DBRS Morningstar Confirms Ratings on All Classes of COMM 2012-LTRT Mortgage Trust

DBRS, Inc. (DBRS Morningstar) confirmed the following ratings of the COMM 2012-LTRT Commercial Mortgage Pass-Through Certificates, Series 2012-LTRT issued by COMM 2012-LTRT Mortgage Trust:

-- Class X-A at AA (sf)
-- Class A2 at AA (low) (sf)
-- Class B at A (low) (sf)
-- Class C at B (high) (sf)
-- Class D at CCC (sf)
-- Class E at CCC (sf)

All trends are Stable, with the exception of Classes D and E, which have ratings that do not typically carry a trend in commercial mortgage backed securities (CMBS) ratings..

The rating confirmations reflect DBRS Morningstar’s ultimate expectation of recoverability based on updated appraisal values obtained by the servicer within the last year for both of the collateral malls backing the loans in the transaction. At the July 2022 review, DBRS Morningstar changed the trends on Classes X-A, A2, B, and C to Stable from Negative and also downgraded Classes C and D to reflect the sustained performance declines for the underlying mall properties, as further outlined below. Based on the most recent performance reported by the servicer for each, the overall credit profile has remained stable since the July 2022 review.

The subject transaction is evidenced by two promissory notes, each individually secured by the fee interest in a portion of one of two super-regional malls known as the Westroads Mall and the Oaks Mall. The two loans are coterminous and originally structured with 10-year loan terms, each with a 30-year amortization schedule with no interest-only (IO) periods. Both loans were originally scheduled to mature in October 2022; however, the servicer recently granted a two-year extension for each and the loans now mature in October 2024. DBRS Morningstar has requested the full terms of the loan modifications from the servicer; as of the date of this press release, the response is pending. As of the June 2023 remittance, the loans report an aggregate senior note balance of $192.5 million, down from $211.2 million as of the July 2022 remittance. Given the reporting shows principal paydown amounts between $3.8 million and $5.5 million at the December 2022, March 2023, and May 2023 remittance periods, DBRS Morningstar believes it is likely the loan modifications required paydown as part of the terms. At issuance there was additional mezzanine debt of $37.0 million, which had been reduced to $30.2 million as of July 2022; DBRS Morningstar inquired regarding the current mezzanine debt balance but has not yet received an update. The loans are not cross-collateralized or cross-defaulted.

The sponsor for both loans is an affiliate of Brookfield Property Partners L.P. (Brookfield). In 2020, a loan modification was approved to allow for a forbearance in response to a relief request submitted by the sponsor as a result of the Coronavirus Disease (COVID-19) pandemic. As of the June 2023 remittance, the loan continues to show current with only nominal outstanding servicer advances, suggesting the forborne amounts have been repaid as agreed. The special servicer reviewed the maturity extension request submitted by the sponsor in advance of the August 2022 maturity date as a nontransfer event and the loans were not transferred to special servicing during the negotiations for the maturity extension.

Of the two loans backing the transaction, the Westroads Mall loan, which is secured by the fee interests in 540,304 square feet (sf) of a 1.1 million-sf regional mall in Omaha, Nebraska, has been the stronger performer. The noncollateral anchor spaces are occupied by JCPenney, Von Maur, and First Westroads Bank, while the largest collateral anchor and junior anchors at the property include Dick’s Sporting Goods, AMC Theatres, and Forever 21. The Forever 21 store at the subject is the only location operating in Nebraska after the retailer left Gateway Mall and Nebraska Crossings in 2019. The mall is a dominant shopping destination within Omaha, but there is a competing open-air shopping center in Village Pointe that is within seven miles and has a concentration of overlapping tenants with the subject, including Designer Shoe Warehouse (DSW) and Old Navy. Village Pointe targets an upscale clientele, and its overall tenant mix is considered superior to the subject’s tenant roster as it includes Apple, Lululemon, and Kendra Scott.

At issuance, Westroads Mall had an occupancy rate of 94.5% and in-line sales of $458 per square foot (psf). The occupancy rate declined slightly to 91.0% as of year-end (YE) 2022. The most recent tenant sales report (TSR) received for the mall is as of September 2021 when the mall reported in-line sales of $240 psf. The senior note reported a debt service coverage ratio (DSCR) of 1.65 times (x) at YE2022, compared with 1.54x at YE2021, 1.51x at YE2020, and 1.89x at YE2019, reflecting healthy performance despite declining sales during the pandemic.

DBRS Morningstar analyzed this loan based on the September 2022 appraisal value of $149.0 million, which is down significantly from the appraisal value at issuance of $242.0 million. This figure compares with the DBRS Morningstar value of $146.2 million derived in 2020 when the ratings were assigned. The appraiser’s value estimate implies a cap rate of 10.6% on the YE2022 NCF figure and an LTV of 71.5% on the outstanding loan balance as of the June 2023 remittance.

