NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed one class of SCG Trust 2013-SRP1 commercial pass-through certificates, series 2013-SRP1 (Starwood Retail Portfolio). A detailed list of rating actions follows at the end of this release.
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.
KEY RATING DRIVERS
The affirmation and Stable Outlook reflect the relatively stable performance of the portfolio as expected since issuance. 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. Anchor tenants include JC Penney (five properties), Macy's (five properties), Sears (three properties), Dillards (two properties), and Wal-Mart (one property). The properties total approximately 5.8 million square feet (sf), of which approximately 3.6 million 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%).
Stable Operating Performance: The portfolio's operations have remained relatively stable since issuance. The five malls combined have maintained an average occupancy of approximately 95% since 2008 and were 94.8% occupied as of June 2016. There has been slight decline in the portfolio net operating income (NOI) over the last three reporting periods, with the NOI per trailing 12 month (TTM) August 2016 borrower financials 6.2% below the year end (YE) 2014 servicer OSAR. According to the servicer, the NOI declines are primarily due to reduced revenues stemming from various issues with delinquent tenants, tenants filing for bankruptcy, and leases converted to percentage rent in lieu of base rents. Expenses have been relatively flat over the last three reporting periods, with largest variance since issuance being an increase in real estate taxes (approximately $2.3 million higher than the issuers underwriting). Despite the NOI declines, the debt service coverage ratio (DSCR) remains strong calculating to 3.92x based on the TTM August 2016 borrower financial statement, compared to 4.0x at YE 2015 and 4.23x at YE 2014.
Loan Extension and Modification: The loan had an initial maturity date of Nov. 8, 2016, with two 12 month extension options subject to debt yield (DY) requirements. The DY requirement for the first year was 11%, and 11.25% for the second extension. In September 2016, the servicer (Wells Fargo Bank N.A.) had notified Fitch that the portfolio would not meet its DY requirement of 11% for the first extension, with an actual DY of only 10.07% based on the borrower's TTM August 2016 financials. As a result, the servicer approved a modification of the loan to reduce the first extension DY to 10% which provides the sponsor time to continue leasing and stabilizing the portfolio, and allows additional time for refinancing options. As a requirement of the extension, the borrower was required to deposit $5 million to be held as additional collateral in a Principal Reserve Account until the loan is repaid in full. In addition, the Borrower is required to deposit a monthly payment into the Principal Reserve Account equal to an additional $10 million collected by the end of the first extension maturity date (Nov. 15, 2017).
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. Based on recent (2016) leasing activity across the portfolio, base rental revenues are expected to increase in excess of $3.0 million. Recent leasing activity includes two major expansions, with a 34,000-sf Dave & Busters (at Franklin Park Mall) and a 51,000-sf Dick's Sporting Goods (at Capital Mall) both scheduled to open in fourth quarter 2016.
Anchor Tenants: All five properties have exposure to Macy's and JC Penney, and three properties have Sear's anchors. Over recent years, the three retailers have had store closures and/or made recent announcements for additional closures. However, TTM April 2016 gross sales at the subject properties for JC Penney (all five stores), Sears (two of three), and Macy's (three of five) were at or above their respective national chain averages. The JC Penney at the Great Northern Mall ($16.5 million gross sales; $103 per square foot [psf]) recently extended its lease for an additional 10 years through November 2026. In addition, in-line tenant sales have remained strong increasing to $414 psf for TTM April 2016, compared to $393 psf for TTM June 2016 and $370 psf for June 2015.
High Trust Fitch Leverage: Fitch's stressed DSCR and loan-to-value (LTV) for the entire trust is currently 0.93x and 97.5%, respectively, compared to 0.96x and 94.5% at issuance. Fitch's stressed DSCR and LTV on class A, the only class rated by Fitch in this transaction, is currently 2.10x and 44%, respectively, compared to 2.20x and 41% at issuance.
RATING SENSITIVITIES
The Rating Outlook for class A remains Stable. Fitch does not foresee negative rating migration unless a material economic or asset level event changes the transaction's portfolio-level metrics.
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.
Additional information is available at www.fitchratings.com.
Applicable Criteria
Counterparty Criteria for Structured Finance and Covered Bonds (pub. 01 Sep 2016)
https://www.fitchratings.com/site/re/886006
Criteria for Analyzing Large Loans in U.S. Commercial Mortgage Transactions (pub. 18 Aug 2016)
https://www.fitchratings.com/site/re/885802
Global Structured Finance Rating Criteria (pub. 27 Jun 2016)
https://www.fitchratings.com/site/re/883130
Related Research
SCG Trust 2013-SRP1, Series 2013-SRP1 -- Appendix
https://www.fitchratings.com/site/re/739516
Additional Disclosures
Dodd-Frank Rating Information Disclosure Form
https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1015149
Solicitation Status
https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1015149
Endorsement Policy
https://www.fitchratings.com/regulatory
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