DBRS Morningstar Downgrades Ratings on Three Classes of Morgan Stanley Capital I Trust 2013-ALTM

DBRS Limited (DBRS Morningstar) downgraded its ratings on three classes of the Commercial Mortgage Pass-Through Certificates, Series 2013-ALTM (the Certificates) issued by Morgan Stanley Capital I Trust 2013-ALTM as follows:
-- Class C to BBB (high) (sf) from A (low) (sf)
-- Class D to BB (high) (sf) from BBB (low) (sf)
-- Class E to BB (low) (sf) from BB (sf)

Classes C, D, and E carry Negative trends.

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 B at AA (low) (sf)

Classes A-1, A-2, X-A, and B carry Stable trends.

All classes have been removed from Under Review with Negative Implications, where they were placed in September 2020 as a reflection of DBRS Morningstar’s concerns with the retail market amid the Coronavirus Disease (COVID-19) pandemic and the resulting stress on regional malls located in secondary markets.

The rating downgrades and Negative trends placed with this review are due to DBRS Morningstar’s concerns for the collateral mall behind the subject transaction. In-line sales have fallen moderately from issuance and a noncollateral anchor space that was vacated in 2018 remains unoccupied. These trends have not contributed to significant cash flow declines to date (recent trends suggest cash flow dips in 2020 were due to coronavirus-related factors) but have likely contributed to a value decline for the subject mall, which increases the refinance risk at loan maturity, scheduled for February 2025.

The transaction does benefit from the stable collateral occupancy history and sales that have showed improvement at the most recent reporting period over the 2020 figures, suggesting the return of shopper traffic has been healthy and consistent as things have begun to reopen in the later months of 2020 and into 2021. In addition, although the cash flow declines reported for 2020 and the first quarter of 2021 are expected to diminish to some extent over the next few years, the property’s revenue remained generally in line with the issuance figures through 2019, prior to the pandemic. Finally, the loan has remained current through the pandemic and there has been no coronavirus relief request submitted by the sponsor to DBRS Morningstar’s knowledge. These factors support the rating confirmations and Stable trends for the AAA (sf) and AA (low) (sf) rated classes.

The Certificates are backed by a $160.0 million first-mortgage loan secured by the fee-simple interest in the Altamonte Mall in Orlando. The 12-year, fixed-rate loan is interest only (IO) for the first five years then amortizes on a 30-year schedule for the remainder of the loan term. As of the August 2021 remittance, the loan balance has amortized down to $149.8 million. The loan is scheduled to mature in February 2025 and is not subject to subordinate debt or mezzanine financing. The loan is sponsored by a joint venture between the New York State Common Retirement Fund and Brookfield Property Partners L.P. (Brookfield), which assumed the loan following Brookfield’s takeover of General Growth Properties Inc. in July 2018. Brookfield also manages the property.

The underlying loan for the subject transaction is secured by the Altamonte Mall, located in a suburban community north of Orlando, Florida. The property is the dominant mall in north Orlando and caters to local shoppers while its competitors generally serve the tourist market. The anchors include noncollateral Macy’s and Dillard’s and a collateral JCPenney, all of which remain open as of August 2021. A noncollateral Sears store was closed around July 2018 and that anchor box remains empty as of August 2021. The servicer has consistently reported occupancy rates in the high 90s for the collateral portion of the mall. Although JCPenney has not announced plans to close the subject location, the sales are low as of the most recent reporting, suggesting the store could be on the chopping block if the retailer closes more locations as part of its effort to reorganize and improve its financial position. However, it is also noteworthy that JCPenney is now owned by a joint venture that includes a Brookfield affiliate, and as such, the sponsor could be motivated to keep the store open even with relatively lackluster sales.

JCPenney reported a trailing 12 month (T-12) period ended March 2021 sales figure of $77.00 per square foot, which is down from the already low figure of $92.00 psf as of the T-12 ended December 2020. The T-12 ended March 2021 tenant sales report showed in-line tenants that occupy less than 10,000 square feet (sf) averaged sales of $446.00 psf, relative to the T-12 ended December 2020 figure of $420.00 psf. These figures fall to $350.00 psf and an estimated $324.00 psf, respectively, when removing Apple’s sales. At year-end (YE) 2019, YE2018, and loan origination, in-line sales excluding Apple were reported at $332.00 psf, $349.00 psf, and $448.00 psf, respectively.

At issuance, the Issuer’s net cash flow (NCF) was $15.9 million, and through YE2019, the servicer’s reported figures were generally in line with that figure. However, cash flows declined in 2020 amid the coronavirus pandemic, with the YE2020 NCF figure down to $12.9 million, with an in-place debt service coverage ratio (DSCR) of 1.46 times (x), down from 1.82x reported for YE2019.

The largest collateral tenants include JCPenney, representing 24.7% of the net rentable area (NRA) with a lease expiry in January 2024; AMC Theatres (AMC), representing 11.6% of the NRA with a lease expiry in June 2023; and Forever 21, representing 4.2% of the NRA with a lease expiry in January 2024. Within the next 12 months, there is moderate rollover risk, with tenants representing 15.7% of the collateral NRA scheduled to expire. AMC received a lease modification, which allowed for a 75.0% deferral of rents from January 2021 to March 2021 and a 50.0% deferral of rents from April 2021 to June 2021. Deferred amounts are to be repaid over a 30-month period beginning in July 2021.

The DBRS Morningstar rating on Classes B and D varies by three or more notches from the results implied by the LTV Sizing Benchmarks, which suggested a lower rating. The variance is warranted due to the declining tenant sales and stagnant NCF growth from issuance.

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 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 loan 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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