DBRS Morningstar Downgrades Three Classes, Changes Trends on Four Classes to Negative of UBS-Barclays Commercial Mortgage Trust 2012-C4

DBRS, Inc. (DBRS Morningstar) downgraded the ratings on three classes of Commercial Mortgage Pass-Through Certificates, Series 2012-C4 issued by UBS-Barclays Commercial Mortgage Trust 2012-C4 as follow:

-- Class D to BB (sf) from BBB (low) (sf)
-- Class E at B (low) (sf) from BB (sf)
-- Class F to CCC (sf) from B (sf)

DBRS Morningstar also confirmed the ratings on the remaining classes as follows:

-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-5 at AAA (sf)
-- Class A-AB 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 (high) (sf)
-- Class C at A (sf)

DBRS Morningstar changed the trends on Classes X-B, C, D, and E to Negative from Stable. Class F has a rating that does not carry a trend. All other trends remain Stable.

The rating downgrades are primarily driven by the projected loss on the second-largest loan in special servicing, Newgate Mall (Prospectus ID #6, 4.9% of the pool), and the Negative trends are largely the result of the increased risk to the pool for the remaining loans in special servicing, which combined represent an additional 10.2% of the pool. Regarding the specially serviced loans, two are secured by regional malls, representing 11.2% of the pool, while the remaining loans are secured by retail and hotel properties. As of the March 2021 remittance, the transaction consists of 79 of the original 89 loans, with collateral reduction of 18.7% since issuance. The pool also benefits from defeasance as 24 loans, representing 19.4% of the pool balance, are defeased.

The transaction is concentrated by property type as 21 loans, representing 28.1% of the pool, are secured by retail properties, and eight loans, representing 21.0% of the pool, are secured by hotel properties. Both asset types have been disproportionately affected by the Coronavirus Disease (COVID-19) pandemic. There are also 22 loans, representing 22.8% of the pool, secured by office properties, including the largest loan in the transaction, KBR Tower (Prospectus ID#2; 10.8% of the pool). In addition to the five loans in special servicing that collectively represent 15.1% of the pool, there are 14 loans on the servicer’s watchlist, representing 14.6% of the pool.

The Newgate Mall loan is secured by a regional mall in Ogden, Utah. The collateral includes the in-line space, the Cinemark 14 Theatre, a former Sports Authority anchor pad that was closed and backfilled by home goods retailer Downeast Home, and a former Sears anchor pad that remains vacant. Non-collateral anchors include Dillard’s, Burlington Coat Factory, and Fly High Adventure Park. The loan transferred to special servicing in March 2020; however, the property’s cash flow declines began in 2017 and accelerated quickly after the loss of Sears in 2018. The servicer has installed The Woodmont Company as the receiver, and news articles suggest the trust was the winning bidder in a foreclosure auction in March 2021. According to the September 2020 rent roll, the collateral was 62.0% occupied. The subject was appraised in November 2020 with an updated value of $20.0 million, down 75.9% from the issuance value of $83.0 million. Based on a haircut to the most recent valuation, DBRS Morningstar liquidated the loan in the analysis for this review, with a loss severity exceeding 75.0%.

The largest loan in special servicing, Visalia Mall (Prospectus ID#3; 6.3% of the pool), is secured by a regional mall in Visalia, California, owned by Brookfield Properties Retail, Inc. (Brookfield). The collateral includes the entire mall, which is anchored by JCPenney and Macy’s, with junior anchors including Old Navy and Forever 21. The loan transferred to the special servicer in May 2020 for imminent monetary default, ahead of the June 2020 maturity date. The special servicer granted a forbearance to the borrower, with terms including a maturity date extension to June 2021 and the installation of a cash flow sweep. Brookfield also paid the $740,000 workout fee. Through the modification, the loan will maintain its interest-only payments. According to the September 2020 rent roll, the property was 96.2% occupied with in-line occupancy of 92.4%. DBRS Morningstar did not receive 2020 tenant sales data; however, at YE2019, in-line tenants reported a combined sales figure of $553 per square foot. According to the YE2019 financial reporting, the net cash flow figure of $10.2 million represents a 39.7% improvement from the issuance figure.

Despite the significant cash flow growth from issuance, an updated appraised value obtained by the special servicer as of August 2020 estimated the mall’s current value at $86.2 million, down 25.0% from the issuance value of $115.0 million and indicative of a loan-to-value ratio of 85.8% for the trust debt. The value decline for a property with sustained performance improvements over the past nine years is somewhat surprising, but is a product of the current environment for regional malls, which has led to appraisers and investors alike using significantly increased capitalization rates. Regarding the August 2020 valuation, the appraiser assumed a capitalization rate of 9.5%, compared with a capitalization rate of 7.3% at issuance. While the loan remains current and Brookfield appears firmly committed to the property and the loan, there are increased risks to the trust with the decline in value and the general uncertainty around the sponsor’s ability to secure a replacement loan within the extended term. As such, DBRS Morningstar made a probability of default adjustment in the analysis for this review to increase the expected loss for the loan.

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 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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