DBRS Morningstar Downgrades Seven Classes of Morgan Stanley Bank of America Merrill Lynch Trust 2013-C7, Confirms Remaining Classes

DBRS, Inc. (DBRS Morningstar) downgraded seven classes of Commercial Mortgage Pass-Through Certificates, Series 2013-C7 issued by Morgan Stanley Bank of America Merrill Lynch Trust 2013-C7 as follows:

-- Class X-B to AA (low) (sf) from AA (sf)
-- Class C to A (high) (sf) from AA (low) (sf)
-- Class PST to A (high) (sf) from AA (low) (sf)
-- Class D to CCC (sf) from BBB (sf)
-- Class E to C (sf) from BB (high) (sf)
-- Class F to C (sf) from BB (sf)
-- Class G to C (sf) from B (sf)

With this rating action, DBRS Morningstar removed Class G from Under Review with Negative Implications, where it placed the class in August 2020.

DBRS Morningstar also confirmed the remaining classes in the transaction as follows:

-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-AB at AAA (sf)
-- Class A-S at AAA (sf)
-- Class X-A at AAA (sf)
-- Class B at AA (high) (sf)

The trends on Classes A-3, A-4, A-AB, A-S, X-A, X-B, B, C, and PST are Stable, while the remaining classes have ratings that do not carry trends.

The rating downgrades reflect the significant increased credit risk to the transaction, which is primarily driven by the three loans in special servicing, collectively representing 15.2% of the pool balance. Two of the loans are secured by regional malls, representing 13.3% of the pool, while the remaining loan is secured by a mixed-use retail and office property. As of the March 2021 remittance, the transaction consists of 57 of the original 64 loans, with collateral reduction of 27.6% since issuance. Seven loans, representing 12.5% of the pool balance are defeased.

The transaction is concentrated by property type as 29 loans, representing 46.4% of the pool, are secured by retail properties, which have been disproportionately affected by the ongoing Coronavirus Disease (COVID-19) pandemic; however, many individual properties in the transaction are anchored by a grocer, which has historically provided higher occupancy and cash flow stability. Additionally, the largest loan in the transaction, Chrysler East Building (Prospectus ID#1; 16.3% of the pool), is secured by a trophy-quality office property in Midtown Manhattan. In addition to the three loans in special servicing, there are 12 loans on the servicer’s watchlist, representing 12.3% of the pool.

The largest loan in special servicing, Solomon Pond Mall (Prospectus ID#2; 9.1% of the pool), is secured by a regional mall in Marlborough, Massachusetts, owned by a joint venture among Simon Property Group, Canada Pension Plan, and Teachers Insurance and Annuity Association of America. The collateral includes the in-line space as well as the Regal Cinemas anchor, with non-collateral anchor tenants including Macy’s, JCPenney, and Sears. The loan transferred to special servicing in May 2020, and according to the servicer, discussions regarding a potential loan modification remain ongoing. In February 2021, Sears announced this location will close, but a firm closing date has not yet been provided. All of the Regal Cinemas locations throughout the country temporarily closed in October 2020 and remain closed as of March 2021, including the subject’s theater. The chain has previously advised of plans to reopen by the spring of 2021, but no firm announcement has been made to date with regard to those plans.

According to the February 2021 rent roll, in-line occupancy had declined to 61.6%. Mall performance was declining in advance of the pandemic as the year-end debt service coverage ratio (DSCR) figures for YE2018 and YE2019 were 1.87x and 1.76x, respectively, with the servicer most recently reporting a YE2020 DSCR of 1.68x. These figures are down from the issuer’s DSCR of 2.10x and the DBRS Morningstar DSCR at issuance of 2.00x. At issuance, the property was valued at $200.0 million; however, the declines in occupancy and cash flow as well as the pending Sears vacancy suggest the value has likely decreased significantly. According to the servicer, an updated appraisal is still being finalized. In the hypothetical liquidation scenario for this loan, DBRS Morningstar applied a stressed capitalization rate to the YE2020 net cash flow of $11.0 million, with the resulting value significantly below the outstanding loan balance of $91.8 million. Given this scenario, DBRS Morningstar believes the trust will ultimately experience a loss at loan resolution.

The second-largest loan in special servicing, Valley West Mall (Prospectus ID#7, 4.2% of the pool), is secured by a regional mall in West Des Moines, Iowa, owned by Minneapolis-based Watson Investments (Watson), which originally developed the mall in 1975. The collateral includes the in-line space and all three anchor pads. The loan transferred to special servicing in August 2019. The property’s cash flow declines began in 2017 and accelerated after the loss of anchor tenant Younkers in 2018, leaving two anchors in Von Maur and JCPenney. Since the loss of Younkers, the servicer has confirmed that Von Maur will also be vacating the property, a likelihood that DBRS Morningstar has noted since 2018 when Von Maur announced plans to open a brand new location at Jordan Creek Town Center, a competing mall in Des Moines. Most recently, the loan reported a DSCR of 0.36x at YE2020, down from 0.84x at issuance and the DBRS Morningstar DSCR of 2.11x at issuance. No plans have been announced for JCPenney to date, but it is noteworthy that the tenant’s lease expires in 2022.

According to a February 2021 news article in the Des Moines Register, the property is likely to be redeveloped with a $278 million plan proposed that would include an equity contribution of $262 million from Watson and a $30 million grant from the state through the Iowa Reinvestment Act. The redevelopment would take five to 10 years and would include the near-total demolition of the current property to add new retail, entertainment, office, hotel, and multifamily components. While the potential for redevelopment is noteworthy, the outlook for the loan remains quite grim as the current value of the collateral is likely significantly below the appraised value of $95.0 million at issuance. While an updated appraisal has yet to be completed, the land value at issuance of $20.1 million is significantly below the outstanding loan balance of $41.9 million and suggests the loan will experience a significant loss at resolution.

The remaining loan in special servicing, 494 Broadway (Prospectus ID#19; 1.9% of the pool), is secured by a mixed-use building (retail and office) in the SoHo neighborhood of Lower Manhattan. The loan has been in special servicing since July 2019, and according to the servicer, a modification proposal could not be finalized with the borrower and the servicer now expects the property will be foreclosed. The property was 77.2% occupied at YE2020; however, two tenants (54.5% of the net rentable area) are on month-to-month leases. The property was last valued at $16.3 million in November 2019, down from the issuance value of $31.3 million and below the current outstanding loan exposure of $21.7 million. The loan is sponsored by Thor Equities, an institutional New York City commercial real estate owner; however, the value decline that has likely been significantly exacerbated amid the effects of the coronavirus pandemic suggests significantly increased risks for this loan. DBRS Morningstar assumed a loss severity exceeding 70.0% in the analysis for this review.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

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 issuance metrics and all historical surveillance commentary on the DBRS Viewpoint platform.

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 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.

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