DBRS Upgrades Two Classes of MSC Mortgage Securities Trust, 2012-C4

DBRS, Inc. (DBRS) has today upgraded the ratings of two classes of Commercial Mortgage Pass-Through Certificates, Series 2012-C4 (the Certificates) issued by MSC Mortgage Securities Trust, 2012-C4 as follows:

-- Class B to AA (high) (sf) from AA (sf)
-- Class C to A (high) (sf) from A (sf)

In addition, DBRS has confirmed the ratings of the following classes:

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-S at AAA (sf)
-- Class D at BBB (high) (sf)
-- Class E at BBB (low) (sf)
-- Class F at BB (sf)
-- Class G at B (sf)
-- Class X-A at AAA (sf)
-- Class X-B at AAA (sf)

All trends are Stable. DBRS does not rate the first loss piece, Class H.

This transaction comprises 38 fixed rate loans secured by 77 commercial properties. The property type with the largest concentration in the pool is retail (including regional malls), which represents approximately 50.0% of the overall pool balance, with the second- and third-largest concentrations in office properties and hotel properties, respectively. As of the January 2016 remittance report, the weighted-average debt service coverage ratio (DSCR) for the pool was 1.70 times (x), with a weighted-average debt yield of 12.7%, and the pool has experienced collateral reduction of 5.0% since issuance, with all 38 loans remaining in the pool. The second-largest loan in the pool, Pros ID #2, Ty Warner Portfolio, representing 9.15% of the pool balance, was fully defeased in Q4 2015. There are two loans on the servicer’s watchlist, representing 3.5% of the pool balance, and one loan in special servicing, representing 1.8% of the pool balance.

The rating upgrades reflect the strong overall performance of the pool and the defeasance of the Ty Warner Portfolio loan, which results in all proceeds for that loan being floored at AAA (sf). The 14 largest non-defeased loans represent 66.8% of the overall pool balance. As of YE2014 reporting, those loans were showing a weighted-average net cash flow (NCF) improvement over the DBRS underwritten figures of 14.7%, with a weighted-average in-place DSCR of 1.67x and a weighted-average debt yield of 12.0%. The servicer reports weighted-average in-place NCF growth from YE2013 to YE2014 of +3.8% for those loans, with most loans showing continued growth thus far with the YTD 2015 reporting.

The largest loan in the pool is Prospectus ID #1, The Shoppes at Buckland Hills, which represents 11.8% of the transaction balance. This loan is secured by 535,000 square feet (sf) of a 1.0 million-sf regional mall owned and operated by General Growth Properties (GGP), located in the Hartford, Connecticut metropolitan statistical area, in the town of Manchester. The property was developed in 1990 and is anchored by non-owned Macy’s, Macy’s Men’s and Macy’s Home, JCPenney and Sears. Owned anchors include Dick’s Sporting Goods (Dick’s) and Barnes & Noble. At issuance, the collateral portion of the mall was 85.4% occupied; as of the September 2015 rent roll, the collateral (including the newly constructed Dave & Buster’s pad site added in 2014) was 83.0% occupied, excluding short-term and temporary tenants, and 91.7% occupied including those tenants. Notable departures in the last few years include Coach, Build-a-Bear Workshop, Ruby Tuesday and Famous Footwear. Since issuance, Forever 21 has expanded its space by approximately 6,000 sf and is reporting average sales of $226 per square foot (psf), up 12.5% over last year.

In-line sales averaged $377 psf at issuance, and $356 psf as of the September 30, 2015, tenant sales report. Although average sales are down from issuance, the September 2015 figure represents an increase of +4.1% over the prior year, with overall mall sales up 3.64% over the prior YTD figures. Notable tenant sales include Dick’s, whose lease expires in January 2017 and reported sales of $154 psf, up 8.17% over last year, but down from $185 psf at issuance. Barnes & Noble’s lease expires in 2019, and that tenant reported sales of $238 psf, down 3.77% from last year and down from $262 psf at issuance. H&M reported sales of $229 psf, up 49.72% over last year and up from $168 psf at issuance. Sales were not reported for the non-owned anchors. To mitigate the increased risk in the overall decline in in-line sales performance from the issuance figures, DBRS modeled this loan on the DBRS underwritten NCF figure.

