DBRS Morningstar Downgrades Ratings on Two Classes of WFRBS Commercial Mortgage Trust 2012-C10

DBRS Limited (DBRS Morningstar) downgraded its ratings on the Commercial Mortgage Pass-Through Certificates, Series 2012-C10 issued by WFRBS Commercial Mortgage Trust 2012-C10 as follows:

-- Class E to BB (low) (sf) from BB (sf)
-- Class F to B (low) (sf) from B (sf)

In addition, DBRS Morningstar confirmed the ratings on the remaining classes as follows:

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

With this review, DBRS Morningstar removed Classes E and F from Under Review with Negative Implications, where they were placed on August 6, 2020. The trends for Classes E and F are Negative. All other trends are Stable.

The rating downgrades and Negative trends are reflective of DBRS Morningstar’s concerns surrounding the larger watchlisted loans in the pool as well as the transaction’s specially serviced loan, all of which are secured by regional malls in tertiary markets. As of the March 2021 remittance, the initial trust balance of $1.3 billion has been reduced by 22.5% to $1.0 billion, with 69 of the original 85 loans remaining in the pool. The transaction is concentrated by property type, as 20 loans, representing 46.6% of the pool, are secured by retail collateral and, more specifically, five loans, representing 29.7% of pool, are secured by regional malls. In addition, there are 17 loans, representing 9.9% of the pool, that are fully defeased.

The transaction’s sole specially serviced loan, Rogue Valley Mall (Prospectus ID#5, 4.9% of the pool), is secured by a regional mall in Medford, Oregon. The mall was originally owned by General Growth Properties but was sold to Brixton Capital in 2016 for a price of $61.5 million, well below the issuance appraised value of $80 million. The mall has been severely impacted by the pandemic and was closed for two months during 2020 as a result of local restrictions. A significant number of tenants requested rent relief or lease modifications and the loan eventually transferred to special servicing in July 2020 for payment default. In addition to the tenants affected by the pandemic, the property also has exposure to several retailers that have struggled over the past several years including JCPenney (19.0% of net rentable area (NRA), lease expires October 2021), Macy’s Home Store (18.6% of NRA, lease expires October 2022), and Macy’s (noncollateral) and will also have to deal with a significant amount of tenant rollover ahead of the loan’s October 2022 maturity. Coronavirus Disease (COVID-19) relief has been requested and the special-servicer commentary notes that the lender is dual-tracking a potential loan modification and foreclosure. For this review, DBRS Morningstar liquidated the loan from the trust, which resulted in an implied loss severity in excess of 40%.

The transaction’s largest watchlist loan, Dayton Mall (Prospectus ID#3, 7.6% of pool), secured by a Washington Prime Group (WPG)-operated regional mall in Dayton, Ohio, is being monitored on the watchlist for low debt service coverage ratio (DSCR). In addition, WPG stated in its Fiscal Year End 2020 10-K filing that there is “substantial doubt about the company’s ability to continue as a going concern,” adding sponsor risk in addition to performance risk. DBRS Morningstar had already been monitoring this loan after the mall lost both its noncollateral anchor tenants in 2018. Both of those spaces remain vacant. The loan’s DSCR dropped below 1.0 times (x) in 2019 and was reported at 0.93x as of Q3 2020. Occupancy has also continued to trend lower, most recently reported at 90.7% as of September 2020. T-12 inline tenant sales were reported at $288 per square foot (psf) as of June 2020, representing a slight improvement from the T-12 August 2019 sales of $261 psf. DBRS Morningstar maintains the risks for this loan are significantly increased from issuance resulting from the challenges in backfilling two empty anchor boxes and the loan’s declining performance metrics as the loan’s September 2022 maturity approaches.

The Towne Mall loan (Prospectus ID#12, 2.0% of the pool), is secured by a Macerich-operated regional mall in Elizabethtown, Kentucky, 45 miles south of Louisville. This loan was added to the servicer’s watchlist in January 2020 for low occupancy and DSCR. The mall’s collateral Sears tenant (19.6% of NRA) vacated in 2018 and, outside of a seasonal Halloween tenant, the space has remained vacant. Cash flow has trended lower nearly every year since issuance and as of Q3 2020, the DSCR was reported at 0.98x with an occupancy rate of 66.6%. The majority of the mall’s vacancies are concentrated in the former Sears wing of the mall, making re-leasing increasingly difficult. DBRS Morningstar analyzed both Dayton Mall and Towne Mall with elevated probabilities of default to reflect their current risk profiles.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Classes X-A and X-B are interest-only (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 issuance metrics and all historical surveillance commentary on the DBRS Viewpoint platform.

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com. The platform includes issuer and servicer 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 methodology is North American CMBS Surveillance Methodology (March 6, 2020), which can be found on 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 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 info@dbrsmorningstar.com.

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 info@dbrsmorningstar.com.

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