DBRS Morningstar Confirms Ratings on All Classes of DBWF 2015-LCM Mortgage Trust

DBRS Limited (DBRS Morningstar) confirmed its ratings on all classes of Commercial Mortgage Pass-Through Certificates, Series 2015-LCM issued by DBWF 2015-LCM Mortgage Trust as follows:

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class X-A at AAA (sf)
-- Class B at AA (high) (sf)
-- Class C at A (high) (sf)
-- Class D at BBB (high) (sf)
-- Class E at BB (low) (sf)
-- Class F at BB (low) (sf)

All trends are Stable.

The rating confirmations reflect the overall stable performance for the underlying collateral mall, which benefits from a nontraditional anchor and major tenant mix that includes Target, Costco Wholesale (Costco), 24 Hour Fitness, and Round1 Bowling & Amusement, as well as Macy’s and JCPenney, a mix that fits the mall’s location within a well-trafficked commercial corridor and surrounded by other big-box development, including The Home Depot and Albertsons. Sales continue to trend upward and the in-place cash flows remain healthy, but performance overall continues to lag issuance expectations. DBRS Morningstar observed these trends when it assigned ratings to the transaction in 2020 and noted mitigating factors in the strong sponsorship and attractive location, and, in recent years, has noted sales trends that show improving metrics.

The collateral for the underlying loan consists of the fee-simple and leasehold interests in the 2.1 million-square-foot (sf) Lakewood Center mall in Lakewood, California, within the southeast portion of the Los Angeles area, about 10 miles north of Long Beach. At issuance, the whole loan of $410.0 million consisted of $240.0 million of senior debt and $170.0 million of junior debt. The subject transaction is backed by $120.0 million of the senior debt and the entirety of the junior debt. The remaining $120.0 million of senior debt is secured in the DBRS Morningstar-rated COMM 2015-CCRE24 Mortgage Trust transaction. The trust loan has an 11-year term and amortizes over a 30-year schedule, maturing in June 2026. As of the June 2023 remittance, the trust debt had amortized by 12.1% with a current trust balance of $254.9 million. The loan sponsor, Macerich Company (Macerich), which acquired the remaining 49.0% ownership interest in the mall in 2014 for around $1.8 billion, owns and operates the property.

Per the December 2022 rent roll, the property was 91.2% occupied, consistent with the prior year’s occupancy levels but below the occupancy rate of 97.8% at issuance. The largest tenants include Macy’s (17.5% of the net rentable area (NRA), lease expires in June 2030), Costco (8.0% of the NRA, lease expires in February 2029), JCPenney (7.8% of the NRA, lease expires in June 2025), and Target (7.7% of the NRA, lease expires in January 2025). Major in-line tenants include Forever 21 (3.9% of the NRA, lease expires in January 2024), 24 Hour Fitness (2.2% of the NRA, lease expires in December 2027), Best Buy (2.2% of the NRA, lease expires in January 2024), and Round1 Bowling & Amusement (2.1% of the NRA, lease expires in August 2028). Near-term rollover risk is moderate over the next 12 months, with tenants representing about 16% of the NRA scheduled to roll, including major tenants Forever 21 and Best Buy. The property also had exposure to Bed Bath & Beyond, which occupied approximately 1.3% of the NRA and vacated its space at lease expiration in January 2023. The servicer confirmed the space remains vacant and is being marketed for lease. DBRS Morningstar has requested a leasing update for the rolling tenants and the servicer’s response is pending.

DBRS Morningstar notes that sales over the past few years have continued to show recovery from the lows experienced amid the Coronavirus Disease (COVID-19) pandemic. As of the trailing 12-month (T-12) period ended December 31, 2022, gross sales across all tenant categories (excluding Costco) were reported at $395.18 per square foot (psf), up from the prior-year figure of $392.01 psf. Department store anchors Macy’s and JCPenney reported average sales of $103.26 psf and $108.76 psf, respectively, compared with the prior-year figures of $106.04 psf and $102.98 psf, respectively. In addition, in-line tenants have reported average sales improvements over the same period, with the report for the T-12 period ended December 31, 2022, showing tenants with less than 10,000 sf averaging sales of $340.98 psf, up from $335.05 psf the year prior.

Based on the most recent financials, the servicer reported a YE2022 net cash flow (NCF) of $28.7 million, compared with the YE2021 NCF of $26.9 million and YE2020 NCF of $29.3 million. In addition, the loan reported a debt service coverage ratio (DSCR) of 1.31 times (x) at YE2022, up slightly over the last few years and relatively in line with DBRS Morningstar’s DSCR of 1.38x. Despite depressed cash flow from the pre-pandemic years, the overall risk profile remains stable and consistent with DBRS Morningstar’s expectations when ratings were assigned in 2020.

In its analysis for this review, DBRS Morningstar derived a stressed NCF based on a haircut to the YE2022 NCF of $28.7 million, resulting in an updated DBRS Morningstar NCF of $28.1 million. A capitalization rate of 7.8% was applied, resulting in a DBRS Morningstar value of $362.9 million. This value is down by 6.7% from the DBRS Morningstar value of $389.0 million derived in 2020. The 2023 DBRS Morningstar value implies a loan-to-value (LTV) ratio of 93.6%, compared with the LTV of 87.3% in 2020. DBRS Morningstar made positive adjustments to the LTV sizing benchmarks to give credit to the ongoing amortization and desirable location within the Los Angeles market. DBRS Morningstar removed the positive qualitative adjustments attributed to the property quality considering the age of the property and generally outdated aesthetic. The amortization credit was reduced from the amount given in prior years given the actual paydown to date and proximity to maturity.

DBRS Morningstar’s rating on Class F is higher than the results suggested by the LTV sizing benchmarks. This variance is reflective of the lower DBRS Morningstar value with this review, driven by the cash flow decline from the pre-pandemic figures. The variance is warranted given the increasing sales and cash flow trends over the last few years and the strong sponsorship in Macerich, which contributed significant equity in 2014 to acquire the minority interest in the property. Although the property is older and has sustained occupancy at a level below issuance for several years, DBRS Morningstar also notes there is approximately $69 million of cushion rated below investment grade in the subject transaction’s bond stack, a significant amount should these increased risks continue to persist through the remainder of the loan term and affect the loan’s refinanceability.

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).

Class X-A is an interest-only (IO) certificate that references 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.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
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 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

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

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

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