The fourth-largest loan, Prospectus ID #4, Capital City Mall, represents 6.0% of the pool and is also secured by a regional mall located in Harrisburg, Pennsylvania. The property is owned and operated by Pennsylvania Real Estate Investment Trust and is anchored by Macy’s, which owns its own parcel, Sears and JCPenney. Notable additions to the property since issuance include DSW and Field & Stream, which took over the Toys “R” Us parcel in late 2014 that was vacated shortly after issuance. H&M also recently signed a ten-year lease for approximately 4.0% of the collateral net rentable area. That store is scheduled to open in mid-2016, and the occupied space will include former spaces for Gap/Gap Kids, The Limited and Hallmark.

According to the September 2015 tenant sales reports, sales for the mall overall are up 4.3% over the prior year, but sales for anchors JCPenney and Sears are low, at $77 psf and $99 psf, respectively. Those figures compare with the at-issuance figures of $106 psf for JCPenney and $154 psf for Sears. The September 2015 sales for JCPenney are up 17.4% year over year, but sales for Sears are down 15.6%. The leases for those tenants expire in 2020 and 2019, respectively. Although the sales trends for the owned anchor tenants are concerning, the mall’s overall performance is considered healthy, with most in-line tenants showing stable or increasing sales on a year-over-year basis and occupancy costs remaining in line with those in place at issuance. In addition, DBRS believes the property’s ability to attract new national tenants in Field & Stream and H&M are indicative of its overall appeal within the market, and expects performance to continue in line with current trends over the near term.

The largest loan on the servicer’s watchlist is Prospectus ID #15, Hilton Springfield, which represents 2.4% of the pool. The loan is secured by a 245-key Hilton hotel located in Springfield, Virginia, approximately 13 miles southwest of the Washington D.C. central business district. The loan has been on the servicer's watchlist for several years because of the low DSCR, which was 0.46x and 0.74x at YE2013 and YE2014, respectively. The Q3 2015 DSCR shows improvement to 0.95x, with improvements in occupancy, average daily rates and revenue per available room. The property’s cash flows have been affected by new supply that has come on line in the past few years, a risk that was noted at issuance by DBRS.

The loan previously transferred to special servicing in late 2013 when the borrower requested relief on the Property Improvement Plan (PIP) funding requirements. A loan modification was approved, with no impact to the loan balance, interest rate or maturity date. The borrower was able to move approximately $500,000 in furniture, fixtures and equipment reserves to the PIP account and was required to fund the remaining $1.25 million. The borrower was also required to pay the special servicing fees and expenses incurred as part of the loan’s transfer in 2013. The loan was transferred back to the master servicer in early 2014, and the master servicer reports that the PIP is substantially complete, with the last of the funds to be disbursed pending an inspection. As part of the modification, a cash sweep has been in place since the loan’s transfer to special servicing. As of the January 2016 remittance, there was a nominal balance in the account, as cash flows have not consistently been above the debt service obligation. The borrower funds any shortfalls on a monthly basis. The cash flow sweep will remain in place until the DSCR reaches a 1.15x threshold.

Prospectus ID #18, Independence Place - Fort Campbell represents 1.9% of the pool and has been in special servicing since October 2013 after cash flow difficulties caused the borrower to cease making scheduled payments on the loan. The collateral property is a multifamily property located in Clarksville, Tennessee, that serves the soldiers of nearby Fort Campbell. The property's occupancy rates began to decline following a significant deployment of troops from the base in early 2013. The most recent financial information provided by the servicer shows a DSCR of 0.78x with an occupancy rate of 72% as of YE2014; these figures compare with the underwritten DSCR of 1.34x and the underwritten occupancy rate of 85%.

The most recent valuation, dated April 2015, shows a value decline to $24.95 million from the issuance value of $30.6 million, indicating a current loan-to-value of 85.5% on the outstanding loan balance and advances as of the January 2016 remittance. The special servicer reports that a potential sale of the property, originally slated to take place in early 2016, has been delayed by the potential buyer’s inability to secure financing. At this time, it is unclear if the sale has the potential to move forward, and a proposed sale price has not been disclosed. Although the most recent valuation implies value in excess of the trust’s exposure, DBRS anticipates a loss will be incurred with the resolution of this loan given the lack of significant improvement in the property’s performance and the delayed status of the potential sale because of financing issues.

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

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodologies are North American CMBS Rating Methodology (June 2015) and CMBS North American Surveillance (December 2015), which can be found on our website under Methodologies.

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