Morningstar DBRS Confirms Credit Ratings on All Classes of OPEN Trust 2023-AIR

DBRS Limited (Morningstar DBRS) confirmed its credit ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2023-AIR issued by OPEN Trust 2023-AIR (OPEN 2023-AIR):

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

All trends are Stable.

The credit rating confirmations reflect the limited financial reporting since issuance. The loan is secured by a diverse portfolio of 38 retail properties across 15 states and 25 markets, which have historically displayed stable occupancy. Since issuance, the loan has paid down by approximately $114.2 million (11.4%), resulting from eight property releases. Given the closing date in November 2023, there has not yet been a full year of servicer reporting; however, the most recently reported occupancy indicates performance remains stable. The interest-only floating-rate loan has an initial two-year term with three one-year extension options.

The issuance loan proceeds of $1.01 billion along with $210 million of sponsor equity facilitated the refinance of the portfolio. The sponsor invested approximately $183.7 million ($22 per square foot (psf)) in total capital expenditures across the portfolio in 2022, with an additional $10.4 million in 2023. The loan is sponsored by Washington Prime Group (WPG), which filed for Chapter 11 bankruptcy protection and entered a restructuring agreement with creditors led by SVP (Strategic Value Partners), after the coronavirus pandemic. The sponsor includes a new, experienced management team with the subject portfolio representing the best assets from the broader WPG portfolio.

At issuance, the loan was secured by the borrower's fee-simple and leasehold interest in 38 retail properties, totalling approximately 8.54 million square feet (sf). The individual properties may be conditionally released at a release price the greater of 95.0% of gross property sales or 125.0% of the allocated loan amount (ALA). After the portfolio achieves a debt yield of at least 14.0% or a debt service coverage ratio (DSCR) of at least 1.40 times (x), the release price is the greater of 85.0% of net property sales or 115.0% of the ALA. The mortgage loan has a partial pro rata/sequential-pay structure, which allows for pro rata paydowns for the first 20.0% of the unpaid principal original balance. Proceeds are applied sequentially for the remaining 80.0% of the pool balance. Morningstar DBRS applied a penalty to the transaction's capital structure to account for the pro rata nature of certain prepayments and for the weak deleveraging premium.

As of the December 2023 rent roll, the portfolio was 92.0% occupied, a slight decrease from the issuance figure of 94.0%. At issuance, leases representing approximately 62.0 % of the portfolio net rentable area (NRA) were scheduled to roll through the fully extended loan term in 2028. Near-term lease expirations across the portfolio are moderately staggered; 11.6 % of portfolio NRA was set to expire in 2024 and 13.0% in 2025. The largest tenant represented in the portfolio is Best Buy, accounting for 4.6% of total NRA and 4.0% of total rent. No tenants contribute more than 5.0% of the Morningstar DBRS In-Place Base Rent, highlighting the granularity of the rent roll. The portfolio has demonstrated strong historical occupancy, reporting consolidated occupancy figures above 95.0% since 2018. According to the YE2023 financials, the portfolio reported a net cash flow (NCF) of $99.4 million, compared with the Morningstar DBRS NCF of $91.0 million when accounting for the released properties. The in-place interest rate cap agreement is required to yield a minimum DSCR of 1.25x.

Morningstar DBRS' credit ratings are based on a value analysis, which was completed at issuance and updated in the current review of the transaction to omit cash flows from the eight released properties. The analysis considered a capitalization rate of 8.75%, unchanged from issuance, resulting in a Morningstar DBRS value of $1.0 billion, a variance of -27.3% from the issuance appraised value of $1.4 billion for the 30 remaining properties. The updated Morningstar DBRS value implies a loan-to-value ratio (LTV) of 86.8%, compared with the LTV of 63.0% on the issuance appraised portfolio value. Morningstar DBRS maintained positive qualitative adjustments to its LTV sizing benchmarks, totalling 1.0%, to reflect the property's low cash flow volatility linked to the historically strong occupancy.

Morningstar DBRS' credit ratings on the applicable classes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. Where applicable, a description of these financial obligations can be found in the transactions' respective press releases at issuance.

Morningstar DBRS' long-term credit ratings provide opinions on risk of default. Morningstar DBRS 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 Morningstar DBRS 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, AND GOVERNANCE CONSIDERATIONS
There were no Environmental, Social, or Governance factors that had a significant or relevant effect on the credit analysis.
 
A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Factors in Credit Ratings at https://dbrs.morningstar.com/research/437781 (August 13, 2024).

All credit ratings are subject to surveillance, which could result in credit ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by Morningstar DBRS.

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

The principal methodology is North American CMBS Surveillance Methodology (March 1, 2024), https://dbrs.morningstar.com/research/428798.

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

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 info-DBRS@morningstar.com.

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.

Morningstar DBRS 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 Limited
DBRS Tower, 181 University Avenue, Suite 700
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://dbrs.morningstar.com/about/methodologies.

-- North American Single-Asset/Single-Borrower Ratings Methodology (September 19, 2024), https://dbrs.morningstar.com/research/439699
-- Morningstar DBRS North American Commercial Real Estate Property Analysis Criteria (September 19, 2024), https://dbrs.morningstar.com/research/439702
-- Interest Rate Stresses for U.S. Structured Finance Transactions (February 26, 2024), https://dbrs.morningstar.com/research/428623
-- North American Commercial Mortgage Servicer Rankings (August 23, 2024), https://dbrs.morningstar.com/research/438283
-- Legal Criteria for U.S. Structured Finance (October 28, 2024), https://dbrs.morningstar.com/research/441840

A description of how Morningstar DBRS analyzes structured finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/417279 (July 17, 2023).

For more information on this credit or on this industry, visit https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.