DBRS Morningstar Finalizes Provisional Credit Ratings on THE 2023-MIC Trust

DBRS, Inc. (DBRS Morningstar) finalized its provisional credit ratings to the following classes of Commercial Mortgage Pass-Through Certificates, Series 2023-MIC issued by THE 2023-MIC Trust:

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

All trends are Stable.

The THE 2023-MIC Trust single-asset/single-borrower transaction is collateralized by the borrower’s fee-simple interest in The Mall in Columbia, a 1,468,977-square foot (sf) Class A super-regional mall approximately 20 miles southwest of Baltimore and 25 miles northeast of Washington, D.C. However, only 1,183,977 sf of retail space is part of the collateral, excluding anchor tenant JCPenney (165,000 sf) and the vacant former Lord & Taylor anchor store (120,000 sf). The super-regional mall is also anchored by Macy’s and Nordstrom, with other major tenants including Apple, Anthropologie, AMC Theatres, and Lululemon. The property had relatively strong in-line sales of approximately $560 per square foot (psf) in the trailing 12 months (T-12) ended June 30, 2023 (excluding Apple). Per the rent roll dated July 31, 2023, the property was 86.3% occupied and the collateral portion of the property was 93.1% occupied. The property has consistently maintained stable occupancy since 2013, with an average annual occupancy rate of 95.1% achieved between 2013 and 2022. The subject also demonstrated increasing in-line sales of approximately $560 psf (excluding Apple) in the T-12 ended June 30, 2023. This represents an 5.3% increase from the YE2019 sales figure of $532 psf from the previous securitization, which further highlights the collateral’s continued strong performance. While the as-is appraised value of the collateral declined to $466.0 million in the current transaction from $594.0 million in the CSMC 2020-TMIC transaction, the previous loan performed as agreed upon and the sponsor is contributing equity to pay down the prior loan by $15 million.

The mortgage loans benefit from an all-in DBRS Morningstar loan-to-value ratio (LTV) of 59.5%, which is well below the leverage point of other recently analyzed single-asset transactions and other regional mall securitizations rated by DBRS Morningstar that reflect a DBRS Morningstar LTV ranging between 68.9% and 86.8%. Furthermore, the $235 million mortgage loan would be able to withstand an implied market value decline of approximately 50% based on the appraised value of $466.0 million.

The subject was delivered to market in 1971 and has had continuous capital improvements, the latest one taking place in 2017. This consisted of the redevelopment of the former Sears box and included the addition of Barnes & Noble, Main Event Entertainment, Uncle Julio’s, and Lidl. The sponsor has invested approximately $83.0 million into the property since 2014. The sponsor's current plan is to activate the lifestyle portion of the mall with new restaurant tenants following the city of Columbia's new open container law for properties larger than 60 acres. This exemplifies the sponsor’s ability to navigate transitive trends in retail, despite the age of the property. The transaction benefits from strong, experienced sponsorship in Brookfield Property Retail Holding LLC and Nuveen Real Estate (Nuveen). Brookfield Properties Retail Group is one of the largest retail real estate companies in the U.S. with a portfolio that encompasses more than 155 million sf of retail space in more than 200 locations in 43 states. Nuveen is an international company ranked as the second-largest global investment manager of retail properties as of December 2022.

Noted risks include concentrated lease rollover, high occupancy costs, and The Mall in Columbia’s close proximity to competing properties. Leases representing approximately 46.4% of the collateral’s net rentable area (NRA) and 77.9% of the DBRS Morningstar gross rent are currently scheduled to expire through the fully extended loan maturity date. Lease rollover is especially concentrated between 2025 and 2027, when leases representing 20.8% of the collateral’s total NRA and 45.2% of the DBRS Morningstar gross rent are currently scheduled to roll. High occupancy costs exceeding 22.5% were observed for 62 in-line or major tenants, representing 12.2% of the NRA, over the T-12 ended June 30, 2023. As part of its net cash flow analysis, DBRS Morningstar generally adjusted rental revenue for in-line and major tenants with occupancy costs exceeding internal hurdles to account for in-place tenants exposed to high occupancy costs at the property. According to the appraisal, the collateral competes with four super-regional malls, all of which are within a 22-mile radius of the subject property. Of concern is the closest competitor to the subject, Arundel Mills, which is within an eight-mile radius of the subject. However, this risk is mitigated as the subject outperforms the competitor in sales psf, with The Mall in Columbia reporting sales of $708 psf and Arundel Mills reporting sales of $544 psf.

Considering the property’s strong sponsorship, asset quality, favorable location, evidence of increasing in-line sales, and generally consistent occupancy trends, DBRS Morningstar has a generally positive view of the credit characteristics of the collateral. Although brick-and-mortar retailers are facing secular headwinds and the proliferation of e-commerce continues, the collateral has displayed consistent improvement in performance, and sales at the property continue to rise.

DBRS Morningstar’s credit ratings on the Certificates address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. The associated financial obligations are listed at the end of this press release.

DBRS Morningstar’s long-term credit ratings provide opinions on risk of default. DBRS Morningstar considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued. The DBRS Morningstar short-term debt rating scale provides an opinion on the risk that an issuer will not meet its short-term financial obligations in a timely manner.

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).
Class X 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 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 Single-Asset/Single-Borrower Ratings Methodology (October 19, 2023; https://www.dbrsmorningstar.com/research/422174).

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

With regard to due diligence services, DBRS Morningstar was provided with the Form ABS Due Diligence-15E (Form-15E), which contains a description of the information that a third party reviewed in conducting the due diligence services and a summary of the findings and conclusions. While due diligence services outlined in Form-15E do not constitute part of DBRS Morningstar’s methodology, DBRS Morningstar used the data file outlined in the independent accountant’s report in its analysis to determine the credit ratings referenced herein.

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.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the credit rating process.

DBRS, Inc.
22 West Washington Street
Chicago, IL 60602 USA
Tel. +1 312 332-3429

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

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

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 22, 2023; https://www.dbrsmorningstar.com/research/420982)

North American Commercial Mortgage Servicer Rankings (August 23, 2023; https://www.dbrsmorningstar.com/research/419592)

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

Financial Obligations of the Issuer are listed as follows:
-- Class A Interest Distribution
-- Class A Principal Distribution
-- Class X Interest Distribution
-- Class B Interest Distribution
-- Class B Principal Distribution
-- Class HRR Interest Distribution
-- Class HRR Principal Distribution