DBRS Morningstar Assigns Ratings to WFLD 2014-MONT Mortgage Trust, Places All Classes Under Review with Negative Implications

DBRS, Inc. (DBRS Morningstar) assigned ratings to the Commercial Mortgage Pass-Through Certificates, Series 2014-MONT issued by WFLD 2014-MONT Mortgage Trust as follows:

-- Class A at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (low) (sf)

DBRS Morningstar has also placed all classes Under Review with Negative Implications, given the negative impact of the Coronavirus Disease (COVID-19) on the underlying collateral. The ratings assigned by DBRS Morningstar do not carry trends.

These certificates are currently also rated by DBRS Morningstar’s affiliated rating agency, Morningstar Credit Ratings, LLC (MCR). In connection with the ongoing consolidation of DBRS Morningstar and MCR, MCR previously announced that it had placed its outstanding ratings of these certificates Under Review–Analytical Integration Review and that MCR intended to withdraw its outstanding ratings; such withdrawal will occur on or about October 20, 2020. In accordance with MCR’s engagement letter covering these certificates, upon withdrawal of MCR’s outstanding ratings, the DBRS Morningstar ratings will become the successor ratings to the withdrawn MCR ratings. Information about the MCR ratings, including the history of the MCR ratings, can be found at www.morningstarcreditratings.com.

On March 1, 2020, DBRS Morningstar finalized its “North American Single-Asset/Single-Borrower Ratings Methodology” (the NA SASB Methodology), which presents the criteria for which ratings are assigned to and/or monitored for North American single-asset/single-borrower (NA SASB) transactions, large concentrated pools, rake certificates, ground lease transactions, and credit tenant lease transactions. For further information on the NA SASB Methodology, please see the press release dated March 1, 2020, at www.dbrsmorningstar.com. On April 24, 2020, DBRS Morningstar placed the ratings on its outstanding SASB transactions secured by retail properties Under Review with Negative Implications while MCR placed the ratings on its outstanding SASB transactions secured by retail properties Under Review Negative as the global shelter-in-place and mandatory retail closures related to the coronavirus have contributed to retail bankruptcies and anticipated vacancies in retail centers. For further information on these rating actions, please see the DBRS Morningstar press release dated April 24, 2020, at www.dbrsmorningstar.com and the MCR press release dated April 24, 2020, at www.morningstarcreditratings.com.

To assign ratings to this transaction, DBRS Morningstar considered both the impact of the updated NA SASB Methodology and its scenarios attributable to the ongoing coronavirus pandemic on the ratings.

Because of the coronavirus’ significant impact on retail performance, DBRS Morningstar first considered the application of the updated NA SASB Methodology in conjunction with the “North American CMBS Surveillance Methodology” to arrive at a baseline result, which incorporated qualitative assumptions, capitalization rates, and loan-to-value (LTV) ratio sizing benchmark quality/volatility adjustments and excluded any potential changes in current or future expected asset performance resulting from the coronavirus.

DBRS Morningstar then overlaid scenarios incorporating additional reductions in net cash flow (NCF) to account for exposure to bankrupt or closed tenants. This resulted in stressed collateral value declines consistent with the projections in its “Global Macroeconomic Scenarios: September Update” published on September 10, 2020, on top of the baseline result to determine the impact of coronavirus-related changes in asset performance on the subject transaction on a tranche-by-tranche basis. For more information on these stress scenarios, please refer to the Coronavirus Impact Analysis section of this document. The global macroeconomic scenarios include a moderate decline of 15% for all commercial real estate (CRE), which acts as an average for all CRE property types. However, DBRS Morningstar expects a greater range of value decline for retail properties, ranging from 10% to 45% based on the type of tenant composition, exposure to bankrupt or challenged retailers, asset sponsorship, and asset location. DBRS Morningstar expects that lower-tier regional malls with in-line sales generally less than $300 per square foot (psf) will be the most affected.

