DBRS Morningstar Downgrades Ratings on Eight Classes of Morgan Stanley Bank of America Merrill Lynch Trust 2013-C9

DBRS, Inc. (DBRS Morningstar) downgraded ratings on eight classes of Commercial Mortgage Pass-Through Certificates, Series 2013-C9 issued by Morgan Stanley Bank of America Merrill Lynch Trust 2013-C9 as follows:

-- Class C to BB (sf) from AA (sf)
-- Class D to CCC (sf) from A (low) (sf)
-- Class E to CCC (sf) from BBB (high) (sf)
-- Class F to CCC (sf) from BBB (sf)
-- Class G to C (sf) from BB (high) (sf)
-- Class H to C (sf) from B (sf)
-- Class X-B to BB (high) (sf) from AA (high) (sf)
-- Class PST to BB (sf) from AA (sf)

In addition, DBRS Morningstar confirmed the following ratings:

-- Class A-S at AAA (sf)
-- Class B at AA (high) (sf)
-- Class X-A at AAA (sf)

With this rating action, all Classes have been removed from Under Review with Negative Implications where they were placed on May 17, 2023, as a result of interest shortfalls up through Class D with the April 2023 remittance. The trends on Classes A-S, B, C, X-A, X-B, and PST are Negative. The remaining Classes D, E, F, G, and H are assigned ratings which typically do not carry trends in commercial mortgage backed securities (CMBS) ratings.

These rating actions and the May 2023 rating actions that placed all classes Under Review with Negative Implications are generally the direct result of the non-recoverability determination made by the master servicer, Midland Loan Services, a Division of PNC Bank, for the pool’s largest remaining loan, Milford Plaza Fee (Prospectus ID #1; 58.4% of the pool). That determination, made following the April 2023 remittance, resulted in a loss of $17.8 million for the unrated Class J and interest shortfalls through Class D. The shortfalls extended into Class C starting with the May 2023 remittance. The master servicer’s non-recoverability determination does not appear to be related to the updated appraised values obtained to date for the collateral property, which have generally been in line with the appraised value at issuance, as further described below. The master servicer’s response to inquiries about this matter has noted that the determination was made based on the extended length of time in special servicing and the uncertainty regarding the time to resolution. DBRS Morningstar expects the wind-down status of the subject transaction and the uncertainty surrounding the timing of the repayment of the second-largest remaining loan were also factors.

At the time of the non-recoverability determination, the total advances and cumulative appraisal subordinate entitlement reduction (ASER) amounts outstanding for the Milford Plaza Fee loan were $49.4 million, with an additional $12.1 million outstanding for the MSBAM 2013-C10 transaction (not rated by DBRS Morningstar). The advances for the Milford Plaza Fee loan represented nearly all of the outstanding advances for the subject trust, and combined for 15.3% of the ending trust balance of $321.1 million at the April 2023 remittance. As mentioned, the transaction is in wind-down with the two largest loans, which combine for approximately 78% of the outstanding pool balance, in special servicing. As such, DBRS Morningstar believes the servicer’s willingness to advance could remain in question, supporting the Negative trends on the six Classes rated BB (sf) and above with this review.

Prior to the April 2023 remittance, shortfalls of $1.3 million were outstanding, all attributed to the unrated Class J certificate. As of the August 2023 remittance, the shortfalls outstanding totaled $3.9 million and continued up the capital stack as high as the Class C certificate, which received partial interest payments for May, June, July, and August 2023. The cumulative ASER, advanced interest, and total advances for the Milford Plaza Fee loan were reported at $24.7 million with the August 2023 remittance. The interest shortfalls that began in April 2023 have been outstanding for periods that exceed DBRS Morningstar’s maximum shortfall tolerance for the respective rating categories assigned prior to this rating action, driving the downgrades with this review. DBRS Morningstar notes the possibility that the pool’s second-largest loan (Dartmouth Mall, Prospectus ID #4; 18.6% of the pool) will be repaid in the near term, which would repay the remaining balance of Class A-S and a significant portion of Class B. These factors and the credit outlook for the pool’s three smallest remaining loans provide support for the rating confirmations, but the situation will be closely monitored for developments. In addition, DBRS Morningstar notes that, as of the August 2023 remittance, the Class C certificate had been shorted interest for four consecutive months and, should those shortfalls continue through the November 2023 remittance period, DBRS Morningstar’s shortfall tolerance for the BB (sf) rating category of six remittance periods will be exceeded and further downgrades could be warranted.

