DBRS Morningstar Assigns Ratings to J.P. Morgan Chase Commercial Mortgage Securities Trust 2012-WLDN

DBRS, Inc. (DBRS Morningstar) assigned ratings to the Commercial Mortgage Pass-Through Certificates, Series 2012-WLDN issued by J.P. Morgan Chase Commercial Mortgage Securities Trust 2012-WLDN as follows:

-- Class X-A at A (high) (sf)
-- Class A at A (sf)
-- Class B at BBB (sf)
-- Class X-B at BBB (low) (sf)
-- Class C at BB (high) (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.

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 21, 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upon withdrawal of MCR’s outstanding ratings, the DBRS Morningstar ratings will become the successor ratings to the withdrawn MCR ratings.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 (sf) will be the most affected.

LOAN/PROPERTY OVERVIEW
The transaction is backed by a $270.0 million, 10-year, fixed-rate, first-lien mortgage loan secured by the fee-simple interest in the Walden Galleria, a super-regional shopping mall in Cheektowaga, New York. The borrower used loan proceeds along with a $30.0 million senior mezzanine loan and a $50.0 million junior mezzanine loan to refinance $291.0 million of existing debt and return $54.3 million of equity back to the sponsor. The loan was structured with an initial three-year interest-only (IO) period, followed by amortizing loan payments on a 30-year schedule with a final balloon principal payment due on May 1, 2022. As of the September 2020 remittance report, the loan balance had amortized down to $247.5 million.

The subject loan transferred to special servicing in April 2020 because of the coronavirus pandemic’s impact and a loan modification is in the final stages of approval. The loan sponsor is The Pyramid Companies (Pyramid), the largest privately held shopping mall developer in the Northeast United States; its affiliate, Pyramid Management Group, LLC, provides management services. The subject is one of several commercial mortgage-backed security (CMBS) loans backed by malls in the sponsor’s portfolio that is in default and in the process of obtaining or has already obtained a loan modification. Pyramid’s access to capital has been constrained amid the pandemic and DBRS Morningstar considers the firm’s ability to weather the challenges in the current environment to be significantly impaired compared with larger, better-capitalized owner-operators, such as Simon Property Group, Inc. and Brookfield Property Partners L.P.

Of the subject mall’s 1.6 million sf of space, approximately 1.2 million sf serves as collateral for the subject loan. Walden Galleria is a super-regional mall that is considered the premier shopping destination in the Buffalo metropolitan statistical area. Anchors include JCPenney, Dick’s Sporting Goods (ground lease), Regal Cinemas, Best Buy, and Forever 21. In addition to the current anchor set, a Sears was in place at issuance; an affiliate owned the store, which was closed and released from the collateral in January 2018. Noncollateral anchors include Macy’s and Lord & Taylor, but the Lord & Taylor store estimated to close in either late 2020 or early 2021 following the retailer’s bankruptcy filing earlier this year. Historically, the mall has relied heavily on traffic from shoppers from Canada, which represent between 20% and 30% of total volume; however, because the Canadian-U.S. border remains closed through the pandemic, that traffic has ceased and will contribute to further deepening of sales declines that were already occurring prior to the pandemic. JCPenney has also filed for bankruptcy, but remains in operation at the subject property with a recent lease amendment that will expire in April 2024 and no announcements that the store will close to date. Regal Cinemas has been closed since the start of the pandemic and the theater’s parent company recently announced that all of its theaters that had reopened in recent months would temporarily close again until further notice, citing operational challenges related to the limited number of box-office releases and resulting low traffic.

Over the past few years, the property has shown precipitous cash flow declines as the YE2018 NCF of $30.2 million was 5.5% below the issuance level of $31.9 million and dipped again by 8.6% from YE018 to YE2019 when the NCF was reportedly $27.5 million, which represents a 13.7% decline from issuance. The most recent sales figures for the trailing 12-month period ended February 29, 2020, also reflected performance declines with total mall sales volume of $400.4 million, which is 19.3% lower than the issuance level of $496.3 million. The property’s occupancy rate generally held near the issuance level of 87.4% prior to the pandemic with the June 2020 occupancy rate reported at 82.5%; however, the loss of Lord & Taylor later this year and the potential for further losses as the pandemic drives a record number of retailers into bankruptcy suggests that the risk of further deterioration in the property’s occupancy rate is high.

The onset of the pandemic in mid-March 2020 forced the property to close in mid-April 2020 and the mall did not reopen until July 10, 2020. Rent collections dropped substantially as the sponsor only received 33.8% of budgeted income between April 2020 and August 2020; however, each month showed significant improvement over the last during this time period with August 2020 collections at 76.6%. Several tenants have yet to reopen at the mall because of government mandates, which include the previously discussed Regal Cinemas, Dave & Buster’s, Billy Beez, and Urban Air Adventure Park (a recently executed lease; the tenant has yet to open for business). Dave & Buster’s, occupying 33,900 sf or 2.8% of the collateral net rentable area, is particularly concerning as the company recently permanently laid off 85 employees at the subject location, per news articles.

Because of the pandemic’s impact, the subject loan transferred to special servicing in April 2020 for imminent default. The sponsor requested payment relief for a six-month period commencing on April 1, 2020. According to the special servicer report dated September 1, 2020, the special servicer, senior mezzanine lender, and borrower have agreed on modifications; however, the junior mezzanine lender is still reviewing the terms. The modifications include (1) debt service payment relief through December 2020; (2) deferral of debt service for both mezzanine loans until the subject mortgage is brought current; (3) the borrower’s agreement to fund any operating expense shortfalls and to fund increases in the capital expenditure and tenant improvement/leasing commission reserves for expected future needs; and (4) the borrower’s ability to grant rent deferral without the servicer’s consent, but to a limited degree, and the commencement of a stated increased debt service payment in January 2021 with the excess monies used to pay down the deferred debt service until the deferred balance is zero. Other terms and conditions have been instituted to permit the basic forbearance strategy. As of the September 2020 remittance report, the sponsor had $245.3 million delinquent principal and interest (P&I) payments and last paid P&I in April 2020. An updated appraisal has been ordered; however, it is currently unavailable.

DBRS Morningstar derived the NCF using the latest reported servicer NCF figure with adjustments, considering the closed and/or bankrupt tenants, challenges in declining sales, and impact of the closed Canada-U.S. border on traffic to the property for the foreseeable future. The resulting NCF figure was $25.4 million and DBRS Morningstar applied a cap rate of 8.0%, which resulted in a pre-coronavirus DBRS Morningstar Value of $317.2 million, a variance of -47.1% from the appraised value of $600.0 million at issuance. The pre-coronavirus DBRS Morningstar Value implies an A note LTV of 77.3% and whole-loan LTV of 102.6% compared with the A note LTV of 45.0% and whole-loan LTV of 58.3% 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 regional mall properties, reflecting its position in a secondary market.

DBRS Morningstar made positive qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis, totaling 0.25% to account for cash flow volatility, 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 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, and C 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.

Classes X-A and X-B are IO certificates that reference a single rated tranche or multiple rated tranches. The IO rating mirrors the lowest-rated applicable reference obligation tranche adjusted upward by one notch if senior in the waterfall.

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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