DBRS Morningstar Confirms Ratings on Four Classes of BBCMS Trust 2015-VFM, Maintains Three Classes Under Review with Negative Implications

DBRS, Inc. (DBRS Morningstar) confirmed the ratings on the following classes of the Commercial Mortgage Pass-Through Certificates, Series 2015-VFM issued by BBCMS Trust 2015-VFM:

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class X at AAA (sf)
-- Class B at AA (high) (sf)

The trends on Classes A-1, A-2, X, and B 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.

The following ratings on Classes C, D, and E remain Under Review with Negative Implications, given the negative impact of the Coronavirus Disease (COVID-19) on the underlying collateral.

-- Class C at AA (sf)
-- Class D at A (sf)
-- Class E at BBB (sf)

The ratings on these classes do not carry trends.

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 centers. 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
The transaction is backed by a $280.0 million 11-year, fixed-rate mortgage loan secured by the fee and leasehold interest in the Vintage Faire Mall, a super-regional mall in Modesto, California. Loan proceeds were used to return $277.2 million of equity to the sponsor. Prior to the closing of the loan, the sponsor paid off $97.6 million of previously existing debt on the property. The loan was not structured with an interest-only (IO) period and will amortize on a 30-year schedule. As of the September 2020 remittance report, the loan balance has amortized down to $248.8 million and is scheduled to amortize down an additional 15% by maturity. The loan sponsor is Macerich, a publicly traded real estate investment trust headquartered in Santa Monica, California, and is one of the largest mall owners and operators in the United States. The sponsor invested more than $40.0 million in renovations and capital improvements from 2001 until loan origination in 2015. Macerich is also the property manager.

Of the subject’s 1.1 million square feet (sf) of space, 692,693 sf serves as collateral for the subject loan. The mall represents the largest enclosed shopping center between Fresno and Sacramento, California, and is the only super-regional mall within a 50-mile radius, excluding three inferior properties outside the subject’s trade area that are located approximately 30 miles away in Stockton and Tracy, California. Anchors include Macy’s Men’s & Home and JCPenney. The mall is shadowed anchored by Macy’s Women’s & Children’s, which is not part of the loan collateral. Although JCPenney has filed for bankruptcy, the store remains in operation and no announcements have been made to date that the store is expected to close. In addition to the current anchor set, Sears and Forever 21 were in place at issuance but both vacated the property in 2019. Forever 21 was not part of the loan collateral as the tenant owned its own improvements. Despite Sears vacating the property, the sponsor was able to quickly backfill the box with Dick’s Sporting Goods (relocating from an outparcel) and Dave & Buster’s. Per the servicer, Dick’s Sporting Goods is expected to open in mid-October 2020 and Dave & Buster’s is expected to take possession in March 2021 and open in November 2021. The Dave & Buster’s location at the property would represent the brand’s first location in the Northern San Joaquin Valley, but there is speculation the location at the mall may not open because of pandemic-related brand struggles. Additionally, the servicer has indicated that the former Forever 21 space will be leased to a large furniture retailer and is expected to open in the next two to three months; however, an executed lease has not been provided and the space is still listed as vacant in the June 2020 rent roll.

Prior to the pandemic, cash flows have generally been increasing from issuance, except in YE2019 when the NCF declined 1.7% to $26.4 million from the $26.8 million in YE2018. Overall, NCF has increased 7.8% from $25.4 million at issuance. The most recent sales figure for YE2019 was $345.8 million, which also reflects a slight decline from YE2018 at $354.2 million yet is still above issuance at $343.5 million. The in-line sales figure at YE2019 (excluding Apple) of $626 psf is favorable to the $576 in-line sales (excluding Apple) at issuance. The collateral occupancy of 97.4%, as of June 30, 2020, is in-line with the issuance collateral occupancy of 96.7%; however, the loss of Sears and Forever 21 plummeted the overall property occupancy level to 71.8% compared with 98.0% at issuance. While the sponsor was quickly able to backfill Sears with Dick’s Sporting Goods and Dave & Buster’s, which would increase occupancy to 82.0%, there is skepticism that the Dave & Buster’s will open at the property. Additionally, there is substantial rollover risk in the near future including JCPenney in March 2022 and Macy’s Men’s & Home in December 2021. Although the JCPenney and Macy’s brands have been struggling as of late, the servicer noted that the JCPenney at the property has been a top-five performer and the Macy’s Men’s & Home was remodeled in 2019, increasing the probability that both stores remain open. That being said, the longer the pandemic persists, the greater the likelihood that the property experiences deterioration in occupancy as more retailers file for bankruptcy or it becomes unable to keep underperforming stores operational.

The onset of the pandemic in mid-March 2020 forced the property to close twice, in late March 2020 and again in July 2020. While the mall has reopened, strict safety procedures have been implemented at the mall limiting overall traffic volume. As a result of the closures, only 14.0% of collections were received in April 2020 and only 45% were received in September 2020. While the mall website only lists a handful of tenants that remain closed, if traffic volume does not increase, Dave & Buster’s is less likely to open at the property. Because of the impact of coronavirus, the sponsor made an initial three-month forbearance request, which was ultimately withdrawn. As of the September 2020 remittance report, the loan remains current as the sponsor has covered debt service and operating costs out of pocket, thus displaying its dedication to the asset. The strong amortization schedule of the loan will mitigate any value decline that stems from the current economic environment.

DBRS Morningstar derived the NCF using the latest reported servicer NCF with an adjustment, considering ongoing collateral performance including tenant movement and sales performance in addition to the current retail landscape. The resulting NCF figure was $26.2 million and DBRS Morningstar applied a cap rate of 7.75%, which resulted in a pre-coronavirus DBRS Morningstar Value of $338.1 million, a variance of -34.0% from the appraised value of $512.0 million at issuance. The pre-coronavirus DBRS Morningstar Value implies an LTV of 73.6% compared with the LTV of 48.6% 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 regional mall properties, reflecting its position in a secondary market.

DBRS Morningstar made positive qualitative adjustments to the final LTV sizing benchmarks used for this rating analysis, totaling 0.50% 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 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 for this review.

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

After applying the Coronavirus Impact Analysis, DBRS Morningstar had variances that were generally higher than those results implied by the LTV sizing benchmarks for Classes C, D, and E. 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 maintained these classes Under Review with Negative Implications.

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 is an IO certificate that references 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.

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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