DBRS Morningstar Downgrades Ratings on Three Classes and Maintains Negative Trends on Two Classes of COMM 2013-CCRE7 Mortgage Trust

DBRS Limited (DBRS Morningstar) downgraded its ratings on three classes of Commercial Mortgage Pass-Through Certificates, Series 2013-CCRE7 issued by COMM 2013-CCRE7 as follows:

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

In addition, DBRS Morningstar confirmed its ratings on the following classes:

-- Class A-4 at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class A-M at AAA (sf)
-- Class X-A at AAA (sf)
-- Class B at AA (low) (sf)
-- Class X-B at A (sf)
-- Class C at A (low) (sf)
-- Class PEZ at A (low) (sf)
-- Class D at BBB (sf)

The trends on Classes E and F are Negative. All remaining classes have Stable trends, with the exception of Class G, which is assigned a rating that does not typically carry a trend in Commercial Mortgage Backed Securities ratings.

The rating downgrades and Negative trends reflect continued performance challenges for select loans within the transaction, which are showing increased credit risk from issuance, as further detailed below. In particular, DBRS Morningstar is closely monitoring the Lakeland Square Mall loan (Prospectus ID #2; 12.9% of the pool), which was analyzed with an elevated expected loss. Additionally, refinance risk may pose a problem for the underperforming loans, all of which are scheduled to mature in 2023.

At issuance, the pool consisted of 59 loans with an initial trust balance of $936.2 million. As of the July 2022 remittance, there has been collateral reduction of 53.0% as a result of loan repayments, liquidations, and scheduled amortization. Sixteen loans have repaid in full since issuance and two loans have liquidated with losses totalling $11.9 million, which have been contained to the nonrated Class H certificate. In addition, 15 loans, representing 30.9% of the current pool balance, have fully defeased. Two loans, representing 7.8% of the pool, are in special servicing, and eight loans, representing 21.3% of the pool, are on the servicer’s watchlist.

The largest and most pivotal loan, Lakeland Square Mall, is secured by 535,937 square feet (sf) of in-line and anchor space in an 883,290-sf regional mall in Lakeland, Florida, 35 miles east of Tampa. The mall is owned and operated by an affiliate of Brookfield Property Partners (Brookfield). The loan was initially added to the servicer’s watchlist in June 2020 after the borrower made a Coronavirus Disease (COVID-19) relief request; subsequently, it was monitored for a low debt service coverage ratio (DSCR) between July 2021 and July 2022. The loan is no longer on the servicer’s watchlist as the DSCR has since improved; however, performance has fallen short of issuance expectations. The YE2021 net cash flow (NCF) of $5.4 million was lower than the previous year’s figure of $5.9 million and the issuer’s underwritten figure of $7.1 million. Similarly the loan’s DSCR declined from 1.83x at issuance to 1.42x as of YE2021. Annualized Q1 2022 reporting shows an improvement in NCF, which increased 16.6% to $6.5 million. The increase in NCF was driven by higher base rental income—likely a result of expiring tenant abatements and rent deferral agreements that were executed during the pandemic.

Since 2017, two of the mall’s noncollateral anchor stores, Sears and Macy’s, have closed. ReSale America took over the 101,333-sf space formerly tenanted by Macy’s in November 2019. ReSale America’s lease is scheduled to expire in March 2023, prior to the loan’s maturity in April 2023. Seritage Growth Properties (Seritage), a real estate investment trust that was spun out of Sears in 2015, owns the 156,020-sf space formerly occupied by the noncollateral Sears and is currently on a lease that expires in March 2023, likely mirroring Sear’s original lease term. Seritage is currently marketing the vacant space, along with the land adjacent to it, as a development opportunity. Remaining anchor tenants include Dillard’s (noncollateral), JCPenney (19.4% of the net rentable area (NRA), lease through November 2025), Burlington Coat Factory (15.3% of the NRA, lease through January 2023), and Cinemark (8.8% of the NRA, lease through February 2024).

Although the mall is 93.1% occupied as of the March 2022 rent roll, collateral and noncollateral tenant leases representing more than 390,000 sf are set to expire prior to loan maturity, which, when coupled with the cash flow declines from issuance, may suggest refinance prospects could be limited. While the loan does benefit from strong sponsorship through Brookfield, DBRS Morningstar notes that the prior relief request and the mall’s location in a secondary market could mean Brookfield’s commitment is limited. In its analysis, DBRS Morningstar applied a probability of default penalty to significantly increase the expected loss for this loan, with the results supporting the rating actions taken with this review.

The largest loan in special servicing, 20 Church Street (Prospectus ID#8; 5.8% of the pool), is secured by a 418,810-sf office building in Hartford, Connecticut. The loan transferred to special servicing in March 2022 for payment default. According to the July 2022 remittance report, the loan is currently 90+ days delinquent. Historically, the loan has performed well, with YE2020 and YE2021 DSCR and NCF figures of $4.2 million and 2.36x, and $3.6 million and 1.92x, respectively. Average rental rates at the property have fallen $0.34/sf to $23.15/sf between YE2020 and YE2021, and occupancy has also declined from 87.1% as of YE2020 to 78.5% as of March 2022, primarily as a result of Tymetrix (24,647 sf; 5.9% of the NRA) vacating upon lease expiration in April 2021. The largest tenant at the property, Care Centrix (73,941 sf; 18.3% of the NRA) has a lease expiration in December 2023, shortly after the loan’s maturity date in April 2023. In addition, the fifth-largest tenant, U.S. Department of Housing and Urban Development (24,647 sf; 6% of the NRA) has an upcoming lease expiration in December 2022, however, the servicer has noted a lease renewal agreement may be executed in the near term. The Q1 2022 reporting indicates a steep decline in NCF (-$110,136) and DSCR (0.19x). Given that the occupancy rate has remained relatively stable from the prior reporting period, it is unclear why cash flow has contracted so significantly. DBRS Morningstar has reached out to the servicer for clarification.

The largest loan on the servicer’s watchlist, PNC Centre (Prospectus ID#7; 6.1% of the pool), is secured by a 337,378-sf office building in Pittsburgh. The loan is being monitored for a decline in the DSCR, which decreased from 1.36x at issuance to 0.91x as of the September 2021 reporting period. The decline in coverage began in 2017, when PNC Bank (109,710 sf; 29% of the NRA) vacated the property upon lease expiration. Subsequently, CBS Corporation (CBS) renewed its lease for an additional 10 years (expiring in October 2028) but downsized its footprint from 18,041 sf to 14,700 sf. Prior to PNC vacating and CBS downsizing, the property operated at or near 90% occupancy. According to the September 2021 rent roll, occupancy has increased to 84% (from 60.2% at YE2020) because of a newly executed lease for 75,956 sf with Dollar Bank, which is now the largest tenant at the property. The lease includes a 16-year term (April 2021 through March 2037) with an initial rental rate of $24.94/sf following a 12-month abatement period for the office space and a 48-month abatement period for the 2,188-sf retail space. The second- and third-largest tenants, Reed Smith LLP and Baker Tilly US LLP, which occupy 65,830 sf and 36,082 sf of space, have lease expirations in May 2029 and July 2023, respectively.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/396929.

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 this transaction.

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.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is the North American CMBS Surveillance Methodology (March 4, 2022), 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.

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.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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