DBRS Morningstar Downgrades Three Classes of WFRBS 2013-C18 Mortgage Trust, Changes Trends on Three Classes to Negative from Stable

DBRS Limited (DBRS Morningstar) downgraded three ratings of the Commercial Mortgage Pass-Through Certificates, Series 2013-C18 (the Certificates) issued by WFRBS Commercial Mortgage Trust 2013-C18 as follows:

-- Class D to BB (sf) from BBB (low) (sf)
-- Class E to CCC (sf) from BB (sf)
-- Class F to CCC (sf) from B (sf)

In addition, DBRS Morningstar confirmed the remaining classes as follows:

-- Class A-4 at AAA (sf)
-- Class A-5 at AAA (sf)
-- Class A-S at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class X-A at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class PEX at A (low) (sf)

With this review, DBRS Morningstar removed Classes D, E, and F from Under Review with Negative Implications where they were placed on August 6, 2020. DBRS Morningstar also changed the trends on Classes C and PEX to Negative from Stable. Class D also has a Negative trend. All other trends remain Stable. In addition, DBRS Morningstar designated Classes D, E, and F as having Interest in Arrears.

The downgrades and Negative trends generally reflect the overall weakened performance of the collateral since the last review and the increased likelihood of losses to the trust upon the resolution of the specially serviced loans, Hotel Felix Chicago (Prospectus ID#5, 6.4% of the current trust balance), the Cedar Rapids Office Portfolio (Prospectus ID#9, 3.0% of the current trust balance) and the HIE Magnificent Mile (Prospectus ID#10, 2.6% of the current trust balance). Based on the 2020 appraised values, these properties had a weighted-average (WA) decline in value of 66.1% over the issuance-appraised values. DBRS Morningstar is also closely monitoring the largest watchlisted loan, JFK Hilton (ProspectusID#4, 8.7% of the current trust balance), which was recently returned to the master servicer after entering into a forbearance agreement, but reported a value decline of 58.4% when it was reappraised in 2020 during its stint in special servicing. The pool has a high concentration of retail and hospitality properties, representing 57.2% of the pool, which is noteworthy as these property types have been most acutely affected by the Coronavirus Disease (COVID-19) pandemic.

As of the February 2021 remittance, 60 of the original 67 loans remain in the pool, with an aggregate principal balance of $710.1 million, representing a collateral reduction of 31.6% since issuance as a result of loan repayment and scheduled loan amortization. The second-largest loan, The Outlet Collection - Jersey Gardens (Prospectus ID#3), which represented 13.5% of the issuance trust balance, repaid in full with the November 2020 remittance. Five loans, representing 3.4% of the current pool balance, are fully defeased.

Two of the three loans in special servicing, representing 9.0% of the current trust balance, are secured by hotel properties that are located less than a mile from one another in Chicago and are owned and operated by the same sponsor, Oxford Capital Group, LLC (Oxford). The firm has developed 14 hotels in the market (3,815/keys), 11 of which have been downtown. The Hotel Felix Chicago loan was previously in special servicing, but was returned to the master servicer in February 2019 as a corrected loan, while the HIE Magnificent Mile loan had been on the servicer’s watchlist since January 2018. Both loans were transferred to special servicing in April 2020 for imminent default and neither loan has made a payment since transferring. While the servicer notes that discussions with the borrower are ongoing, the borrower’s proposals have been rejected thus far, the servicer has filed for foreclosure and receivers were installed in January 2021.

The respective properties both struggled prior to the outbreak of the pandemic with coverages hovering around or below breakeven over the past couple of years stemming from sustained performance declines driven by supply additions, soft market conditions and increased expenses, primarily a result of increased real estate taxes and general and administrative costs. While both properties benefited from heavy capital expenditure to reposition the assets prior to issuance, no significant renovations have been completed in recent years. According to the July 2020 appraisals, Hotel Felix Chicago reported an as-is value of $23.5 million (104,000/key), well below the issuance value of $68.6 million, reflecting a decline of 65.7% and a loan-to-value (LTV) of 193.6%; HIE Magnificent Mile reported an as-is value of $12.4 million ($71,000/key), well below the issuance value of $36.3 million ($209,000/key), reflecting a decline of 65.8% and a LTV of 175.2%. DBRS Morningstar analyzed both loans based on their updated values and increased their respective expected losses to reflect the individual credit profile of either loan.

The remaining loan in special servicing, The Cedar Rapids Office Portfolio, was initially transferred in May 2017 and has been REO since June 2020. The loan is secured by two cross-collateralized Class A office buildings located in Cedar Rapids, Iowa. According to the December 2020 appraisal, the property was valued at $11.9 million, down from the July 2019 figure of $16.2 million and the issuance figure of $36.2 million. In the analysis for this review, DBRS Morningstar assumed a loss severity in excess of 90.0% based on a discount to the recent appraised value of $11.9 million.

There are 14 loans, representing 21.6% of the current trust balance, on the servicer’s watchlist. The servicer is monitoring these loans for a variety of reasons, including low debt service coverage ratio and occupancy issues; however, the primary reason for the increase of loans on the watchlist is the coronavirus-driven stress for retail and hospitality properties, with watchlisted loans backed by those property types generally reporting a declining DSCR.

The largest loan on the servicer’s watchlist is JFK Hilton, which is secured by a 356-key, full service hotel adjacent to JFK Airport in Jamaica, New York. The loan was initially added to the servicer’s watchlist in October 2019 following a declining debt service coverage ratio (DSCR), which fell to 0.93 times (x) at YE2019, primarily driven by a $1.4 million (198%) increase in real estate taxes. As of Q3 2020, updated reporting showed that performance had been further exacerbated by the effects of the pandemic given the dependence on commercial and contract demand, with coverage falling to -0.41x. The loan was transferred to special servicing in August 2020 upon the borrower’s request for relief, but was recently returned to the master servicer in January 2021 after a loan modification agreement was approved. The borrower was granted the use of furniture, fixtures, and equipment reserves to fund June 2020 through November 2020 debt service payments and will be required to repay those funds over a 24-month period beginning in June 2021. The borrower was also approved for a $1.6 million paycheck protection program loan. At issuance, the property had a value of $103.3 million ($290,000/key), but was reappraised in November 2020 for $52.1 million ($146/key), reflecting a 50.3% reduction in value and an LTV of 144.2%. The appraisal also provides a stabilized figure of $78.0 million ($219,000/key), projected in January 2024. While the loan remains current, DBRS Morningstar has elevated the probability of default for this loan and will continue to monitor the loan.

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.

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

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DBRS Morningstar notes that this press release was amended on July 15, 2021, to clarify DBRS Morningstar's treatment of the loans in special servicing.

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/375376.

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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