DBRS Morningstar Finalizes Provisional Credit Ratings on OPEN Trust 2023-AIR

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

-- Class A at AAA (sf)
-- Class B at AA (low) (sf)

All trends are Stable.

OPEN Trust 2023-AIR is a single-asset/single-borrower transaction collateralized by the borrower’s fee-simple and leasehold interest in a diversified portfolio of 38 retail properties across 15 states and 25 markets. The 38 assets are open-air retail centers that generally consist of anchored, strip shopping, and power centers. DBRS Morningstar views the overall credit profile of the transaction favorably based on the portfolio’s geographic diversification and retail sector stability, especially with grocer/pharmacy anchored and big-box anchored shopping centers. Although the portfolio will continue to face secular headwinds and the continued proliferation of e-commerce, the portfolio has displayed stable historical occupancy and consistent improvement in performance. Portfoliowide, net operating income (NOI) has recovered from Coronavirus Disease (COVID-19)-related impacts and, as of TTM July 2023, was over 4.0% higher than 2019.

The portfolio has concentrated exposure across the Midwest and Sunbelt, specifically in Texas, Indiana, and Florida. The portfolio has a Herfindahl (Herf) score of 21.14 by allocated loan amount, a state Herf of 8.40, and an MSA Herf score of 14.22, making the portfolio one of the most diversified retail portfolios rated by DBRS Morningstar. Across the portfolio, there are approximately 654 diverse tenants presenting distinct offerings such as services, electronics, food, and entertainment. The largest tenant represented in the portfolio is Best Buy (Morningstar Investor Services: A3), accounting for 4.6% of total net rentable area and 4.0% of total rent.

The portfolio consists of 23 properties accounting for approximately 73.7% of the Issuer’s NOI that are anchor or shadow-anchored by grocery or pharmacy tenants including Walmart (nonowned), Target (nonowned), Whole Foods, Trader Joe’s, Aldi, Walgreens, BJ’s Wholesale Club, Winn-Dixie, and Giant Foods. The weighted-average (WA) occupancy for the grocer/pharmacy anchored properties is 95.9%, compared with the WA of the portfolio, which is 93.5%. Overall, the grocery and pharmacy-anchored properties continue to illustrate strong sales and growth with July TTM 2023 net cash flow (NCF) of $121.7 million, approximately 6.6% above the 2022 NCF of $114.2 million and approximately 12.3% above the 2021 NCF of $108.4 million.

In June 2021, the Sponsor, Washington Prime Group (WPG), filed for Chapter 11 bankruptcy protection and entered a restructuring agreement with creditors led by SVP (Strategic Value Partners), after the coronavirus pandemic. WPG emerged from Chapter 11 bankruptcy in October 2021, having reorganized and recapitalized the business, with additional capital to invest in the portfolio. SVP and related funds own 100.0% of WPG and will retain equity in WPG, following the closing of the transaction. The sponsor includes a new, experienced management team with the subject portfolio representing the best assets from the broader WPG portfolio. WPG emphasizes its continued capital investment, cost-saving initiatives, and improved leasing spreads to further catalyze growth of the portfolio.

As of 2022, the sponsor invested approximately $183.7 million ($22 per square foot (psf)) in total capital expenditures across the portfolio and an additional $10.4 million in 2023. The sponsor feels confident that the capital investments are a key value driver contributing to the portfolio’s NOI growth and further illustrates its commitment to the portfolio. The loan is structured with approximately $210.3 million ($25 psf) of the sponsor’s cash-in equity, highlighting WPG’s pledge to growing and supporting the portfolio.

Historically, the sponsor noted that the portfolio’s leasing spreads have been below market; under the new leadership team of WPG, the sponsor has prioritized leasing efforts, and the portfolio is now achieving mark to market leases. The portfolio has demonstrated strong leasing trends as the portfolio reported positive blended leasing spreads of 20.8% as of the June 2023 TTM, encompassing 52.9% of new leasing spreads and 13.3% of renewal leasing spreads corresponding to leases in place prior to January 2022.

The portfolio has reported declining collections over the past year; rent collections in 2021 were 97.6%, compared with 96.7% in 2022. To mitigate this risk, DBRS Morningstar included a deduction for credit loss in the cash flow analysis.

DBRS Morningstar received certain third-party reports that were completed over a year ago and may not reflect more recent market conditions, which have generally been negative for commercial real estate. Despite the negative industrywide headwinds, the retail sector has broadly recovered from coronavirus disruptions in 2020 to 2021 and faces strength from strong consumer spending. According to the CBRE H1 2023 Cap Rate Survey, retail cap rates have seen the smallest cap rate increase from H2 2022 and, depending on location, have generally widened out 25 basis points (bps) to 50 bps. The portfolio appraised value results in an implied cap rate of 7.2% based on the YE2022 NOI, which compares with an implied cap rate of 7.7% as of TTM July 2023 or a cap rate increase of approximately 50 bps. DBRS Morningstar applied a loan-to-value penalty across the capital structure to take into account the dated third-party reports.

In today's challenging interest rate environment, base rates have increased significantly from before the Fed's interest rate hike regime that began in mid-2022. The rise in interest rates over the past year has severely constrained debt service coverage ratios (DSCRs) and in the case of the subject loan, the DSCR is 1.13 times (x) based on the Issuer's NCF. Because of the floating interest rate structure of the loan, the DSCR could improve over time if interest rates decline. Furthermore, to mitigate this risk, the loan is structured with a DSCR trigger event, should the DSCR fall below 1.05x as of the first day of each two consecutive fiscal quarters. In order for the DSCR to fall below a 1.05x coverage on the whole loan, the Issuer's NCFs would need to decline by approximately 9.5%.

DBRS Morningstar’s credit rating on the certificates addresses 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 credit ratings do not address nonpayment risk associated with contractual payment obligations contemplated in the applicable transaction document(s) that are not financial obligations (for example, Yield Maintenance Premiums or Default Interest).

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

Environmental (E) Factors
Emissions, Effluents, and Waste had a relevant effect on the credit analysis because the portfolio reported recognized environmental conditions (RECs) across seven assets in the portfolio. The environmental conditions vary in severity with estimated costs of remediation in aggregate range from $250,000 to $4.45 million.

There were no Social or 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).

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)

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 22, 2023; https://www.dbrsmorningstar.com/research/420982)

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

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 Principal Amount
-- Class A Interest Distribution Amount
-- Class B Principal Amount
-- Class B Interest Distribution Amount