DBRS Morningstar Assigns Ratings to BB-UBS Trust 2012-TFT, Places Certain Classes Under Review with Negative Implications

DBRS, Inc. (DBRS Morningstar) assigned ratings to the Commercial Mortgage-Pass Through Certificates, Series 2012-TFT issued by BB-UBS Trust 2012-TFT as follows:

-- Class A at AAA (sf)
-- Class X-A at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at BBB (high) (sf)
-- Class D at B (low) (sf)
-- Class E at CCC (sf)
-- Class TE at B (high) (sf)

DBRS Morningstar has also placed Classes A, X-A, B, C, D, and TE Under Review with Negative Implications, given the negative impact of the Coronavirus Disease (COVID-19) on the underlying collateral. Class E, rated CCC (sf), does not carry a trend.

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 22, 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upon withdrawal of MCR’s outstanding ratings, the DBRS Morningstar ratings will become the successor ratings to the withdrawn MCR ratings.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 transaction is 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 are secured by the Tucson Mall located in Tucson; the Fashion Place mall located in Murray, Utah; and the Town East Mall in Mesquite, Texas. The loans were sponsored by GGP Limited Partnership, which Brookfield Property Partners, L.P. (rated BBB with a Negative trend by DBRS Morningstar) acquired in July 2018. The first-mortgage loans along with a combined $65.2 million in mezzanine debt ($40.5 million allocated to Tucson Mall and $24.7 million allocated to Fashion Place) were used to refinance $341.0 million of existing debt and return $292.0 million of equity back to the sponsor.

The loans were originally set to mature on June 1, 2020; however, the sponsor was unable to refinance the outstanding debt because of complications surrounding the coronavirus pandemic. The sponsor requested relief and was transferred to special servicing in May 2020 for imminent default with the upcoming maturity. In June 2020, a modification agreement was executed, which includes the following for all three properties: (1) a maturity date extension to June 1, 2021, including mezzanine debts; and (2) the borrower’s ability to grant rent deferral without the servicer’s consent, but to a limited degree. Other terms and conditions have been instituted to permit the basic forbearance strategy. As of the September 2020 remittance report, the sponsor is current on all interest payments and has agreed to continue to cover operating and debt service shortfalls out of pocket. Updated appraisals have been ordered but are currently unavailable.

A $205.5 million portion of the combined $567.8 million of debt is secured by a 667,581-sf portion of the 1.3 million-sf Tucson Mall. The property is anchored by Dillard’s, Macy’s, JCPenney, Dick’s Sporting Goods, and Forever 21, all of which own their own improvements. Dillard’s, Macy’s, and JCPenney sublease the land from the sponsor. In addition to the current anchor set, a Sears was in place at issuance but it vacated the property in April 2020. While JCPenney has filed for bankruptcy, the store at the subject property remains in operation and no announcements have been made to date that the store will close. Over the past few years, the property has shown precipitous cash flow declines as the YE2018 NCF of $19.5 million was 19.2% below the issuance level of $24.1 million and dipped again by 14.0% from YE018 to YE2019 when the NCF was reportedly $16.8 million, representing a 30.4% decline from issuance. The most recent sales figures for the trailing 12-month (T-12) period ended July 31, 2020, also reflected performance declines with comparable sales below 10,000 sf at $320 psf, which is 17.7% lower than the issuance level of $389 psf. The property’s occupancy rate generally held near the issuance level of 97.1% prior to the pandemic with the August 2020 occupancy rate reported at 92.5%; however, the potential for a deterioration in occupancy is likely as the pandemic drives a record number of retailers into bankruptcy. The mall has been severely affected by the pandemic as it was forced to close for two months and did not reopen until May. While collections at the property improved from 39.5% in April 2020, the property averaged only 58.0% between April and September 2020 and have had consecutive month-to-month declines from the peak in July 2020. Furthermore, the upcoming expirations of Macy’s in October 2020 (with 11 five-year renewal options remaining), Dillard’s in July 2021, and JCPenney in July 2022 could prove obtaining refinancing difficult if any of the anchor tenants vacated or give notice to vacate the property prior to the extended maturity date in June 2021. To date, Macy’s remains at the property despite the upcoming expiration. DBRS Morningstar has requested a leasing update.

A $202.0 million portion of the combined $567.8 million of debt is secured by a 421,206-sf portion of the 1.0 million-sf Fashion Place regional mall located in Murray. The property is anchored by Macy’s, Dillard’s, and Nordstrom; Dillard’s and Nordstrom own their respective improvements and land. In addition to the current anchor set, a Sears was in place at issuance. Despite Sears vacating the property, this did not have a trickledown effect for the mall as occupancy has remained consistent with issuance levels at 98.9% with the July 2020 occupancy level at 98.2%. While the YE2019 NCF of $26.0 million is 11.0% below the $29.2 million at YE2018, the YE2019 NCF is still 19.6% above the issuance level of $21.8 million. The most recent sales figures for the T-12 period ended July 31, 2020, reported a slight increase in performance with comparable sales below 10,000 sf at $723 psf, which is 1.5% higher than the issuance level of $712 psf. The mall has been severely affected by the pandemic as it was forced to close in March 2020 and did not reopen until May. While rent collections have improved from the 30.3% in April 2020, collections started to decline beginning in August 2020 and were at only 55.9% in September 2020, which represents a 15.6% decline from the August 2020 level. A decline in performance is anticipated moving forward as the pandemic continues to have devasting impacts on business and forces additional retailers into bankruptcy.

