DBRS Morningstar Downgrades Ratings on Four Classes of MSBAM Commercial Mortgage Securities Trust 2012-CKSV, Assigns Negative Trends

DBRS Limited (DBRS Morningstar) downgraded its ratings on four classes of the Commercial Mortgage Pass-Through Certificates, Series 2012-CKSV (the Certificates) issued by MSBAM Commercial Mortgage Securities Trust 2012-CKSV as follows:

-- Class B to A (high) (sf) from AA (sf)
-- Class X-B to AA (low) (sf) from AA (high) (sf)
-- Class C to BBB (low) (sf) from A (sf)
-- Class D to B (high) (sf) from BBB (high) (sf)

DBRS Morningstar also confirmed its ratings on the remaining classes as follows:

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class X-A at AAA (sf)
-- Class CK at BBB (low) (sf)

All Classes carry a Negative trend.

DBRS Morningstar placed all classes, with the exception of Class CK, Under Review with Negative Implications when the ratings were assigned in October 2020. The designations reflected concerns with the retail market amid the Coronavirus Disease (COVID-19) pandemic and particularly the collateral for the underlying loans, Clackamas Town Center (Clackamas) and Sunvalley Shopping Center (Sunvalley) which are in Happy Valley, Oregon, and Concord, California, respectively. With this review, these ratings have been removed from Under Review with Negative Implications. However, the Negative trend assignment and rating downgrades on Classes B, X-B, C, and D reflect the continued performance concerns of both loans, but especially the Sunvalley loan.

All classes rated by DBRS Morningstar, except for Class CK, are backed by two separate promissory notes secured by the two regional malls. Class CK is backed by the Clackamas loan. The Clackamas loan has a current senior component balance of $190.8 million and subordinate component balance of $25.2 million and is scheduled to mature on October 1, 2022. The Clackamas loan is a fixed-rate loan that was structured with a 10-year term and is interest only throughout the term. The Sunvalley loan has a current senior balance of $158.4 million and is scheduled to mature on September 1, 2022. The Sunvalley loan is a fixed-rate loan that was structured with a 10-year term with a 30-year amortization schedule. The loans are not cross-collateralized or cross-defaulted. Both loans have reported no delinquencies on debt service payments since the transaction’s last review. The Clackamas loan is sponsored by a joint venture between Brookfield Property Partners L.P. (Brookfield) and Teacher’s Retirement System of the State of Illinois (TRS), while the Sunvalley loan is sponsored by Simon Property Group after its acquisition of The Taubman Realty Group Limited Partnership in December 2020.

The Sunvalley loan is secured by a 1.2 million-square-foot (sf) portion of a 1.4 million-sf regional mall in Concord, California. Collateral anchors at Sunvalley include JCPenney, Macy’s, and Macy’s Men & Home. There is also a noncollateral Sears, which remains open and is not listed in the most recent round of store closures. As of the March 2021 rent roll, the collateral is 87.0% occupied at an average rental rate of $19.00 per square foot (psf), a decline from the May 2020 occupancy rate of 93.6%. The largest collateral tenants are JCPenney, representing 17.8% of net rentable area (NRA) with an upcoming lease expiry in May 2022; Macy’s representing 16.8% of NRA with a lease expiry in July 2028; and Macy’s Men & Home, which represents 14.9% of NRA with a lease expiry in August 2029. There is substantial near-term lease rollover risk of 26.0% of NRA, primarily consisting of the JCPenney exposure.

A trailing three-month (T-3) March 2021 tenant sales report was provided. On an annualized basis, in-line tenants reported a March 2021 sales figure of $298 psf, compared with an annualized T-3 March 2020 figure of $288 psf. Although sales have rebounded slightly, tenant sales at year-end (YE) 2019 were reported at $393 psf, which is a significant decline from the issuance sales figure of $453 psf. As of the most recent financial reporting, the T-3 March 2021 debt service coverage ratio (DSCR) was 0.39x, relative to the YE2020 and YE2019 DSCRs of 1.19x and 1.56x, respectively. Furthermore, net cash flow (NCF) has been declining year-over-year since issuance. At contribution, the loan reported an NCF of $23.8 million, compared with the pre-coronavirus NCF of $17.8 million at YE2019. Although rental income has remained in line with issuance figures, there has been a significant increase in its operating expenses, specifically, real estate taxes and general and administrative costs. Although the property was hard hit during the pandemic, which left the subject closed for several months, the loan has continued to deteriorate and has seen little to no improvement. DBRS Morningstar recognizes the elevated risk with the asset, demonstrated by its lack of sales, declining NCF and DSCR, generally poor anchor mix, and significant upcoming lease rollover risk.

The Clackamas loan is secured by a 631,000-sf portion of a 1.4 million-sf regional mall in Happy Valley, Oregon, a southeastern suburb of Portland. As of the March 2021 rent roll, the collateral portion of the property was 92.2% occupied at an average rental rate of $55.00 psf. The largest collateral tenants include Century Theatres, representing 11.0% of NRA with a lease expiry in December 2022, Dave & Buster’s representing 5.7% of NRA with a lease expiry in January 2030, and Forever 21 representing 5.3% of NRA with a lease expiry in January 2024. The subject has several noncollateral anchor tenants including Macy’s, Macy’s Home Store, JCPenney, and a Dick’s Sporting Goods, which back-filled the previously dark Sears space. A noncollateral Nordstrom permanently closed in August 2020. However, it was noted in the rent roll the tenant continues to make its monthly rental obligation.

According to the December 2020 tenant sales report, tenants smaller than 10,000 sf noted YE2020 sales of $358 psf compared with the YE2019 sales figure of $493 psf. Total in-line space reported YE2020, YE2019, and issuance figures of $322 psf, $451 psf, and $432 psf, respectively. Century Theatres reported sales of approximately $120,000 per screen at YE2020, $410,000 per screen at YE2019, and $441,000 per screen at issuance. As of the most recent financial reporting, the T-3 ended March 2021 DSCR was 2.34x, compared with the YE2020 and YE2019 DSCR of 2.41x and 2.81x, respectively. YE2020 NCF remains depressed at $22.1 million, compared with the YE2019 NCF of $25.6 million. DBRS Morningstar does note that the Clackamas loan has weathered the coronavirus pandemic in much better fashion than its Sunvalley counterpart. However, risk is still present in the vacant Nordstrom anchor space, and there is declining in-line tenant sales and a collection of struggling noncollateral anchor tenants in Macy’s, Macy’s Home Store, and JCPenney.

The DBRS Morningstar rating on Classes A-1 and A-2 varies by three or more notches from the results implied by the LTV Sizing Benchmarks. The variance is warranted because of Sunvalley’s declining tenant sales and declining NCF from issuance and Clackamas’ vacant Nordstrom anchor space.

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.

The DBRS Viewpoint platform provides additional information on this transaction and underlying loans including DBRS Morningstar metrics, commentary, servicer-reported cash flows, and other performance-related data.

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 methodology is North American CMBS Surveillance Methodology (March 26, 2021), 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 [email protected].

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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