DBRS Morningstar Upgrades Ratings on Three Classes of COMM 2013-CCRE8 Mortgage Trust

DBRS Limited (DBRS Morningstar) upgraded its ratings on the following three classes of Commercial Mortgage Pass-Through Certificates, Series 2013-CCRE8 issued by COMM 2013-CCRE8 Mortgage Trust:

-- Class B to AAA (sf) from AA (sf)
-- Class C to AA (high) (sf) from AA (sf)
-- Class X-B to AAA (sf) from AA (high) (sf)

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

-- Class D at A (sf)
-- Class E at BB (high) (sf)
-- Class X-C at BB (low) (sf)
-- Class F at B (high) (sf)

All trends are Stable.

The rating confirmations and the upgrades of Classes B, C, and X-B reflect the increased credit support provided to the bonds as 43 loans have repaid from the trust since DBRS Morningstar’s last rating action, representing principal paydown of $601.9 million. As the pool continues to wind down, DBRS Morningstar looked to a recovery analysis for the remaining loans in the pool, as part of the approach for this review. The results of that analysis suggested the rated certificates in the pool are generally protected against loss, with the three most senior classes particularly well insulated, having a total balance of $83.4 million below them in the bond stack.

According to the July 2023 remittance, four of the original 59 loans remain in the trust with an aggregate principal balance of $252.6 million, representing collateral reduction of 81.8% since issuance. Three of these loans, totalling 20.2% of the current pool balance, transferred to the special servicer between June 2023 and July 2023 for maturity defaults. RFR Holding LLC (RFR), the sponsor for the largest remaining loan, 375 Park Avenue (Prospectus ID#1; 78.9% of the pool), was seeking a $1.0 billion takeout loan prior to the final maturity date in May 2023. Ultimately, RFR was unable to successfully refinance the subject loan, resulting in the loan’s transfer to the special servicer. The servicer approved a loan modification to allow for two one-year maturity extension options, pushing the loan’s current and fully extended maturity dates to May 2024 and May 2025, respectively. According to the servicer, the terms of the loan extension included an initial $15.0 million principal curtailment, followed by a secondary $40.0 million principal curtailment, to be paid over a 24-month period. The loan has been trapping excess cash since 2021 when the debt service coverage ratio (DSCR) dropped below 1.20 times (x), and, according to the July 2023 loan-level reserve report, there is approximately $53.5 million held in various escrows that can be used to mitigate any potential rollover risk and/or offset some of the borrower’s existing obligations tied to tenant improvement costs.

The 375 Park Avenue loan is secured by an 830,928-square-foot (sf) 38-story Class A trophy office tower, known as the Seagram Building, in Midtown Manhattan. The $201.5 million trust loan represents a portion of a pari passu whole loan, which reported a total balance of approximately $768 million as of the July 2023 remittance. The property was more than 90.0% occupied with more than 59 tenants at issuance; however, the departure of the largest tenant, Wells Fargo (formerly 30.2% of the net rentable area), in February 2021 brought occupancy down to 72.0%. Since that time, there has been positive leasing momentum at the property, with RFR signing approximately 375,000 sf of new leases in 2022. The largest signing was Blue Owl Capital Inc. (Blue Owl), which leased 136,660 sf of space in September 2022. Blue Owl is now the largest tenant at the property, with a lease expiration date in December 2038. Various online news reports state that RFR’s average asking rental rate at the property is approximately $200.0 per square foot (psf), a sizeable premium over the Manhattan average. The landlord recently spent $25.0 million to create the “Seagram Playground,” a 34,000-sf complex with a sports court, a wellness center, and an executive boardroom, among other amenities.

As of March 2023, occupancy at the property had rebounded to 92.0%. However, reported net cash flow (NCF) remains subdued, with the annualized trailing three months ended March 2023 and YE2022 NCF figures of $22.2 million (DSCR of 0.8x) and $25.5 million (DSCR of 0.9x), respectively, more than 60.0% below the issuance figure of $70.9 million (DSCR of 2.5x). DBRS Morningstar expects cash flows will trend upward in the near to moderate term, given that the majority of tenants who signed leases at the property in 2022 are likely still in free-rent and/or build-out periods.

In April 2023, the collateral was reappraised for $1.45 billion ($1,758 psf), below the issuance appraised value of $1.6 billion ($1,939 psf) but well above the current whole loan balance. The April 2023 appraisal value is indicative of a healthy loan-to-value (LTV) ratio of 53.0%. The implied LTV will fall further as the required principal curtailments are paid over the fully extended maturity period, assuming the second option is exercised. In addition to the low in-place LTV, the loan benefits from an experienced sponsor that remains committed to the asset as demonstrated by the recent capital expenditure program and principal curtailment payments associated with the loan extension. In addition, the property’s overall desirability is demonstrated by the significant leasing traction achieved over the last few years, a period that has been marked by lower demand and general market disruptions for most office product in New York and elsewhere across the country. Even with a sizable haircut to the appraiser’s most recent as-is value, the recovery analysis considered by DBRS Morningstar as part of this review suggests the likelihood of a loss remains minimal, supporting DBRS Morningstar’s upgrades of the higher-rated classes. However, given the general uncertainty regarding the stabilization of the office market and the concentrated nature of the subject pool, a conservative approach was maintained for the three most subordinate rated classes, supporting the rating confirmations in that part of the bond stack.

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/416784 (July 4, 2023).

Classes X-B and X-C 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 credit ratings are subject to surveillance, which could result in credit ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by DBRS Morningstar.

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

The principal methodology is North American CMBS Surveillance Methodology (March 16, 2023; https://www.dbrsmorningstar.com/research/410912).

Other methodologies referenced in this transaction are listed at the end of this press release.

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 credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

DBRS Morningstar had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

DBRS Morningstar notes that a sensitivity analysis was not performed for this review as the transaction is in wind down, with only a few loans remaining. In those cases, the DBRS Morningstar ratings are typically based on a recoverability analysis for the remaining loans.

DBRS Limited
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Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577

The credit rating methodologies used in the analysis of this transaction can be found at:
https://www.dbrsmorningstar.com/about/methodologies.

North American CMBS Multi-Borrower Rating Methodology (March 16, 2023)/North American CMBS Insight Model v 1.1.0.0 (https://www.dbrsmorningstar.com/research/410913)

Rating North American CMBS Interest-Only Certificates (December 19, 2022; https://www.dbrsmorningstar.com/research/407577)

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 12, 2022; https://www.dbrsmorningstar.com/research/402646)

North American Commercial Mortgage Servicer Rankings (September 8, 2022; https://www.dbrsmorningstar.com/research/402499)

Interest Rate Stresses for U.S. Structured Finance Transactions (June 9, 2023; https://www.dbrsmorningstar.com/research/415687)

Legal Criteria for U.S. Structured Finance (December 7, 2022; https://www.dbrsmorningstar.com/research/407008)

A description of how DBRS Morningstar analyses structured finance transactions and how the methodologies are collectively applied can be found at: https://www.dbrsmorningstar.com/research/417279.

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