DBRS Morningstar Assigns Ratings to DBWF 2015-LCM Mortgage Trust

DBRS, Inc. (DBRS Morningstar) assigned ratings to the Commercial Mortgage Pass-Through Certificates, Series 2015-LCM (the Certificates) issued by DBWF 2015-LCM Mortgage Trust as follows:

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class X-A at AAA (sf)
-- Class B at AA (high) (sf)
-- Class C at A (high) (sf)
-- Class D at BBB (high) (sf)
-- Class E at BB (low) (sf)
-- Class F at BB (low) (sf)

All trends are Negative as the underlying collateral continues to face performance challenges associated with the Coronavirus Disease (COVID-19) global pandemic.

These certificates are currently also rated by DBRS Morningstar’s affiliated rating agency, Morningstar Credit Ratings, LLC (MCR). In connection with the ongoing consolidation of DBRS Morningstar and MCR, MCR previously announced that it had placed its outstanding ratings of these certificates Under Review–Analytical Integration Review and that MCR intended to withdraw its outstanding ratings; such withdrawal will occur on or about October 14, 2020. In accordance with MCR’s engagement letter covering these certificates, upon withdrawal of MCR’s outstanding ratings, the DBRS Morningstar ratings will become the successor ratings to the withdrawn MCR ratings. Information about the MCR ratings, including the history of the MCR ratings, can be found at www.morningstarcreditratings.com.

On March 1, 2020, DBRS Morningstar finalized its “North American Single-Asset/Single-Borrower Ratings Methodology” (the NA SASB Methodology), which presents the criteria for which ratings are assigned to and/or monitored for North American single-asset/single-borrower (NA SASB) transactions, large concentrated pools, rake certificates, ground lease transactions, and credit tenant lease transactions. For further information on the NA SASB Methodology, please see the press release dated March 1, 2020, at www.dbrsmorningstar.com. On April 24, 2020, DBRS Morningstar placed the ratings on its outstanding SASB transactions secured by retail properties Under Review with Negative Implications while MCR placed the ratings on its outstanding SASB transactions secured by retail properties Under Review Negative as the global shelter-in-place and mandatory retail closures related to the coronavirus have contributed to retail bankruptcies and anticipated vacancies in retail centers. For further information on these rating actions, please see the DBRS Morningstar press release dated April 24, 2020, at www.dbrsmorningstar.com and the MCR press release dated April 24, 2020, at www.morningstarcreditratings.com.

To assign ratings to this transaction, DBRS Morningstar considered both the impact of the updated NA SASB Methodology and its scenarios attributable to the ongoing coronavirus pandemic on the ratings.

Because of the coronavirus’ significant impact on retail performance, DBRS Morningstar first considered the application of the updated NA SASB Methodology in conjunction with the “North American CMBS Surveillance Methodology” to arrive at a baseline result, which incorporated qualitative assumptions, capitalization rates, and loan-to-value (LTV) ratio sizing benchmark quality/volatility adjustments and excluded any potential changes in current or future expected asset performance resulting from the coronavirus.

DBRS Morningstar then overlaid scenarios incorporating additional reductions in net cash flow (NCF) to account for exposure to bankrupt or closed tenants. This resulted in stressed collateral value declines consistent with the projections in its “Global Macroeconomic Scenarios: September Update” published on September 10, 2020, on top of the baseline result to determine the impact of coronavirus-related changes in asset performance on the subject transaction on a tranche-by-tranche basis. For more information on these stress scenarios, please refer to the Coronavirus Impact Analysis section of this document. The global macroeconomic scenarios include a moderate decline of 15% for all commercial real estate (CRE), which acts as an average for all CRE property types. However, DBRS Morningstar expects a greater range of value decline for retail properties, ranging from 10% to 45% based on the type of tenant composition, exposure to bankrupt or challenged retailers, asset sponsorship, and asset location. DBRS Morningstar expects that lower-tier regional malls with in-line sales generally less than $300 per square foot (psf) will be the most affected.

LOAN/PROPERTY OVERVIEW
The collateral for the loan is the fee-simple and leasehold interests in the 2.1 million sf Lakewood Center located in Lakewood, California, within Los Angeles County. The mall was originally constructed in 1951 and has been expanded and renovated many times over the years with the last major expansion occurring in 2009. The mall is owned and operated by The Macerich Company (Macerich), which purchased the remaining 49% ownership interest in the subject in 2014 for a total consideration of approximately $1.8 billion. The Certificates are backed by a $290.0 million loan consisting of a $120.0 million senior note and two junior notes each with a principal balance of $85.0 million. The three notes have 11-year terms and amortize over 30-year terms with loan maturity in June 2026. As part of the financing, but not part of the trust collateral for this security, there is also a $120.0 million A-1 companion loan, which ranks pari passu with the senior trust note and is securitized in the DBRS Morningstar-rated COMM 2015-CCRE24 Mortgage Trust transaction. The whole loan total financing secured by the property totals $410.0 million, or $198 psf. Per the September 2020 remittance, the trust has amortized by 10.7% with a current trust balance of $268.1 million.

