DBRS Morningstar Downgrades Two Classes of WFRBS Commercial Mortgage Trust 2012-C10, Changes Trends on Two Classes to Negative From Stable

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

-- Class E to C (sf) from CCC (sf)
-- Class F to C (sf) from CCC (sf)

In addition, DBRS Morningstar confirmed the following ratings:

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

DBRS Morningstar changed the trends on Classes C and X-B to Negative from Stable. The trends on all other classes are Stable, with the exception of Classes D, E, and F, which are assigned ratings that do not typically carry trends in commercial mortgage-backed securities (CMBS) ratings. As discussed in further detail below, the rating downgrades and Negative trends reflect significant risk imposed by the remaining loans in the pool and increased certainty of losses given increasing concentration and adverse selection as the transaction winds down. Declining property values, uncertain disposition timelines, and high exposure to regional malls are key drivers of DBRS Morningstar’s loss projections. Although low recoveries at resolution are expected, the senior-most certificates remain insulated from loss, based on DBRS Morningstar’s stressed value estimates.

As of the April 2023 remittance, six of the original 85 loans remain outstanding, with an aggregate principal balance of $299.7 million, representing a collateral reduction of 77.0% since issuance. All of the remaining loans defaulted at maturity and are currently in special servicing.

Since DBRS Morningstar’s last rating action in November 2022, five of the six outstanding loans (96.4% of the current pool) have reported updated appraisal values. In all cases, the values have significantly deteriorated from the prior figures, with the declines ranging from 44.3% to 82.3% on a percentage basis. Based on the updated appraised values, DBRS Morningstar adjusted the projected loss scenarios and, for all loans liquidated in the analysis, the combined loss figure was in excess of $117.0 million, which represents a 38.2% increase in projected losses from DBRS Morningstar’s recoverability analysis in November 2022. This would result in a full reduction of the Class E, Class F, and unrated Class G certificates, as well as an erosion of nearly half of the Class D certificate balance. Out of six loans, five continue to make debt service payments despite being in maturity default, and the special servicer is negotiating maturity extensions for two loans.

As of April 2023, four loans (60.5% of the pool) are secured by regional malls, two of which have experienced significant performance and valuation declines. The Dayton Mall (Prospectus ID#3; 24.7% of the pool) in Dayton, Ohio, and Towne Mall (Prospectus ID#12; 6.2% of the pool) in Elizabethtown, Kentucky, have reported performance declines since the peak of the Coronavirus Disease (COVID-19) pandemic, with debt service coverage ratios (DSCRs) reported well below breakeven for the past few years. Based on the most recent rent rolls, the properties reported occupancy rates of 69.0% in June 2022 and 66.0% in YE2022, respectively. According to the latest special servicer update, both loans are being tracked for foreclosure. Since DBRS Morningstar’s last rating action, both malls have received updated appraised values. The value of Dayton Mall declined by 69.5% from issuance to $40.2 million as of August 2022, and the value of Towne Mall declined by 82.1% from issuance to $7.3 million as of November 2022. DBRS Morningstar’s liquidation scenario, which is based on a stress to the most recent appraised values, resulted in loss severities above 70.0% for each of these loans.

The Rogue Valley Mall (Prospectus ID#5; 15.8% of the pool) is in Medford, Oregon, and was 94.5% occupied as of November 2022. The June 2022 DSCR was reported to be 1.13 times (x). Bed Bath & Beyond is the third-largest tenant, and this location is on the company’s closure list related to its recent bankruptcy filing. The special servicer is currently dual tracking foreclosure and continuing negotiations with the borrower regarding a possible extension to allow time to refinance the loan. The February 2023 appraisal value of $32.5 million represents a 59.4% decline from the issuance value of $80.0 million, resulting in a loss severity of 54.6% in DBRS Morningstar’s liquidation scenario.

The Animas Valley Mall (Prospectus ID#6; 13.7% of the pool) in Farmington, New Mexico, was previously listed for sale and, according to commentary from the special servicer, a buyer has been identified. Closing is expected to occur by the end of April 2023. The property was re-appraised in October 2022 at a value of $52.0 million, representing a 29.7% decline from the issuance value of $74.0 million. DBRS Morningstar’s liquidation scenario for this loan resulted in a loss severity of 28.0%.

The largest loan in the pool is Republic Plaza (Prospectus ID#1; 35.9% of the pool), which is secured by a 1.3 million-square-foot (sf), Class A office property in downtown Denver. The building features 48,371 sf of ground floor retail space. According to the most recent servicer commentary, the borrower is in discussions with the special servicer regarding a potential workout. Per the YE2022 financials, the DSCR was reported at 1.29x with an occupancy rate of 79.4%, which is expected to decline as several tenants, representing more than 20.0% of the net rentable area (NRA), are scheduled to vacate the property upon lease expiration and/or downsize its space in the next few months. The largest tenant, Ovintiv USA Inc., is giving back approximately 72,000 sf while extending its remaining 18.8% of the NRA through April 2026. The second-largest tenant, DCP Midstream (11.0% of the NRA), is vacating its space upon lease expiration in May 2023. The borrower is in discussions with a prospective tenant, but no lease has been signed to date. The December 2022 appraisal value of $298.1 million represents a 44.3% decline from the issuance value of $535.4 million. The loan-to-value (LTV) ratio at issuance was only 52.3%, while the most recent appraised value suggests an updated LTV of 93.9%. DBRS Morningstar’s liquidation scenario, which is based on a stress to the most recent appraised value given the upcoming tenant rollover, results in a loss severity of less than 12%.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/396929 (May 17, 2022).

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.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal methodology is North American CMBS Surveillance Methodology (March 16, 2023; https://www.dbrsmorningstar.com/research/410912).

Other methodologies referenced in this transaction are listed at the end of this press release.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482.

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 rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the rating process for this rating action.

DBRS Morningstar had access to the accounts, management and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

This is a solicited credit rating.

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.

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 Limited
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Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577

The rating methodologies used in the analysis of this transaction can be found at: https://www.dbrsmorningstar.com/about/methodologies.

North American CMBS Multi-Borrower Rating Methodology (March 16, 2023)
https://www.dbrsmorningstar.com/research/410913

Rating North American CMBS Interest-Only Certificates (December 19, 2022)
https://www.dbrsmorningstar.com/research/407577

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 12, 2022) https://www.dbrsmorningstar.com/research/402646

North American Commercial Mortgage Servicer Rankings (September 8, 2022) https://www.dbrsmorningstar.com/research/402499

Interest Rate Stresses for U.S. Structured Finance Transactions (August 30, 2022) https://www.dbrsmorningstar.com/research/402153

Legal Criteria for U.S. Structured Finance (December 7, 2022)
https://www.dbrsmorningstar.com/research/407008

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