LOAN/PROPERTY OVERVIEW
The first-mortgage loan is secured by the fee-simple interest in a 835,597-square foot (sf) portion of the 1.3 million-sf Westfield Montgomery center in Bethesda, Maryland, approximately 15 miles north of Washington, D.C. The two-story, Class A super-regional mall was constructed in 1968 and has undergone several renovations, the last of which was a $90 million upgrade completed in 2014. The mall is anchored by Macy’s, Macy’s Home, Nordstrom, and Arclight Cinemas (Arclight) which was added as part of the 2014 renovation. Additionally, there is a vacant Sears box at the property. The Macy’s, Macy’s Home, Nordstrom, and vacant Sears boxes are not part of the loan collateral; however, Nordstrom operates on a ground lease, expiring in October 2025. The sponsor purchased the Sears store in 2017 after it became vacant and the sponsor is in the initial stages of a multiyear expansion and renovation plan.

The mall collateral includes a condominium ownership interest in 61,559 sf of space on the first level leased to retail tenants with the second level controlled by Macy’s, serving as the Macy’s Home location. Also included in the collateral is the 25,849-sf Westlake Crossing neighborhood center, which was 100.0% occupied as of June 2020.

The loan has a ten-year term and is interest only throughout, maturing in August 2024. The loan facilitated the recapitalization of the sponsor’s interest in the property where $345.6 million of cash equity was distributed to the borrower. The sponsor, Unibail-Rodamco-Westfield (successor to Westfield America, Inc.), has continued to invest in the property since closing, as it contributed equity to construct a transit center at the mall, which opened in 2016 and consists of six bus routes that bring consumers to the subject.

The loan remains current as the sponsor has been able to reconfigure spaces and improve revenue in response to changing patterns of consumer behavior and store closures. The 2019 NCF of $33.6 million equated to a debt service coverage ratio of 2.51 times and represented a 9.0% improvement over the 2018 NCF. The YE2019 NCF remains 6.0% below the issuer’s underwritten NCF at issuance; however, as operating expenses have increased.

In response to the coronavirus outbreak, the mall closed in mid-March and reopened in June. While most tenants are open for business, major experiential tenants remained closed under Montgomery County Phase 2 restrictions with ultimate reopening dates unknown at this time. These tenants include Arclight, Lucky Strike, and Dream Aero. According to the information provided by the servicer, a total of 16 tenants received rent abatements or rent deferrals, totaling over $750,000. Tenants that received rent deferrals will begin repaying past due rent beginning in October 2020 through YE2020 in up to 12 monthly installments.

As of the June 2020 rent roll, total collateral occupancy was 91.6%; however, in-line occupancy had declined to 71.4%. This was driven by large in-line vacancies from tenants that reduced their footprints in recent years, including Old Navy and Victoria’s Secret which downsized by 12,500 sf and 6,000 sf, respectively. The sponsor has successfully signed new leases with Amazon 4-Star, Avalon, Lego, and Nature’s Elite, increasing in-line occupancy to 73.5%. Upcoming tenant rollover risk is moderate, as several major tenants including Forever 21 (3.6% of the net rentable area (NRA); 1.7% of base rent), Gap (1.3% of the NRA; 1.5% of base rent), and Zara (1.1% of the NRA; 0.6% of base rent). all have lease expirations at month-end January 2021. Other major collateral tenants, Arclight (10.8% of the NRA; 12.7% of base rent), Lucky Strike (2.5% of the NRA; 1.7% of base rent), and Old Navy (1.1% of the NRA; 1.8% of base rent) have lease expirations in October 2029, January 2026, and January 2029, respectively.

According to the sales report for the trailing 12 months (T-12) ended June 30, 2020, tenant sales are down as expected caused by the effects of the pandemic in combination with the changing retail landscape. Arclight reported sales of $465,000 per screen, which DBRS Morningstar considers to be relatively low but healthy. Junior anchors reported sales of $199 psf, and in-line stores reported sales of $922 psf, dropping to $481 psf when sales from Apple and Tesla are excluded. In comparison with the previous year’s T-12 ended June 30, 2019, figures, movie theater and junior anchor sales were down approximately 30.0% while total in-line sales declined 18.6%.