The Oaks Mall loan is secured by the fee interest in 581,849 sf of a 906,349-sf super regional mall in Gainesville, Florida. The property is approximately four miles from the University of Florida’s main campus and is anchored by Belk, two Dillard’s stores (one of which is collateral), and JCPenney (noncollateral). Major tenants JCPenney, Belk, and Forever 21 recently extended their leases an additional five years to 2028. At issuance, additional anchors, Macy’s and Dillard’s, were operating on ground leases. The Macy’s closed in 2018 and the ground-leased parcel was purchased by Dillard’s and released as collateral for the trust, with net proceeds of $4.9 million from the sale held in reserve as additional collateral. Dillard’s continues to operate a second store on the former Macy’s parcel. There was also a noncollateral Sears store at issuance, with the property and improvements owned by Seritage, until that anchor was closed in 2018. The former Sears box is now occupied by the University of Florida Health (UF Health) - The Oaks. UF Health’s ear, nose, and throat doctors’ offices previously occupied space in the adjacent Hampton Oaks Medical Plaza. The property could potentially add additional office and/or residential space after the City of Gainesville voted to rezone the property from retail to mixed-use in May 2019. The mall historically drew traffic from the nearby college campus, but Butler Plaza, a competing open-air shopping center that is the largest power center in the Southeastern United States with nearly 2.0 million sf of retail space, is also nearby and has become the primary retail destination for the area.

At issuance, the Oaks Mall had an occupancy rate of 96.8% and in-line sales of $368 psf. According to the YE2022 financial reporting, the property was 93.0% occupied compared with the YE2021 occupancy rate of 94.3%, while the September 2021 TSR reported in-line sales of $151 psf. Although occupancy has remained relatively stable, DBRS Morningstar notes cash flows have been trending downward since peaking at YE2018. The senior loan’s DSCR dropped to 1.19x at YE2019, from 1.46x at YE2018 and 1.97x at YE2017. According to the most recent financials, the senior note reported a YE2022 DSCR of 1.10x compared with the YE2021 DSCR of 1.17x, and the YE2020 figure of 0.86x. There was a year over year (YOY) increase in 2021 from 2020 attributed to a 36.8% decrease in operating expenses, while income remained static. Operating expenses have since begun to trend upward, as expected by DBRS Morningstar, given the largest decreases, which included a 52.9% decrease in property tax and a 143% decrease in other expenses, were not considered sustainable. The loan remains on the servicer’s watchlist as the DSCR remains below 75% of the issuer’s DSCR of 2.04x. The precipitous cash flow declines began before the loss of two anchor stores and accelerated following the closures. Although it is noteworthy that Dillard’s took one of the vacant boxes and a medical tenant took the other, the cash flow trends suggest the overall risks have increased sharply since issuance.

DBS Morningstar analyzed this loan based on the September 2022 appraisal value of $85.0 million, which is down significantly from the appraisal value at issuance of $227.0 million. This figure compares with the DBRS Morningstar value of $94.1 million derived in 2020 when the ratings were assigned. The appraiser’s value estimate implies a cap rate of 10.6% on the YE2022 NCF figure and an LTV of 101.2% on the outstanding loan balance as of the June 2023 remittance.

Given Brookfield’s recent request for maturity extensions on both loans (a request which appears to have been approved on the condition of principal paydown), DBRS Morningstar is cautiously optimistic and believes the firm is demonstrating an increased level of commitment to the subject malls but recognizes its recent willingness to turn other underperforming properties, like the Oaks Mall, which is the larger of the two malls, in its portfolio back to the lenders for other assets backing commercial mortgage backed securities loans. With the downgrades in July 2022 and as confirmed with this review, there are three classes with a combined balance of $50.5 million rated below investment grade, providing significant cushion against loss for the two outstanding classes above those three in the waterfall.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) 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/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022).

Class X-A is an IO certificate 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 the North American CMBS Surveillance Methodology (March 16, 2023), which can be found on https://www.dbrsmorningstar.com/research/410912.

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

DBRS Morningstar’s ratings on Class C and Class D had variances that were lower than the results implied by LTV Sizing Benchmarks based on the updated September 2022 appraisal values. These variances are warranted given the declining cash flows for the Oaks Mall and uncertain timeline for the property’s ultimate stabilization.

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 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.

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

North American Single-Asset/Single-Borrower Ratings Methodology (February 23, 2023;
https://www.dbrsmorningstar.com/research/410191)

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 (June 9, 2023;)
https://www.dbrsmorningstar.com/research/415687

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].