DBRS Morningstar Downgrades Ratings on Four Classes of BB-UBS Trust 2012-TFT

DBRS Limited (DBRS Morningstar) downgraded the ratings on four classes of Commercial Mortgage Pass-Through Certificates, Series 2012-TFT issued by BB-UBS Trust 2012-TFT as follows:

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

In addition, DBRS Morningstar confirmed the ratings on three classes as follows:

-- Class A at AAA (sf)
-- Class X-A at AAA (sf)
-- Class TE at B (high) (sf)

With this review, DBRS Morningstar revised the trends on Classes C and TE to Stable from Negative. All other trends are Stable, excluding Classes D and E, which have ratings that generally do not carry a trend.

The transaction was originally backed by three separate 7.5-year, fixed-rate, interest-only (IO) first-mortgage loans with a combined principal balance of $567.8 million. The three loans were secured by the Tucson Mall (Prospectus ID#1; 59.8% of the pool) in Tucson; the Fashion Place mall (Prospectus ID#2) in Murray, Utah; and the Town East Mall (Prospectus ID#3; 40.2% of the pool) in Mesquite, Texas. The loans were sponsored by GGP Limited Partnership, which Brookfield Property Partners, L.P. acquired in July 2018. As of the December 2022 reporting, two of the original three loans remain in the trust with an outstanding balance of $343.8 million, reflecting a collateral reduction of 39.4% since issuance as a result of the payoff of the Fashion Place loan in June 2021.

During the June 2021 review, both of the remaining mall properties were specially serviced and DBRS Morningstar downgraded Classes B and C, and placed negative trends on Classes C, D, and TE, to reflect the initial 2020 value decline for both collateral mall properties, representing a combined decline of 35.1% from issuance. Following a return of the loans to the master servicer, and given the overall property quality of both malls, favorable tenant rosters, and strong sales, which remained stable throughout the Coronavirus Disease (COVID-19) pandemic, DBRS Morningstar confirmed its ratings in June 2022 and has continued to monitor the loans for evidence of cash flow improvements. While the performance of Town East Mall appears to have stabilized, the most recent financial reporting indicates Tucson Mall’s operations will not recover despite stable occupancy and sales. Additionally, appraised values for both underlying properties have continued to decline, now representing a 52.9% cut from issuance. DBRS Morningstar believes Tucson Mall, representing the majority of the pool balance, will be unlikely to achieve pre-pandemic performance in the near term. In addition, DBRS Morningstar remains concerned about the increased refinance risk based on the general lack of liquidity for regional malls. The final extended maturity date for both loans is June 2024. These factors are the drivers behind DBRS Morningstar’s downgrades of classes B through E.

For this review’s rating analysis, DBRS Morningstar derived a net cash flow (NCF) for both properties based on an annualization of the most recently reported NCF; the NCF for Tucson Mall was given an additional stress to reflect the deterioration of the property’s value and the continued decline in revenue. DBRS Morningstar applied cap rates that are at the high end of DBRS Morningstar’s Cap Rate Ranges for regional mall properties and in line with the appraiser’s estimates, reflecting the secondary market locations and Class B nature of the collateral. The combined DBRS Morningstar concluded value of $286.9 million suggests Class E and a portion of Class D could be exposed to losses should a default and liquidation ultimately occur within the near to moderate term.

DBRS Morningstar maintained positive and negative qualitative adjustments to the final loan-to-value (LTV) sizing benchmarks used for this rating analysis to account for property quality and market fundamentals, amounting to a positive 0.25% adjustment for the Town East Mall loans and -0.50% for the Tucson Mall loan.

The rating confirmations and Stable trends reflect the sufficient credit support available to the remaining bonds relative to DBRS Morningstar’s ongoing expectations. Although DBRS Morningstar believes that the recent cash flow trends at Tucson Mall and the as-is values for both malls have fallen significantly since issuance, it considers the Class A certificate to be well insulated from potential loss. DBRS Morningstar’s outlook for Town East Mall as the better performer of the remaining assets points to additional insulation for the directed Class TE certificate. The loans are neither cross defaulted nor cross collateralized. Based on the most recent financials, both malls have maintained consistent occupancy year over year, stable sales volumes, and above-breakeven cash flows in comparison with the YE2021 reporting. Foot traffic is also expected to hold steady as these are the primary malls for residents of each mall’s respective area. Additionally, the loans received loan modifications and/or maturity extensions in 2021, including a maturity extension for both properties to June 2022 with two additional, one-year extension options in tandem with a small equity infusion to pay down the loan balances and a full cash flow sweep until the loans are paid in full. According to the servicer, both properties have met the extension requirements, consisting of debt yield hurdle tests, and both loan maturities have been extended to June 2023. The fully extended maturity date is June 1, 2024.

According to the December 2022 reporting, the two remaining loans are current, with Town East Mall being monitored on the servicer’s watchlist for the upcoming lease expiration of the noncollateral anchor tenants. Please see below for more information.

The Tucson Mall loan is secured by a 667,581-square foot (sf) portion of a 1.3 million-sf super regional mall in Tucson. The property is currently anchored by Dillard’s, Macy’s, JCPenney, Dick’s Sporting Goods, and Forever 21, all of which own their own improvements. As of the September 2022 rent roll, the total mall occupancy rate was 93.8%, in line with the February 2022 figure of 94.0%, and consistent with reporting since issuance. According to the most recent sales report, in-line sales for YE2021 were reported to be $464 psf, which is well above the YE2020 sales of $318 psf and the issuance level of $389 psf. Downward pressure on rents as a result of rent deferrals, combined with increasing operating expenses, continues to stress the NCF as of the year-to-date (YTD) ended June 30, 2022, financials. The annualized Q2 2022 NCF is reported at $12.3 million (with a debt service coverage ratio (DSCR) of 1.71 times (x)), representing a 15.7% decrease from the YE2021 NCF of $14.6 million (with a DSCR of 1.99x), and well below the issuer’s NCF of $24.1 million (with a DSCR of 3.29x). Should the deferred rents be recollected, DBRS Morningstar expects that, barring a significant improvement in base rental rates, the asset is unlikely to recapture pre-pandemic performance. The most recent appraisal valued the property at $121.0 million, representing a 70.0% decline from $400.0 million at issuance.

The Town East Mall loan is secured by a 421,206-sf portion of a 1.2 million-sf regional mall in Mesquite, 10 miles east of Dallas. The property is anchored by Dillard’s, JCPenney, and Macy’s, none of which are included as collateral for the loan. All three anchor leases have reported ground lease expiration dates of December 31, 2022, and, according to the servicer, the borrower is working on long-term renewals. Other major retailers at the mall include Dick’s Sporting Goods, Forever 21, and H&M. According to the September 2022 rent roll, total mall occupancy was 80.0%, in line with the YE2021 figure of 80.5%. The vacancy is due to the departure of the non-collateral Sears in April 2021. The DSCR for the YTD period ended June 30, 2022, was 2.79x, which remains in line with the YE2021 and issuer’s DSCR of 2.77x and 2.89x, respectively. In-line sales for the 12 month period (T-12) ended March 31, 2022, were reported to be $562 psf, surpassing sales for the T-12 ended September 30, 2021, of $554 psf and pre-pandemic YE2019 sales of $539 psf. As of June 2021, the property was revalued by the appraiser at $187.0 million, a 26.4% decline from the issuance value of $254.0 million.

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/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (17, May, 2022).

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.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is the North American CMBS Surveillance Methodology (October 3, 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.

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.

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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