DBRS Morningstar Downgrades Two Classes and Changes Trends on Four Classes of COMM 2012-LTRT Mortgage Trust

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

-- Class C to B (high) (sf) from BB (low) (sf)
-- Class D to CCC (sf) from B (low) (sf)

In addition, DBRS Morningstar confirmed its ratings on the following:

-- Class A1 at AAA (sf)
-- Class X-A at AA (sf)
-- Class A2 at AA (low) (sf)
-- Class B at A (low) (sf)
-- Class E at CCC (sf)

The trends on Classes X-A, A2, B, and C were changed to Stable from Negative. The trend on Class A1 remains Stable. Classes D and E have ratings that do not carry a trend.

The ratings downgrades reflect the sustained performance declines for both loans in the transaction, which are secured by retail properties, and DBRS Morningstar’s expectation of the ultimate recovery of the second-largest loan in the pool. DBRS Morningstar had previously assigned Negative trends to Classes X-A, A2, B, C, and D as a reflection of the potential for further declines in the outlook for the two loans in this pool as both have experienced performance declines since issuance, exacerbated by the impact of the Coronavirus Disease (COVID-19) pandemic. DBRS Morningstar continues to note the concentration of loans secured by retail properties, as the effects of the COVID-19 pandemic disproportionately affected the performance of retail properties.

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 coterminous 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 2022 remittance, the loans have an aggregate senior note balance of $211.2 million and an aggregate mezzanine debt balance of $30.2 million. The loans are not cross-collateralized or cross-defaulted.

The sponsor for both loans is an affiliate of Brookfield Property Partners L.P. (Brookfield). In May 2020, the servicer advised that the sponsor had notified the servicer of cash flow concerns caused by the 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 2022 remittance, the loan continues to show current with 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. Village Pointe targets an upscale clientele and its overall tenant mix is considered superior to the subject’s tenant roster as it includes Apple, Lululemon, and Kendra Scott.

At issuance, Westroads Mall had an occupancy rate of 94.5% and in-line sales of $458 per square foot (psf). As of the September 2021 rent roll, the occupancy rate of 94.4% was directly in line with the issuance level but, according to the September 2021 tenant sales report (TSR), the mall reported in-line sales of $240 psf. According to the most recent financials, the senior note reported a debt service coverage ratio (DSCR) of 1.63 times (x) at YE2021, compared with 1.51x at YE2020 and 1.89x at YE2019. The revenue increases in 2021 compared with 2020 appear to be directly related to the recovery from the pandemic. The Westroads Mall loan is scheduled to mature in October 2022 and, although the struggles of regional malls in secondary markets that have been exacerbated amid the pandemic could affect the sponsor’s ability to secure takeout financing, DBRS Morningstar views the generally stable performance to date as encouraging.

DBRS Morningstar analyzed this loan with a 9.25% cap rate. Using the YE2021 net cash flow (NCF), the DBRS Morningstar implied value was $166.2 million, compared with the appraisal value at issuance of $242.0 million (haircut of 31.3%).

The Oaks Mall loan is secured by the fee interest in 581,849 sf of a 906,349-sf super regional mall in Gainesville, Florida. 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, additional anchors, Macy’s and Dillard’s, were operating on ground leases. The Macy’s closed in 2018 and the ground-leased parcel was purchased by Dillard’s and released as collateral for the trust with net proceeds of $4.9 million from the sale being held in reserve as additional collateral. Dillard’s continues to operate a second store on the former Macy’s parcel. There was also a non-collateral Sears store at issuance, with the property and improvements owned by Seritage, until that anchor was closed in 2018. The Sears anchor is now occupied by the University of Florida Health (UF Health) - The Oaks. UF Health’s ear, nose, and throat doctors’ 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 Butler Plaza, a competing open-air shopping center that is the largest power center in the Southeastern United States with nearly 2.0 million sf of retail space, is also nearby and has become the primary retail destination for the area.

At issuance, the Oaks Mall had an occupancy rate of 96.8% and in-line sales of $368 psf. According to the YE2021 rent roll, the property was 94.3% occupied, while the September 2021 TSR reported in-line sales of $151 psf. 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 at YE2019, from 1.46x at YE2018 and 1.97x at YE2017. According to the most recent financials, the senior note reported a YE2021 DSCR of 1.46x, compared with the YE2020 figure of 0.86x. The year over year (YOY) increase was attributed to a 36.8% decrease in operating expenses, while income remained static. The YOY operating expense declines are likely not sustainable, as the largest decreases included a 52.9% decrease in property tax, and a 143% decrease in other expenses. The loan remains on the servicer’s watchlist as the DSCR remains below 75% of the issuer’s DSCR of 2.04x. The precipitous cash flow declines began before the loss of two anchor stores and accelerated following the closures. Although it is noteworthy that Dillard’s took one of the vacant boxes and a medical tenant took the other, 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 commercial mortgage-backed securities loans, DBRS Morningstar believes the firm’s commitment to the subject mall could be tenuous as well.

DBRS Morningstar analyzed this loan with a 12.0% cap rate. Using the YE2021 NCF, the DBRS Morningstar implied value was $80.9 million, compared with the appraisal value at issuance of $227.0 million (haircut of 64.3%).

The servicer commentary notes that, while both loans have upcoming maturities in October 2022, the servicer has not received an update regarding whether the borrower plans to refinance or repay the loans at maturity. Final maturity notices were not scheduled to be sent until July 2022 and DBRS Morningstar has requested further updates but, as of the date of this press release, a response is pending.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance (ESG) 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.

Class X-A is an IO certificate 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.

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.

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 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.

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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