DBRS Morningstar Downgrades Ratings on Six Classes of COMM 2012-LTRT Mortgage Trust

DBRS Limited (DBRS Morningstar) downgraded its ratings on six classes of the Commercial Mortgage Pass-Through Certificates, Series 2012-LTRT issued by COMM 2012-LTRT Mortgage Trust as follows:

-- Class X-A to AA (sf) from AAA (sf)
-- Class A-2 to AA (low) (sf) from AAA (sf)
-- Class B to A (low) (sf) from AA (low) (sf)
-- Class C to BB (low) (sf) from BBB (high) (sf)
-- Class D to B (low) (sf) from BBB (sf)
-- Class E to CCC (low) (sf) from BB (high) (sf)

In addition, DBRS Morningstar confirmed its rating on Class A-1 at AAA (sf) and discontinued its rating on Class X-B as it references a class that now has a CCC (sf) rating.

All classes carry Negative trends with the exception of Class A-1, which has a Stable trend, and Class E, which has a rating that does not carry a trend.

With this review, DBRS Morningstar removed all classes from Under Review with Negative Implications where they were placed on October 7, 2020.

The subject transaction is evidenced by two promissory notes, each individually secured by the fee interest in a portion of one of two super-regional malls known as the Westroads Mall and the Oaks Mall. The two loans are co-terminus with a 10-year loan term, a 30-year amortization schedule with no interest-only (IO) periods, and a maturity date of October 1, 2022. As of the July 2021 remittance, the loans have an aggregate senior note balance of $217.2 million and an aggregate mezzanine debt balance of $32.0 million. The loans are not cross-collateralized or cross-defaulted.

The ratings downgrades and Negative trends are primarily driven by DBRS Morningstar’s negative outlook on the Oaks Mall loan, which represents 45.7% of the allocated senior loan balance. For this review, DBRS Morningstar concluded a combined value of $226.1 million for the two malls, based on the in-place cash flows at year-end (YE) 2020 for the Oaks Mall and at YE2019 for Westroads Mall and a weighted-average (WA) cap rate of approximately 10.0%. The concluded value represents a variance of -51.8% from the combined value of $469.0 million at issuance and implies a loan-to-value ratio (LTV) of 96.0% on the trust debt. The Oaks Mall loan is secured by a regional mall in Gainesville, Florida, and has consistently reported cash flows well below the issuance figure since 2017, with the most recent figure showing a YE2020 debt service coverage ratio (DSCR) of 0.86x. These trends will be particularly problematic given the 2022 maturity date for the loan, as further discussed, below.

The sponsor for both loans is an affiliate of Brookfield Property Partners L.P. (Brookfield; rated BBB with a Negative trend by DBRS Morningstar) following Brookfield’s 2018 acquisition of the parent company for the sponsor at issuance, General Growth Properties, Inc. In May 2020, the servicer advised that the sponsor had notified the servicer of cash flow concerns caused by the Coronavirus Disease (COVID-19) pandemic. A loan modification allowing for a forbearance was approved for both loans by the master servicer by June 2020 and as of the July 2021 remittance, the loan continues to show current and there are only nominal outstanding servicer advances, suggesting the forborne amounts have been repaid as agreed.

Of the two loans backing the transaction, the Westroads Mall loan, which is secured by the fee interests in 540,304 square feet (sf) of a 1.1 million-sf regional mall in Omaha, Nebraska, has been the stronger performer. The noncollateral anchor spaces are occupied by JCPenney, Von Maur, and First Westroads Bank, while the largest collateral anchor and junior 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 Nebraska after the retailer left Gateway Mall and Nebraska Crossings in 2019. The mall is a dominant shopping destination within Omaha, but there is a competing open-air shopping center in Village Pointe that is within seven miles and has a concentration of overlapping tenants with Westroads, including Designer Shoe Warehouse (DSW) and Old Navy. The overall tenant mix at Village Pointe is considered superior to the subject’s tenant roster, as it includes Apple, Lululemon, and Kendra Scott, with that center targeting an upper scale clientele.

At issuance, Westroads Mall had an occupancy rate of 94.5% and in-line sales of $458 per square foot (psf). As of the March 2021 rent roll, the occupancy rate was directly in line with the issuance level and according to the YE2019 tenant sales report (most recent sales on file with DBRS Morningstar), the mall reported in-line sales of $410 psf. According to most recent financials, the senior note reported a YE2020 DSCR of 1.51x, compared with the YE2019 figure of 1.89x and YE2018 of 1.91x. The revenue declines in 2020 appear to be directly related to the coronavirus pandemic. The Westroads Mall loan is scheduled to mature in October 2022 and, although the struggles for regional malls in secondary markets that have been exacerbated amid the pandemic could affect the sponsor’s ability to secure a replacement loan, DBRS Morningstar notes the generally stable performance to date and the amortization that has reduced the trust exposure by over $23.0 million since issuance.

The Oaks Mall is approximately four miles from the University of Florida’s main campus and is anchored by Belk, two Dillard’s stores, and JCPenney. Of the anchors, only one of the Dillard’s stores and the Belk store serve as collateral for the subject loan. At issuance, there were two additional noncollateral anchors in Sears and Macy’s, both of which closed in 2018. The former Macy’s anchor was purchased by Dillard’s and 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. The property could potentially add additional office and/or residential space after the City of Gainesville voted to rezone the property from retail to mixed-use in May 2019. The mall historically drew traffic from the nearby college campus, but a competing property in Butler Plaza, an open-air shopping center that is the largest power center in the Southeast United States with nearly 2 million sf of retail space, is also nearby and has become the primary retail destination for the area.

At issuance, Oaks Mall had an occupancy rate of 96.8% and in-line sales of $368 psf. According to the December 2020 rent roll, the property was 94.0% occupied. Updated sales have not been provided to DBRS Morningstar to date. Although occupancy has remained relatively stable, DBRS Morningstar notes cash flows have been trending downward over the past four years. The senior loan’s DSCR dropped to 1.19x in the YE2019, from 1.46x and 1.97x at YE2018 and YE2017, respectively. The precipitous cash flow declines began before the loss of two anchor stores and accelerated following the closures. Although Dillard’s taking one of the vacant boxes and a replacement medical tenant taking the other are noteworthy, the cash flow trends suggest that the as-is value has declined sharply since issuance, significantly increasing the risks for the loan, which is scheduled to mature in October 2022. Given Brookfield’s demonstrated willingness to turn underperforming properties in its portfolio back to the lenders for other assets backing CMBS loans, DBRS Morningstar believes the firm’s commitment to the subject mall could be tenuous, as well.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Class X-A is an interest-only (IO) certificate that references 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.

The DBRS Viewpoint platform provides additional information on this transaction and underlying loans including DBRS Morningstar metrics, commentary, servicer-reported cash flows, and other performance-related data.

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 methodology is North American CMBS Surveillance Methodology (March 26, 2021), which can be found on 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 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 related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link under Related Documents or by contacting us at info@dbrsmorningstar.com.

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.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.

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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