The remaining $160.3 million first-lien mortgage is secured by a 421,206-sf portion of the 1.2 million-sf Town East regional mall in Mesquite. The property is anchored by Sears, Dillard’s, JCPenney, and Macy’s, all of which own their own stores, portions of the land, and parking areas. Other major retailers at the mall include Dick’s Sporting Goods, Forever 21, and H&M. While Sears and JCPenney have filed for bankruptcy, both stores remain open at the mall and are not included in store closures. The YE2019 NCF of $19.2 million is slightly down from the $19.3 million from YE2018, yet it is still 14.3% above issuance levels at $16.8 million. Although overall operating performance has increased, sales have actually declined from $452 psf at issuance for comparable sales below 10,000 sf; the T-12 period ended July 31, 2020, reported comparable sales at $429 psf, which represents a 5.1% decline. Despite the small decline in sales, occupancy levels remain consistent with issuance levels at 99.2% compared with 96.3% in August 2020. The mall has also been severely affected by the pandemic as it was forced to close in March 2020 and did not reopen until May. While rent collections have improved from 28.8% in April 2020, collections started to decline beginning in August 2020 and were at only 51.5% in September 2020, representing a 21.5% decline from the August 2020 level. The mall is at an inflection point because of the performance issues caused by the pandemic and all four anchors have ground-lease expirations in December 2020. In the event any number of the anchor tenants decide to vacate the property, this could have a devastating impact on performance and the sponsor’s ability to refinance the loan. A decline in future performance is anticipated as the pandemic continues to have devasting impacts on businesses and forces additional retailers into bankruptcy.

DBRS Morningstar derived the NCF for each property using the latest reported servicer NCF with an adjustment, considering ongoing collateral performance including tenant movement and sales performance. The resulting NCF figure for Tucson Mall was $16.4 million and DBRS Morningstar applied a cap rate of 8.25%, which resulted in a pre-coronavirus DBRS Morningstar Value of $199.3 million, a variance of -50.2% from the appraised value of $400.0 million at issuance. The resulting NCF figure for Fashion Place was $25.5 million and DBRS Morningstar applied a cap rate of 7.75%, which resulted in a pre-coronavirus DBRS Morningstar Value of $329.1 million, a variance of -13.9% from the appraised value of $382.0 million at issuance. The resulting NCF figure for Town East Mall was $18.8 million and DBRS Morningstar applied a cap rate of 8.25%, which resulted in a pre-coronavirus DBRS Morningstar Value of $227.8 million, a variance of -10.3% from the appraised value of $254.0 million at issuance. The combined pre-coronavirus DBRS Morningstar Value implies an A note LTV of 75.1% and a whole loan LTV of 83.7% compared with the A note LTV of 54.8% and whole loan LTV of 61.1% on the appraised value at issuance.

The cap rates DBRS Morningstar applied is at the middle end of the range of DBRS Morningstar Cap Rate Ranges for regional mall properties, reflecting each mall’s position within its respective suburban market.

DBRS Morningstar made positive and negative qualitative adjustments to the final LTV sizing benchmarks for each loan used for this rating analysis to account for cash flow volatility at each property. In summary, DBRS Morningstar applied positive 0.25% adjustments for the Fashion Place and Town East Mall loans and -0.50% for the Tucson Mall loan.

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 assets 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.

After applying the Coronavirus Impact Analysis, DBRS Morningstar had higher variances from the ratings assigned to Classes A, B, and C to the results of its LTV sizing benchmarks. The variation is warranted due to going concerns with the impact of the coronavirus pandemic on the collateral assets and, as a result, DBRS Morningstar placed these classes Under Review with Negative Implications.

Class X-A is an IO certificate that references a single rated tranche and mirrors the referenced obligation.

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.

DBRS Morningstar’s North American CMBS analytical team will continue to monitor the transaction to evaluate the increased risk factors related to the coronavirus pandemic. As information (e.g., updated property-level financials, rent rolls, new valuations for specially serviced loans, and workout and/or modification specifics, if applicable) becomes available, DBRS Morningstar will address the Under Review with Negative Implications rating actions over the near to moderate term. DBRS Morningstar typically endeavors to resolve an Under Review rating action within 90 days, but the circumstances surrounding these rating actions (i.e., the unknown length of the pandemic-related downturn) may result in a prolonged resolution period.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

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