As noted above, the sponsor is in the early stages of a significant expansion and renovation at the property, which contemplates a three-phase plan to add up to 3.0 million sf of retail, creative office, and hotel product as well as 400 multifamily units and a three-story fitness center. The sponsor received approval in July 2020 to draw up plans, submit for and pull permits with a ten-year window to complete development. Phase 1 will include 400 apartment units and up to 90,000 sf of commercial product at the former Sears space with a planned construction start in March 2023 and completion date of December 2025. While the development will not serve as collateral for the loan, DBRS Morningstar views the sponsor’s continued investment in the property as a long-term positive for the mall as more consumers will be brought to the area and the inherit value of the collateral is likely to increase.

DBRS Morningstar derived the NCF using the latest reported servicer NCF with an adjustment, considering the increased in-line vacancy and uncertainty in the overall retail landscape. The resulting NCF figure was $32.9 million and DBRS Morningstar applied a cap rate of 7.5%, which resulted in a pre-coronavirus DBRS Morningstar Value of $438.7 million, a variance of 35.5% from the appraised value of $680.0 million at issuance. The pre-coronavirus DBRS Morningstar Value implies an LTV of 79.8% compared with the LTV of 51.5% on the appraised value at issuance.

The cap rate DBRS Morningstar applied is at the middle end of the range of DBRS Morningstar Cap Rate Ranges for retail properties, reflecting the increase vacancy and current retail landscape.

DBRS Morningstar made positive qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis, totaling 4.0% to account for property quality and market fundamentals.

CORONAVIRUS IMPACT ANALYSIS
DBRS Morningstar overlaid various scenarios incorporating higher NCF declines, resulting in stressed collateral value declines consistent with the projections in the “Global Macroeconomic Scenarios: September Update” (https://www.dbrsmorningstar.com/research/366542) to estimate the impact of coronavirus-related changes in asset performance on a tranche-by-tranche basis for the subject transaction. The scenarios included deducting cash flow for bankrupt retailers and/or increased vacancy expected at the asset to arrive at a coronavirus DBRS Morningstar Value under the moderate scenario, a 15.0% reduction from the pre-coronavirus DBRS Morningstar Value. Because of the more permanent value impairment resulting from the lost tenancy revenue stream, DBRS Morningstar’s analysis considered this value when assigning ratings.

Under the moderate scenario, the cumulative rated debt was insulated from loss.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

After applying the Coronavirus Impact Analysis, DBRS Morningstar had higher variances from the ratings assigned to Classes A, B, C, and D to the results of its LTV Sizing Benchmarks. The variation is warranted due to going concerns with the impact of the coronavirus pandemic on the collateral assets and, as a result, DBRS Morningstar placed these classes Under Review with Negative Implications.

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

DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for this transaction.

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com. The platform includes loan-level data for most outstanding CMBS transactions (including non-DBRS Morningstar-rated), as well as loan-level and transaction-level commentary for most DBRS Morningstar-rated and -monitored transactions.

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

The principal methodologies are the North American Single-Asset/Single-Borrower Ratings Methodology (March 1, 2020) and North American CMBS Surveillance Methodology (March 6, 2020), which can be found on www.dbrsmorningstar.com under Methodologies & Criteria. For a list of the structured-finance-related methodologies that may be used during the rating process, please see the DBRS Morningstar Global Structured Finance Related Methodologies document, which can be found on www.dbrsmorningstar.com in the Commentary tab under Regulatory Affairs. Please note that not every related methodology listed under a principal structured finance asset class methodology may be used to rate or monitor an individual structured finance or debt obligation.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The DBRS Morningstar long-term rating scale definition indicates that ratings of CCC or lower are assigned when the bond is highly likely to default or default is imminent, thereby prevailing over a sensitivity analysis.

DBRS Morningstar’s North American CMBS analytical team will continue to monitor the transaction to evaluate the increased risk factors related to the coronavirus pandemic. As information (e.g., updated property-level financials, rent rolls, new valuations for specially serviced loans, and workout and/or modification specifics, if applicable) becomes available, DBRS Morningstar will address the Under Review with Negative Implications rating actions over the near to moderate term. DBRS Morningstar typically endeavors to resolve an Under Review rating action within 90 days, but the circumstances surrounding these rating actions (i.e., the unknown length of the pandemic-related downturn) may result in a prolonged resolution period.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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