DBRS Morningstar Places All Classes of WFLD 2014-MONT Mortgage Trust Under Review with Negative Implications

DBRS Limited (DBRS Morningstar) placed all classes of Commercial Mortgage Pass-Through Certificates (the Certificates), issued by WFLD 2014-MONT Mortgage Trust Under Review with Negative Implications 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)

There are no trends for these rating actions.

DBRS Morningstar placed all classes Under Review with Negative Implications because of the most recently reported net cash flow (NCF) decline for the year-end (YE) 2021 reporting period, which was first reported with the May 2022 remittance report. Although property revenues were consistently in line with, to slightly improved from, the Issuer’s expectations prior to the onset of the Coronavirus Disease (COVID-19) pandemic, increases in operating expenses have kept the NCF below the Issuer’s figure from 2017 onward. At the time of DBRS Morningstar’s last review, the YE2020 figures were the most recent figures available. Those figures showed a decline from 2019 given the known impacts of the coronavirus pandemic, but, because the in-place occupancy remained relatively stable, it was expected that revenue would continue to grow toward historical figures as the pandemic effects subsided. However, the 2021 figures showed occupancy declines leading to a further decline in property revenues, as well as another significant increase in expenses, driving the debt service coverage ratio (DSCR) down from previous figures well above 2.0 times (x) to 1.65x. The 2021 NCF figure of $22.0 million, results in a variance of -33.0% from the DBRS Morningstar NCF figure derived when ratings were assigned in 2020 and -38.2% from the Issuer’s NCF figure.

The 10-year interest-only (IO) loan is secured by the fee-simple interest in an approximately 836,000-square-foot (sf) portion of the 1.3 million-sf Westfield Montgomery Mall in Bethesda, Maryland, located 15 miles north of Washington, D.C. The mall is anchored by Macy’s, Macy’s Home, and Nordstrom, which are not part of the loan collateral; however, Nordstrom operates on a ground lease, expiring in October 2025. Additionally, there is a vacant Sears box at the property, which the sponsors purchased in 2017 with the intention of redeveloping the box as part of a comprehensive expansion and renovation of the property and surrounding area. Sears closed in 2018, and, in July 2020, BISNOW noted that the sponsor had obtained approval from local officials for the development of 2.9 million sf of retail and 717 residential units at and around the property. However, the plans were put on hold amid the coronavirus pandemic and no progress has been recorded to date. More recently, the loan sponsor, Unibail-Rodamco-Westfield (URW) (which took over the property as part of Unibail-Rodamco’s acquisition of Westfield in 2018), has been in the news for its plans to exit its holdings in the United States and sell the remainder of its malls and other retail properties around the country.

According to the December 2021 tenant sales report, in-line tenants occupying less than 10,000 sf reported sales of $826 per square foot (psf); excluding Apple Store (Apple) and Tesla, in-line sales were $533 psf, an improvement from the trailing 12 (T-12) months ended March 31, 2021, sales of $375 psf and comparable to issuance sales of $532 psf. Macy’s, Macy's Home, and Nordstrom reported YE2021 sales of $193 psf, $129 psf, and $81 psf, respectively, an improvement from the T-12 ended March 31, 2021, sales of $106 psf, $74 psf, and $39 psf, respectively; however, figures are still below issuance, when Macy’s and Macy’s Home reported sales of $272 psf and Nordstrom reported sales of $436 psf.

Based on the YE2021 reporting, the occupancy rate was 76.6% with an NCF of $22.0 million, equivalent to a debt service coverage ratio (DSCR) of 1.65 times (x). This is a decline from the YE2020 occupancy rate of 92.6% and NCF of $29.7 million (with a DSCR of 2.22x) and YE2019 occupancy rate of 90.0% and NCF of $33.6 million (with a DSCR of 2.51x). The year-over-year decline was primarily driven by the decrease in occupancy as the effective gross income (EGI) represented a 14.5% decrease from YE2020. The occupancy drop was partially driven by the departure of Arclight Cinemas (7.6% of the net rentable area (NRA)) in 2021, ahead of its October 2029 lease expiration. According to the servicer, AMC Theatres (AMC) back-filled the former ArcLight Cinemas space and opened its doors in March 2022 with a lease through February 2034. AMC is currently paying an annual rent of $1.7 million ($26.34 psf), which is well below the amount ArcLight Cinemas was previously paying of approximately $3.6 million ($56.10 psf). When factoring in AMC’s occupancy and other smaller tenants that have signed leases in recent months, DBRS Morningstar estimates the property’s current leased rate is approximately 88.0%.

Although DBRS Morningstar notes the healthy in-line sales figures, as well as the mall’s desirable in-line tenant roster that includes higher-end tenants such as Apple, Tesla, Altar’d State, Free People, Coach, and Vineyard Vines, as well as entertainment venues such as Lucky Strike and AMC and other popular draws in Under Armour, Zara, and Sephora, the cash flow trends in recent years suggest the possibility that the as-is value for the mall has fallen significantly since issuance. In 2020, when DBRS Morningstar assigned ratings, the DBRS Morningstar value considered cash flows in place as of the most recent reporting period in 2019 and since that time, sustained drops in revenue have been realized. Although there has been recent leasing that could mean increased revenues for 2022, it is unclear how significant that improvement will be. DBRS Morningstar has asked the servicer for additional information, including 2022 sales figures, a current rent roll and leasing update and an update on URW’s plans to sell this and other properties in the U.S. over the next few years. That information, along with the T-6 ending June 30, 2022, reporting is expected to be available in the next few months and DBRS Morningstar will evaluate that information as part of the process to resolve the Under Review with Negative Implications designations placed on all classes with these rating actions.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

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.

The DBRS Morningstar 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 issuer and servicer 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 4, 2022), 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.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482.

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.

DBRS Morningstar notes a risk sensitivity analysis was not completed for this rating action as all classes were placed Under Review with Negative Implications.

These ratings are Under Review with Negative Implications. Generally, the conditions that lead to the assignment of reviews are resolved within a 90-day period; however, given the timing of financial reporting for the first half of 2022, it is possible the resolution of this review could extend slightly beyond that time 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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