DBRS Morningstar Confirms Ratings on GS Mortgage Securities Corporation Trust 2012-ALOHA, Removes from Under Review with Negative Implications

DBRS Limited (DBRS Morningstar) confirmed the ratings on the Commercial Mortgage Pass-Through Certificates, Series 2012-ALOHA issued by GS Mortgage Securities Corporation Trust 2012-ALOHA as follows:

-- Class A at AAA (sf)
-- Class X-A at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (high) (sf)
-- Class X-B at A (sf)
-- Class D at A (low) (sf)

All trends are Negative because the underlying collateral continues to face performance challenges associated with the Coronavirus Disease (COVID-19) global pandemic. The ratings have been removed from Under Review with Negative Implications, where they were placed on April 24, 2020.

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 as the global shelter-in-place and mandatory retail closures related to the coronavirus have contributed to retail bankruptcies and anticipated vacancies in retail centres. For further information on these rating actions, please see the DBRS Morningstar press release dated April 24, 2020, at www.dbrsmorningstar.com.

During its review of the ratings for 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
This loan is secured by a retail and office complex that includes a super-regional mall, two office buildings, and a retail strip in the Waikiki neighborhood of Honolulu. The largest portion of the loan (96.4% of the allocated loan balance) is the Ala Moana Center (2.4 million square feet (sf)), which is the seventh-largest shopping mall in the United States and the largest open-air mall in the world. The other collateral properties are the Ala Moana Building (196,000 sf), Ala Moana Pacific Center office buildings (167,000 sf), and Ala Moana Plaza strip retail centre (14,000 sf), all of which are adjacent to the Ala Moana Center. The loan sponsor, Brookfield Properties Retail Group, owns all four properties. The subject loan is interest only (IO) for its 10-year term and serves to refinance existing debt of $1.3 billion and return $91.7 million of cash equity to the sponsor.

The Ala Moana Center is a 2.4 million-sf super-regional mall, of which approximately 1.5 million sf serves as collateral. The mall has four department store anchors, only one of which, Macy’s, (25.1% of collateral net rentable area (NRA)) is part of the collateral. Neiman Marcus owns its improvements subject to a ground lease with the mall. Neiman Marcus has been closed since the beginning of the coronavirus shutdown and has not yet reopened. The company laid off all of the staff at this location; however, the servicer reported that Neiman Marcus is not planning to close this store permanently. Macy’s has also committed to its space at the subject by extending its lease through December 2025. Both Bloomingdale’s and Nordstrom are part of the 660,000-sf Ewa Wing, which was developed after the sponsor acquired and demolished the Sears store. The sponsor acquired the expansion after the closing of this loan and is not part of the collateral. Following the relocation of Nordstrom to the new wing, the former Nordstrom space, which is part of the collateral, was redeveloped and leased to Target and Saks Off Fifth.

The loan benefits from the collateral’s above-average property quality as well as its outstanding location less than two miles to downtown Honolulu, Waikiki beach, and the Hawaii Convention Center. The mall boasts a unique combination of size, location, tenancy, and events such as live entertainment, which all contribute to making it a premier shopping and entertainment destination for local residents and millions of international visitors alike. Historically, the mall has depended heavily on tourism and international tourism in particular. With the coronavirus-related shutdowns and restrictions remining in place in Hawaii, the mall has experienced a drop in traffic. According to the Hawaii Tourism Authority, year-to-date tourist numbers are down 69% this year and the mall’s performance will likely be depressed until restrictions have been lifted and travellers show a willingness to return to the area.

The collateral derives most of its revenue from the Ala Moana Center as it has more than 350 shops and restaurants. Historically, the mall has performed extremely well with average occupancies in excess of 97% and average annual sales well above $1,000 psf. It has consistently generated total annual mall sales in excess of $1 billion. As of YE2019, in-line tenants with less than 10,000 sf reported sales of more than $1,500 psf. Because of disruptions and closures associated with the pandemic, trailing 12-month sales as of June 2020 fell to just more than $1,200 psf. The mall portion of the collateral was 94.4% occupied as of June 2020, while the total collateral inclusive of the office buildings was 92.3% occupied. As of YE2019, the loan reported a debt service coverage ratio (DSCR) of 2.50 times (x), which represents 5.0% decline from YE2018. Despite the recent difficulties stemming from coronavirus, the property has not seen a high level of permanent closures. The annualized Q2 2020 DSCR was reported at 2.53x and is more than sufficient to cover debt service in the short term. The loan will mature in April 2022 and it is possible that, by that time, the mall traffic will still be well below pre-pandemic levels, which elevates refinance risk. Despite this, the mall has an irreplaceable location in Honolulu and strong brand awareness with locals and tourists. Even in a lower cash flow scenario, the sponsor holds significant equity in the property, which likely increases the willingness of the sponsor to pay off this loan.

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 $147.0 million and DBRS Morningstar applied a cap rate of 6.5%, which resulted in a pre-coronavirus DBRS Morningstar Value of $2.3 billion, a variance of 16.9% from the appraised value of $2.7 billion at issuance. The pre-coronavirus DBRS Morningstar Value implies an LTV of 61.9% compared with the LTV of 51.4% on the appraised value at issuance.

The cap rate DBRS Morningstar applied is at the lower end of the range of DBRS Morningstar Cap Rate Ranges for regional mall properties, which is reflective of the prime location within a heavily trafficked tourist area, particularly for visitors from Japan, China, and South Korea, and overall desirability of the collateral property, particularly with the significant capital investment since issuance.

DBRS Morningstar made positive qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis, totalling 5.5% to account for cash flow volatility, 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/or increased vacancy expected at the asset to arrive at a coronavirus DBRS Morningstar Value under the moderate scenario, a 10% 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 for this review.

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.

Classes X-A and X-B are IO certificates 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.

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 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 [email protected].

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].

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577