DBRS Morningstar Assigns Ratings to COMM 2012-LTRT Mortgage Trust, Places All Ratings Under Review with Negative Implications

DBRS, Inc. (DBRS Morningstar) assigned ratings to the COMM 2012-LTRT Commercial Mortgage Pass-Through Certificates issued by COMM 2012-LTRT Mortgage Trust as follows:

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class X-A at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at BBB (high) (sf)
-- Class D at BBB (sf)
-- Class X-B at BBB (low) (sf)
-- Class E 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upon withdrawal of MCR’s outstanding ratings, the DBRS Morningstar ratings will become the successor ratings to the withdrawn MCR ratings.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 (psf) will be the most affected.

LOAN/PROPERTY OVERVIEW
The COMM 2012-LTRT Mortgage Trust transaction is evidenced by two promissory notes. Each note is secured by the fee interest in a portion of a super-regional mall: Westroads Mall and Oaks Mall. The two loans are co-terminus with a 10-year loan term, a 30-year amortization schedule, and maturity on October 1, 2022. The loans currently have an aggregate senior note balance of $222.0 million and an aggregate mezzanine debt balance of $32.0 million. The loans are not cross-collateralized or cross-defaulted.

The sponsor and manager of both loans is Brookfield Property Partners L.P. (Brookfield; rated BBB with a Negative trend by DBRS Morningstar) as Brookfield acquired the original owner, General Growth Properties, Inc. The sponsor has continued to support the performance of both properties by contributing fresh equity to cover shortfalls for operating expenses and debt service to keep the loans current. Both loans are currently on the servicer’s watchlist, as the borrower has notified the master servicer about potential cash flow concerns caused by the coronavirus pandemic. However, the loan for Oaks Mall was also watchlisted because the operating statement dated March 31, 2020, exhibited a debt service coverage ratio (DSCR) of 1.13 times (x), which is well below the YE2017 and YE2018 DSCRs of 1.97x and 1.46x, respectively

The Westroads Mall loan had an initial balance of $140.7 million and an initial mezzanine debt balance of $16.4 million. It is secured by the fee interest in 540,304 square feet (sf) of a 1.1 million-sf regional mall in Omaha, Nebraska. The subject was originally constructed in 1968 and has undergone several different renovations with the most recent renovation in 2016. The sponsor finished constructing a new food hall, Flagship Commons, in January 2016 and the old food court space was converted into a Container Store leased box later in 2016. The noncollateral anchor spaces are occupied by JCPenney, Von Maur, and Macy’s. The noncollateral tenant JCPenney has filed for bankruptcy protection; although this location has not appeared on the company’s store closings list to date, the future operational status is currently unknown. The largest anchor tenants at the property include Dick’s Sporting Goods, AMC Theatres, and Forever 21. The Forever 21 store remains in operation at the mall, and is the only Forever 21 operating in the state of Nebraska after the retailer left Gateway Mall and Nebraska Crossings in 2019. AMC Theatres reopened with reduced capacity to facilitate social distancing on August 31, 2020, after closing because of the pandemic. The theater requires movie-goers to wear face coverings and is currently open only three days a week: Thursday, Friday, and Saturday.

A new Topgolf venue, which is not a part of the collateral, opened east of I-680 and west of Westroads Mall in July 2020, which should help drive traffic to the mall and the surrounding area. Village Pointe, an open-air design shopping center, competes with the subject and is located approximately 7 miles west of Westroads Mall. Both properties have overlapping tenants, such as Old Navy and Designer Shoe Warehouse (DSW). Village Pointe has been able to position itself as a more upscale shopping center compared with the subject by leasing to national retailers such as Apple, Kendra Scott, Bentley, and Lululemon. The subject will likely continue to have to compete with Village Pointe for tenants, especially as retailers continue to consolidate and close amid the pandemic.

At issuance, Westroads Mall had an occupancy rate of 94.5% and in-line sales of $458 psf for the trailing 12 months (T-12) period ended June 2012. Westroads Mall was 95.3% occupied as of the March 2020 rent roll and had in-line sales of $410 psf for the YE2019. The senior note annual DSCR remained steady from the YE2012 to the YE2019 with the senior DSCR ranging from 1.89x for the YE2019 to 2.00x for the YE2018. Westroads Mall was closed in March 2020 because of the pandemic but reopened with restrictions on May 5, 2020.

