DBRS Confirms All Classes of WFRBS Commercial Mortgage Trust 2012-C10

DBRS Limited (DBRS) has today confirmed the ratings on the following classes of Commercial Mortgage Pass-Through Certificates, Series 2012-C10 issued by WFRBS Commercial Mortgage Trust 2012-C10:

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-FX at AAA (sf)
-- Class A-FL at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class A-S at AAA (sf)
-- Class X-A at AAA (sf)
-- Class X-B at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (low) (sf)
-- Class E at BB (sf)
-- Class F at B (sf)

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

The rating confirmations reflect the pool’s overall stable performance. At issuance, the transaction consisted of 85 loans secured by 115 commercial and multifamily properties. The pool has since experienced a collateral reduction of 5.6% as the result of successful loan repayment and scheduled amortization with 84 of the original 85 loans remaining in the pool. The pool reported a weighted-average (WA) debt service coverage ratio (DSCR) of 2.02 times (x) and a WA debt yield of 12.4% based on 95.0% of the pool that reported YE2015 financials. Comparatively, the prior-year reporting showed a WA DSCR and WA debt yield of 1.90x and 11.7%, respectively.

This transaction is heavily concentrated with retail properties, which secure loans representing 44.8% of the current pool balance, including eight of the largest 15 loans. These eight loans represent 32.2% of the current pool balance and the majority are managed and/or owned by an experienced operator and are anchored by national tenants. These loans reported a WA YE2015 DSCR of 2.31x compared with the WA YE2014 DSCR of 2.29x. Overall, occupancy is strong across the collateral properties, averaging 93% and ranging from 85% to 96% as of the figures reported by the most recent rent rolls.

As of the October 2016 remittance, there are eight loans on the servicer’s watchlist, representing 9.4% of the current pool balance. Three of these loans, representing 5.8% of the current pool balance, were placed on the watchlist for deferred maintenance issues and two loans, representing 1.5% of the current pool balance, were flagged for major tenant rollover. In cases of rollover, the servicer has confirmed to DBRS that either a renewal is in place or a replacement tenant has been found for all properties. Two loans, including one loan on the servicer’s watchlist, are further discussed below.

The Bluerock Business Center loan (Prospectus ID#15), representing 1.4% of the current pool balance, is secured by a 101,297 square foot (sf) mixed-use property comprising two office buildings containing 77,661 sf and three single-story retail buildings containing 23,636 sf located in Antioch, California. As of the rent roll dated July 1, 2016, the property was 81.3% occupied; however, the servicer has confirmed that the second-largest tenant, Wells Fargo, occupying 16.2% of the net rentable area (NRA) vacated at the time of its lease expiry on July 31, 2016, bringing the physical occupancy rate down to 65.1%. All vacancy is included in the office portion of the property, which is 54.5% occupied with retail occupancy at 100.0%. The largest remaining tenants at the property are Sutter East Bay Medical (25.3% of NRA) and Dow Great West Credit Union (6.3% of NRA) on leases that expire in March 2020 and June 2026, respectively.

According to CoStar, the property is located in the Antioch/Pittsburg submarket and the reported vacancy for the submarket was 10.0% with an availability rate of 11.7% as well as an average asking rental rate of $22.42 per square foot (psf). Based on the most recent financials, the loan reported an annualized Q2 2016 DSCR of 1.79x compared with the YE2015 DSCR of 1.56x and the DBRS underwritten DSCR of 1.40x. Given the recent occupancy decline, this loan was modeled with a stressed cash flow figure to reflect the increased probability of default (POD).

The One North Arlington loan (Prospectus ID#38), representing 0.9% of the current pool balance, is secured by a 164,264 sf office tower located in Arlington Heights, Illinois. The trust loan refinanced existing debt as the borrower contributed cash equity of $5.8 million to close. This loan is monitored on the servicer’s watchlist for a low DSCR because of low occupancy. As of June 2016, the property was 31.3% occupied with average rental rates of $14.75 psf. Occupancy has been low since the largest tenant, State Farm Mutual Automobile Insurance, representing 30.0% of the NRA, vacated in May 2015 when its lease expired. There are ongoing collections funding a tenant improvement/leasing commission reserve for this loan with an outstanding balance of approximately $857,000 ($5.22 psf) as of the October 2016 reporting. The borrower’s lease-up strategy appears to include the build-out of speculative space with planned capital expenditures for that work cited in the servicer’s January 2016 site inspection for the property. Additional investments planned for the near term also included parking lot resurfacing and lobby decor.

According to CoStar, the subject is located in the Schaumburg Area submarket, which reported a vacancy rate of 17.6% with an availability rate of 42.3% and average asking rental rates of $21.11 psf. The five-year average vacancy rate for this submarket is 24.6%. Financial performance at the property continue to decline year over year, given the struggle to lease up the vacant space at the subject. Based on the most recent financial reporting, the annualized Q2 2016 DSCR was negative 0.91x, further decreasing from the YE2015 DSCR of 0.45x. Given the elevated vacancy rates in the market, DBRS expects that this loan will continue to perform at depressed levels; as such, the loan was modeled with a significantly increased POD and will be monitored closely for developments.

The ratings assigned to Classes B, C, D, E and F materially deviate from the higher ratings implied by the quantitative model. DBRS considers a material deviation to be a rating differential of three or more notches between the assigned rating and the rating implied by the quantitative model that is a substantial component of a rating methodology; in this case, the assigned ratings reflect the sustainability of loan performance trends not demonstrated.

For more information on this transaction and supporting data, please log into DBRS CMBS IReports, at www.ireports.dbrs.com. DBRS continues to monitor this transaction monthly with periodic updates provided in the DBRS CMBS IReports platform.

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

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 to the right under Related Research or by contacting us at info@dbrs.com.

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

The applicable methodologies are North American CMBS Rating Methodology (March 2016) and CMBS North American Surveillance (December 2015), which can be found on our website under Methodologies.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.