges for the remaining anchors in the bankrupt JCPenney and Dillard’s, which reported a net loss of $138.7 million for the 39 weeks ended October 31, 2020, with the retailer citing coronavirus-related challenges contributing to those results. Brookfield was part of the group that acquired JCPenney out of bankruptcy, however, and the consensus appears to be that the mall operator should be well incentivized to keep the JCPenney locations at its malls open. In addition, although down from issuance, cash flows have remained generally healthy, and the collateral occupancy rate has held steady through the anchor closures and into the first few months of the pandemic. Given the challenges for the loan, particularly amid the coronavirus pandemic that has driven many retailers into bankruptcy or further toward trimming store counts, DBRS Morningstar assumed a liquidation scenario based on a 50.0% haircut to the issuance value as part of this review, which resulted in a loss severity of just above 20.0%.

The two largest loans in special servicing are both secured by hotels and include Hampton Inn Jekyll Island, GA (Prospectus ID #21, 2.7% of the pool) and NCH Portfolio (Prospectus ID #25, 2.1% of the pool). The larger loan, Hampton Inn Jekyll Island, GA, is secured by a limited-service hotel in a tourist area off the southeastern Georgia coastline. The property is the newest of the competitive set and has historically performed quite well, with the YE2019 DSCR at 2.22x. The loan transferred to special servicing in March 2020 following the borrower’s coronavirus relief request, but it has generally been kept current since the transfer. The special servicer reports a loan modification will be finalized in the near term, allowing for a forbearance of the DSCR covenants on the loan through the beginning of 2021. After the finalization, the loan would return to the master servicer. For this review, DBRS Morningstar assumed an elevated probability of default (PoD) given the unknowns regarding hotel performance trends through the near- to moderate-term, increasing the expected loss in the analysis.

The NCH Portfolio loan is secured by a portfolio of three limited-service hotels in tertiary markets in North Dakota, Minnesota, and Illinois. The loan transferred to special servicing in April 2020 with the borrower’s coronavirus relief request, but the property’s cash flows had been well-below issuance figures long before the onset of the pandemic, with the YE2019 DSCR at 1.04x. The loan was current as of the November 2020 reporting, and the special servicer reports a modification is close to being finalized but has not provided specifics to date. Given the previous cash flow declines and the tertiary markets for the hotels, suggesting the effects of the pandemic may linger beyond the period for more centrally located properties, DBRS Morningstar applied a PoD penalty, significantly increasing the expected loss in the analysis for this review.

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.

DBRS Morningstar materially deviated from its North American CMBS Insight Model when determining the ratings assigned to Classes B and C as the quantitative results suggested a higher rating for both classes. The material deviation is warranted, given the uncertain loan-level event risk with the loans in special servicing and on the servicer’s watchlist.

Classes X-A and X-B are interest-only (IO) certificates 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 the following loans in the transaction:

-- Prospectus ID #2– Lakeland Square Mall (12.6% of the pool)
-- Prospectus ID#21 – Hampton Inn Jekyll Island, GA (2.7% of the pool)
-- Prospectus ID#25 – NCH Portfolio (2.1% of the pool)
-- Prospectus ID #33 – Tifton Plaza (1.5% of the pool)
-- Prospectus ID #28 – Sunset Plaza (1.5% of the pool)

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com. The platform includes issuer and servicer 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 methodology is North American CMBS Surveillance Methodology (March 6, 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 related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info@dbrsmorningstar.com.

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 info@dbrsmorningstar.com.

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