The Milford Plaza Fee loan is secured by the borrower’s leased fee interest in the ground beneath the 1,331-key hotel most recently known as Row NYC (and formerly known as the Milford Plaza Hotel) in the Times Square-Theatre District in New York City. The $275 million whole loan, which has a pari passu structure with pieces contributed to the subject transaction ($165 million) and also to the non-DBRS Morningstar-rated MSBAM 2013-C10 transaction ($110 million), has been in special servicing since June 2020 when it reached 60 days delinquent. At the time of the loan’s transfer to special servicing, it was noted that the ground rent payments were no longer being made by the leasehold owner, a joint venture between Highgate Holdings and Rockpoint Group. The sponsors for the subject loan are David Werner and the Los Angeles County Employees Retirement Association, which own 25% and 75% of the borrowing entity, respectively. The ground lease runs through February 2112, with the last rent roll on file with DBRS Morningstar showing an annual ground lease payment of $17.1 million due in 2017.

The hotel was initially closed in the very early stages of the Coronavirus Disease (COVID-19) pandemic, but was subsequently contracted by NYC Health + Hospitals (NYCHH), which has housed migrants in some or all of the hotel rooms since the spring of 2020. Most recently, NYCHH confirmed in its March 2023 Report to the Board of Directors that the contract with the subject property had been renewed for a 12-month term. The contract rate is not disclosed in NYCHH’s report, but prior news reports have noted the contract was in place at a rate of $190 per night per room. For reference, the hotel last reported an average daily rate (ADR) of $169 in 2019, down from an ADR of $190 in 2013 when the subject loan closed.

At issuance, the subject collateral was valued at $386 million, with a loan-to-value ratio of 71.2%. After the loan’s transfer to special servicing, the first appraisal obtained by the special servicer, LNR Partners, LLC, was dated August 2020, with an as-is value estimate of $378 million. The July 2021 appraisal showed an as-is value estimate of $324 million, but appraisals obtained since then have generally trended back in line with the August 2020 appraisal. The June 2022 appraisal valued the collateral at $365 million and, most recently, a value of $375 million was estimated in a May 2023 appraisal obtained by the special servicer. Although the ongoing delinquency and the special servicer’s sometimes vague updates about the status of the workout were noted concerns, the consistency in the valuations and the implied recovery well beyond the total loan amount of $275 million supported DBRS Morningstar’s general expectation prior to the non-recoverability determination that the master servicer would continue to advance the bulk of the interest due through the remainder of the workout period. These assumptions also supported the prior rating confirmations, with surveillance reviews conducted by DBRS Morningstar between the 2020 transfer to special servicing and the February 2023 rating action. DBRS Morningstar notes that the trend on Class H was changed to Negative in February 2023 to reflect the growing advance amount and general uncertainty for the final resolution of the Milford Plaza Fee and other loans exhibiting increased credit risks amid the transaction’s wind-down status.

The special servicer continues to report ongoing efforts to pursue legal remedies while maintaining negotiations with both the subject borrower and the leasehold owner regarding the resolution strategy. DBRS Morningstar located a court filing dated November 8, 2022, submitted on behalf of the subject trust in response to the leasehold owner’s efforts to stipulate the installation of a receiver; it is unclear what the status of those efforts are since that time. In addition, DBRS Morningstar does not know who is collecting the money being paid by the city as part of the contract to house migrants, as the mortgage and, apparently, the ground lease remain in default. DBRS Morningstar has requested specific details on the efforts to pursue legal remedies and, as of the date of this press release, the special servicer’s response is pending.

The Dartmouth Mall loan, secured by a regional mall in Dartmouth, Massachusetts, transferred to special servicing for a maturity default in June 2023. The sponsor is an affiliate of Pennsylvania Real Estate Investment Trust (PREIT) and, according to the servicer, a replacement loan is in the works with ongoing negotiations between the special servicer and PREIT to document a short-term forbearance. Cash management has been initiated and excess funds are being trapped. As of the YE2022 reporting, the loan had a debt service coverage ratio (DSCR) of 1.98 times (x), in line with DSCRs reported since issuance, and an occupancy rate of 98% was reported for the property. Although DBRS Morningstar believes the subject’s secondary location and general decline in investor appetite for regional mall property types have likely contributed to a significant value decline from issuance, it appears the sponsor remains committed to the property and the subject loan and a refinance is ultimately expected to be achieved in the near to moderate term.

As of the August 2023 remittance, four of the original 60 loans remain in the pool. The initial pool balance of $1.28 billion has been reduced by 77.9%, to $282.4 million, which includes $18.2 million in realized losses to date.

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-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 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 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.

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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)

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