The fee-simple collateral interest totals 1.37 million sf, while the remaining collateral is ground leased to major tenants. Anchor tenants include Macy’s (17.6% of net rentable area (NRA)), Costco Wholesale (8.1% of NRA), JCPenney (7.9% of NRA), Target (7.7% of NRA), and Home Depot (6.4% of NRA). Other major tenants include Forever 21, Burlington Coat Factory, Nordstrom Rack, Best Buy, Albertsons, and the 16-screen Pacific Theatres. Lakewood Center’s enclosed mall is primarily one story; however, attached anchors, including Round 1 Bowling, encompass two stories. While JCPenney filed for Chapter 11 bankruptcy in May 2020, the subject’s location was not on the list of initial store closures and was open for business as of August 2020. In addition, 24 Hour Fitness (2.2% of NRA) filed for Chapter 11 bankruptcy in June 2020 and planned to permanently close over 100 locations; however, the subject location was not listed in the published closing list as of September 2020.

Per a Yahoo Finance article dated September 2020, the Lakewood Mall had been forced to close by the State of California mandates twice throughout the coronavirus pandemic. The mall shut down for the first time in March 2020 and later reopened in May 2020 before closing again in July 2020. The mall’s website advertises curb-side pickup and limited in-person shopping, which is anticipated to generate partial income for the tenants. Large stores such as Home Depot, Costco Wholesale, Albertsons, Target, and others have remained open with proper social distancing of customers.

Property performance had been stable as the occupancy rate remained above 95.0% since issuance. Per the March 2020 rent roll, the collateral was 95.4% occupied compared to the 98.4% occupancy rate at issuance. DBRS Morningstar anticipates the occupancy rate to likely decline in the near term as a result of the coronavirus pandemic. The debt service coverage ratio (DSCR) for the subject has also been steady over the past few years with a trailing three-month ending March 2020 DSCR of 1.69 times (x), compared with the YE2019 DSCR of 1.65x, YE2018 DSCR of 1.65x, and YE2017 DSCR of 1.62x. DBRS Morningstar has requested an update regarding tenant rent collections or sales figures for the collateral since the coronavirus pandemic. As of the September 2020 remittance date, the loan is current and has shown no delinquencies or late payments.

DBRS Morningstar derived the NCF using the latest reported servicer NCF with an adjustment, considering ongoing collateral performance including tenant movement and sales performance. The resulting NCF figure was $35.5 million and DBRS Morningstar applied a cap rate of 7.75%, which resulted in a pre-coronavirus DBRS Morningstar Value of $457.7 million, a variance of -27.5% from the appraised value of $631.0 million at issuance. The pre-coronavirus DBRS Morningstar Value implies an LTV of 52.4% compared with the LTV of 65.1% on the appraised value at issuance.

The cap rate DBRS Morningstar applied is at the middle end of the range of DBRS Morningstar Cap Rate Ranges for retail properties, reflecting the suburban location and market position of the asset.

DBRS Morningstar made positive qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis, totaling 3.5% to account for property quality, and market fundamentals.

CORONAVIRUS IMPACT ANALYSIS
DBRS Morningstar overlaid various scenarios incorporating higher NCF declines, resulting in stressed collateral value declines consistent with the projections in the “Global Macroeconomic Scenarios: September Update” (https://www.dbrsmorningstar.com/research/366542) to estimate the impact of coronavirus-related changes in asset performance on a tranche-by-tranche basis for the subject transaction. The scenarios included deducting cash flow for bankrupt retailers and increased vacancy expected at the asset to arrive at a coronavirus DBRS Morningstar Value under the moderate scenario, a 15.0% reduction from the pre-coronavirus DBRS Morningstar Value. Because of the more permanent value impairment resulting from the lost tenancy revenue stream, DBRS Morningstar’s analysis considered this value when assigning ratings.

Under the moderate scenario, the cumulative rated debt was insulated from loss.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

Class X-A is an interest-only (IO) certificate that references 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.

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com. The platform includes loan-level 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 methodologies are the North American Single-Asset/Single-Borrower Ratings Methodology (March 1, 2020) and North American CMBS Surveillance Methodology (March 6, 2020), which can be found on www.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 www.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.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

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.

Generally, 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 [email protected].

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