DBRS Morningstar Downgrades Three Classes of WFRBS Commercial Mortgage Trust 2013-C18, Maintains Negative Trend on Two Classes

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

-- Class D to CCC (sf) from BB (sf)
-- Class E to C (sf) from CCC (sf)
-- Class F to C (sf) from CCC (sf)

In addition, DBRS Morningstar confirmed the remaining ratings 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 maintained the Negative trends on Classes C and PEX. Classes D, E, and F have ratings that do not carry trends, but these classes continue to carry the Interest in Arrears designation. All other trends remain Stable.

The downgrades and Negative trends reflect the increased credit risk and likely negative resolution outcomes of the five specially serviced loans in the transaction, currently representing 22.0% of the pool: JFK Hilton (Prospectus ID#4, 8.8% of the pool), Hotel Felix Chicago (Prospectus ID#5, 6.5% of the pool), Cedar Rapids Office Portfolio (Prospectus ID#9, 3.0% of the pool), HIE Magnificent Mile (Prospectus ID#10, 3.1% of the pool), and Fairfield Inn & Suites McDonough GA (Prospectus ID#35, 0.6% of the pool). All of these properties have been reappraised since Q4 2020, reflecting a weighted-average (WA) value decline from issuance of 57.8% and a WA loan-to-value (LTV) ratio of 150.1% based on the current outstanding loan amounts. Interest in arrears have nearly doubled since the last DBRS Morningstar rating action in March 2021, totalling approximately $6.0 million, according to January 2022 reporting.

The largest loan in special servicing, JFK Hilton, is secured by a 356-key, full-service hotel adjacent to John F. Kennedy International Airport in Jamaica, New York. The loan had transferred to special servicing in August 2021 for a second time but remained current as of January 2022 reporting. According to the servicer, the loan was transferred to special servicing to allow the borrower and servicer to negotiate and effectuate a discounted payoff (DPO) with waivers of the partial prepayment of the loan. The property was reappraised in November 2020 at a value of $51.1 million, a 50% decline compared with the issuance value of $103.3 million. Based on the most recent value, the loan has an elevated LTV of 116.3%. Although the loan remains current, a loss to the trust is anticipated given the large value decline and the borrower’s request for a DPO.

Two of the remaining specially serviced loans, Hotel Felix Chicago and HIE Magnificent Mile, are secured by hotel properties less than one mile from one another in Chicago and are owned and operated by the same sponsor, Oxford Capital Group, LLC (Oxford). Both loans transferred to special servicing in April 2020 for monetary default as a result of declining performance, largely stemming from an oversupply in the market and increased real estate taxes with performance declines further exacerbated by the decline in tourism as a result of the Coronavirus Disease (COVID-19) pandemic. Although the servicer noted that discussions with the borrower are ongoing, receivers were appointed in January 2021, with foreclosure listed as the current workout strategy. Oxford has made a number of alternative investments, including the acquisition of five Bay Area hotels in December 2020 and, more recently, The Westin Book Cadillac, with plans to institute a $16.5 million renovation; however, it has failed to provide a viable workout solution for the two subject loans.

According to the April 2021 appraisals, Hotel Felix Chicago was valued at $24.7 million, below the issuance value of $68.6 million, reflecting a decline of 64.0% and a current LTV of 182.3%. HIE Magnificent Mile was valued at $12.4 million, below the issuance value of $36.3 million, reflecting a decline of 65.8% and a current LTV of 175.2%. Given the sizable declines in value and the absence of a viable proposal from the sponsor, which may indicate a strategic decision to walk away from the properties given its other recent investments, DBRS Morningstar expects both loans to incur loss upon resolution with loss severities in excess of 70.0%.

The Cedar Rapids Office Portfolio has been real estate owned since June 2020. The loan is secured by two cross-collateralized Class A office buildings in Cedar Rapids, Iowa. According to the December 2020 appraisal, the property was valued at $11.9 million, below the issuance value of $36.2 million, reflecting a decline of 67.0% and a current LTV of 173.2%. Given the decline in value and current loan exposure, DBRS Morningstar anticipates this loan will incur a loss severity of nearly 100% upon resolution.

Of the original 67 loans, 56 loans remain in the pool, with an aggregate principal balance of $689.6 million, representing a collateral reduction of 33.6% since issuance as a result of scheduled loan amortization and loan repayment. In addition, there are 10 loans, representing 8.2% of the pool, that are fully defeased. There are also seven loans, representing 7.7% of the pool, on the servicer’s watchlist.

At issuance, DBRS Morningstar assigned an investment-grade shadow rating to Garden State Plaza (Prospectus ID#1, 21.8% of the pool). DBRS Morningstar confirmed that the performance of this loan remains consistent with investment-grade loan characteristics.

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 updated analysis and in-depth commentary in the DBRS Viewpoint platform for the following loans in the transaction:

-- Prospectus ID#4 – JFK Hilton (8.8% of the pool)
-- Prospectus ID#5 – Hotel Felix Chicago (6.5% of the pool)
-- Prospectus ID#10 – HIE Magnificent Mile (3.1% 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 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.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482/baseline-macroeconomic-scenarios-application-to-credit-ratings.

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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