The Oaks Mall loan had an initial balance of $118.3 million and an initial mezzanine debt balance of $20.7 million. Oaks Mall is secured by the fee interest in 581,849 sf of the 906,349-sf Oaks Mall in Gainesville, Florida. The subject was originally constructed in 1978 and has undergone several different renovations and expansions with the most recent major renovation in 2002. Mall operators reportedly installed solar panels on the mall’s roof and replaced light pole bulbs with LED bulbs in 2017. The mall is anchored by Belk, two Dillard’s, and a JCPenney. The Dillard’s located at the southern portion of the mall and the JCPenney are both not collateral for this transaction. JCPenney has filed for bankruptcy protection and the store was not listed among the latest round of store closures. Since issuance two noncollateral anchor suites that were tenanted by Macy’s and Sears have been backfilled. The former Macy’s anchor was purchased by Dillard’s. Dillard’s reportedly purchased the Macy’s box because their existing suite was around half the size of a typical Dillard’s and the operator wanted to provide more brand selection at this mall. The Sears anchor is now occupied by the University of Florida Health (UF Health) The Oaks. UF Health’s ear, nose, and throat doctor offices previously occupied space in the adjacent Hampton Oaks Medical Plaza. UF Health is planning to have other UF Health medical offices operate out of the Hampton Oaks Medical Plaza, now that UF Health’s ear, nose, and throat doctor offices have moved into the former Sears box. The Oaks Mall has the potential to add additional office and/or residential space after the City of Gainesville voted to rezone the Oaks Mall property from retail to mixed-use in May 2019.

Oaks Mall was 89.1% occupied per the December 31, 2019, rent roll and the mall had in-line sales of $309 psf for YE2019. At issuance, Oaks Mall had an occupancy rate of 96.8% and in-line sales of $368 psf for the T-12 period ended June 2012. While the senior loan’s DSCR remained at least at 1.94x from the YE2012 to the YE2017, the senior loan’s DSCR began declining in the YE2018 because of tenant closures. National tenants such as Charming Charlie, Charlotte Rouse, and Wet Seal have closed at the property since issuance after corporate bankruptcies. The senior loan’s DSCR dropped to 1.19x in the YE2019 from 1.46x in the YE2018 and 1.97x in the YE2017, which implies the property was already facing performance issues prior to the pandemic. Oaks Mall was closed in March 2020 because of the pandemic but reopened with restrictions on May 15, 2020.

Oak Mall is located around 4 miles from the University of Florida’s main campus. The mall competes with the open-air shopping center, Butler Plaza, which is the largest power center in the southeast United States. Butler Plaza is located only 2.5 miles from University of Florida’s main campus. Butler Plaza first opened in the 1980s but has undergone several expansions. Butler Plaza is leased by notable tenants such as Whole Foods, Target, Regal Cinemas, Publix, Ross Dress for Less, and numerous restaurants. Oak Mall will continue to have to compete with Butler Plaza for tenants, as national tenants continue to close and consolidate locations in secondary markets.

DBRS Morningstar derived the respective NCFs using the latest reported servicer NCF with an adjustment, considering ongoing collateral performance including tenant movement and sales performance. The resulting aggregate NCF figure was $25.3 million and DBRS Morningstar applied a cap rate of 8.94% based on a blend of 8.25% for Westroads Mall and 10.00% for Oaks Mall. Based on the DBRS Morningstar NCF and DBRS Morningstar blended cap rate, DBRS Morningstar concluded a pre-coronavirus DBRS Morningstar Value of $282.7 million, a variance of -39.7% from the appraised value of $469.0 million at issuance. The pre-coronavirus DBRS Morningstar Value implies an LTV of 78.5% compared with the LTV of 47.3% on the appraised value at issuance

The cap rate DBRS Morningstar applied is in the middle of the range of DBRS Morningstar Cap Rate Ranges for retail properties, reflecting the locations and market positions of the assets.

DBRS Morningstar made positive and negative qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis, totaling 0.75% to account for cash flow volatility, property quality, and market fundamentals. DBRS Morningstar also made other negative adjustment to account for the near-term maturity risk of the loans.

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-1, A-2, B, C, D, and E to the results of its LTV sizing benchmarks. The variation is warranted due to going concerns with the impact of coronavirus 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 interest-only (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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