Fitch Affirms SCG Trust 2013-SRP1.
The transaction certificates represent the beneficial interests in a three-year (plus two one-year extension options), floating-rate interest-only mortgage loan with a balance of $760 million. The certificates follow a sequential-pay structure. The loan is secured and cross-collateralized by the Starwood Mall Portfolio, which includes Franklin Park Mall in Toledo, OH; West Covina Mall in West Covina, CA; Parkway Mall in El Cajon, CA; Capital Mall in Olympia, WA; and Great Northern Mall in North Olmsted, OH. The properties total approximately 5.85 million sf, of which approximately 3.68 million sf serves as collateral for the loan. The sponsor is a joint venture among affiliates of Starwood Capital Group, L.P. (SCG; 90%) and Westfield Group (10%).
KEY RATING DRIVERS
Declining Operating Performance: Portfolio performance has declined since issuance due to lower revenues and increased expenses. Per the servicer OSAR, total revenues have declined from $134.5 million in 2014 to $129.4 million for year-end (YE) 2016. Revenue declines are primarily attributed to lower reimbursements due to a conversion of many tenants' rental payments to percentage rents. In addition, real estate taxes have increased across all properties within the portfolio, with a total increase of $4.1 million (or 22.8%) since issuance. Overall servicer-reported NOI as of YE2016 has declined to $75.3 million from $87.8 million at issuance; Fitch NOI at issuance was $79.2 million. The resulting DSCR is 3.5:1 based on the (floating) interest-only payments, compared to 4.0x at YE 2015 and 4.38x at issuance.
Second Loan Extension & Modification; Principal Reserve Account: The loan had an initial maturity date of Nov. 8, 2016, with two 12-month extension options subject to debt yield (DY) requirements. The loan was unable to meet its first extension DY requirement of 11%, which was subsequently modified in October 2016 to 10%, allowing the sponsor to extend the loan. The loan was again unable to meet the second extension DY requirement (11.25%) prior to the first extended maturity date of Nov. 8, 2017. As a result, the servicer recently executed a second loan modification that waived the DY requirement, allowing the sponsor to extend the loan to the final maturity date of Nov. 8, 2018. In exchange for both loan modifications, the borrower was required to deposit additional collateral in a principal reserve account (with larger initial deposits plus ongoing monthly deposits) totalling $15 million by the end of the first extension ($5 million upfront with $909,901 monthly), and $45 million by the end of the second extension ($10 million upfront and $1.82 million monthly). The affirmation of class A is the partially the result of the reserves, which have somewhat mitigated the decline in cash flow.
Anchor Tenants: All five properties have exposure to Macy's and JC Penney, and three properties have Sear's anchors - none of which are part of the collateral. Over recent years, the three retailers have had store closures and/or made recent announcements for additional closures; to date, none of the collateral-related stores have been identified as closing. Additional anchors include Dillard's (two properties) and Wal-Mart (one property).
Tenant Sale Declines: During the TTM ended August 2017, reported inline sales at the five malls declined to approximately $362psf from $409psf at TTM April 2016 and $384 at issuance. The decline of inline sales is primarily attributed to reported declines at West Covina Mall and Franklin Park Mall. As of TTM August 2017, the servicer-reported inline sales for stores less than 10,000sf were $335psf and $340psf compared with $446 and $399 as of TTM April 2016, respectively. Fitch has contacted the servicer for more details on the sales declines at these malls.
TTM Aug 2017 gross sales for JC Penney (for all five reported malls) and Sears (for two out of three reported) were at or above their respective national chain averages. Three of the five Macy's were at or above the national chain average. Anchor sales have been relatively flat over the past 12 months, with the exception of Macy's at the Capital Mall (declining to $179psf from $236psf) and Macy's at Parkway Mall (declining to $216psf from $263psf).
Diverse Tenancy and Leasing Activity: The portfolio's five regional malls are located in distinct geographic regions with over 700 separate leases. No single tenant represents more than 3% of total base rental income.
Although cash flow has declined and the loan terms have been modified, the affirmations reflect class A's senior position in the capital stack as well as the significant reserves that can be used to reduce the outstanding debt. Fitch remains concerned with the increasing refinancing risk given the loan's final maturity date is of Nov. 8, 2018. A default of the loan at maturity is possible. A Negative Outlook assignment or downgrade is possible if mall performance continues to decline or if the loan defaults and a protracted workout is deemed likely.
USE OF THIRD-PARTY DUE DILIGENCE PURSUANT TO SEC RULE 17G-10
No third party due diligence was provided or reviewed in relation to this rating action.
Fitch has affirmed the following class:
--$330 million class A at 'AAAsf'; Outlook Stable.
Fitch does not rate the class A-J, B, C, D, E, and V certificates. The classes X-CP and X-NCP certificates were not part of the final structure of this transaction and had been previously withdrawn.
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|Publication:||Daily the Pak Banker (Lahore, Pakistan)|
|Date:||Feb 1, 2018|
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