DBRS Morningstar Confirms Credit Ratings on All Classes of WFLD 2014-MONT Mortgage Trust

DBRS Limited (DBRS Morningstar) confirmed its credit ratings on all classes of Commercial Mortgage Pass-Through Certificates, Series 2014-MONT issued by WFLD 2014-MONT Mortgage Trust as follows:

-- Class A at AAA (sf)
-- Class B at BBB (sf)
-- Class C at BB (sf)
-- Class D at B (low) (sf)

All trends are Stable.

The 10-year interest-only loan is secured by 835,597 square feet (sf) of the 1.3 million-sf Westfield Montgomery Mall in Bethesda, Maryland, located 15 miles north of Washington, D.C. The loan sponsor is Unibail-Rodamco-Westfield, which had previously announced its intention to sell its U.S. portfolio and exit the market by YE2023. Plans to divest its holdings have slowed amid increasing foot traffic to brick-and-mortar retail as well as increasing interest rates.

The credit rating confirmations and Stable trends reflect a transaction performance that has remained in line with DBRS Morningstar’s expectations since the last rating action, given the stable-to-improving trends observed in the underlying collateral’s reported tenant sales and cash flow, as described in further detail below. In November 2022, DBRS Morningstar downgraded Classes B, C, and D because of sustained cash flow declines observed year-over-year since 2019. DBRS Morningstar also pointed to the sponsor’s announcement that it intended to divest its portfolio of U.S. retail assets, coupled with a general lack of liquidity for this property type, as evidence for increased refinance risk at the loan’s scheduled maturity in August 2024. Since the November 2022 rating action, property cash flow and tenant sales have continued to stabilize. Additionally, the sponsor is moving forward with plans to redevelop the vacant Sears pad, pointing to increasing foot traffic and ongoing investment in the asset. Despite these improvements, DBRS Morningstar remains cautious regarding the loan’s near-term maturity given the current interest rate environment and likelihood that additional capital will be required to refinance or retire the current debt. As part of this review, DBRS Morningstar derived an updated value of $367.3 million, which is indicative of a loan to value ratio (LTV) of 95.3%.

The mall is anchored by tenants Macy’s, Macy’s Home, and Nordstrom, which are not part of the loan collateral; however, Nordstrom operates on a ground lease expiring in October 2025. Additionally, there is a vacant Sears box at the property that the sponsor purchased in 2017 with the intention of redeveloping and renovating the property and surrounding area. As per the March 2023 rent roll, the collateral was 91.0% occupied, up from the YE2021 figure of 76.6% and relatively in line with the 92.0% at issuance. The largest collateral tenants include American Multi-Cinema (7.3% of the net rental area (NRA), lease expiry in March 2034), Forever 21 (2.4% of the NRA, lease expired in April 2023), and Alex Baby & Toys (2.0% of the NRA, lease expiry in April 2025). While the rent roll does not list any extension options for Forever 21, the store appears to be open according to the Westfield Montgomery website. Upcoming rollover risk among the remaining collateral tenants is minimal as tenants occupying only 4.4% of the collateral NRA have lease expirations through YE2024.

The servicer reported a YE2022 net cash flow (NCF) of $28.1 million and debt service coverage ratio (DSCR) of 2.10 times (x) compared with the YE2021 figures of $22.0 million and 1.65x, respectively. Although cash flow has improved over the prior reporting year, it remains below the pre-pandemic figure of $33.6 million as of YE2019 and the issuer’s underwritten figure of $35.7 million. According to the tenant sales report for the trailing 12 months (T-12) ended June 30, 2023, in-line tenants occupying less than 10,000 sf reported sales of $734 per square foot (psf). When Apple and Tesla are removed from the total, in-line sales were reported at $554 psf, a marked improvement compared with in-line sales of $481 psf for the T-12 ended June 30, 2020. DBRS Morningstar believes it is unlikely the property will be able to recapture pre-pandemic performance prior to loan maturity.

For purposes of this review, DBRS Morningstar derived an NCF of $27.5 million, based on a haircut to the YE2022 reported NCF of $28.1 million. Using a capitalization rate of 7.5%, DBRS Morningstar concluded a value of $367.3 million, representing a variance of -45.9% from the appraised value of $680.0 million at issuance. The 2023 DBRS Morningstar value implies an LTV of 95.3%, compared with the DBRS Morningstar LTV of 103.7% in 2022 and the LTV of 51.5% on the appraised value at issuance. DBRS Morningstar also maintained positive adjustments to the LTV sizing benchmarks totaling 4%, to give credit to property quality and desirable location within the submarket.

DRBS Morningstar recognizes that the lack of amortization and high leverage point of the transaction could pose an elevated refinance risk as the loan approaches maturity. In a refinance scenario, takeout rates will probably be higher than the current interest rate of 3.7%. Prospective buyers will likely need to front capital to complete a purchase of the property based on the DBRS Morningstar LTV. DBRS Morningstar addressed these concerns in its November 2022 downgrade of Classes B, C and D. In confirming the credit ratings of all classes with the current review, DBRS Morningstar notes that its expectations for the loan remain largely unchanged.

The DBRS Morningstar rating assigned to Class A is higher than the results implied by the LTV sizing benchmarks by more than three notches. The variance is warranted given the continued stabilization of loan performance, improving sales and occupancy, and the relatively low leverage point for the Class A balance.

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/416784 (July 4, 2023).

All credit ratings are subject to surveillance, which could result in credit 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 credit rating was initiated at the request of the rated entity.

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

This is a solicited credit rating.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the credit rating process.

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577

The credit 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 (October 19, 2023; https://www.dbrsmorningstar.com/research/422174)

DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 22, 2023; https://www.dbrsmorningstar.com/research/420982)

Interest Rate Stresses for U.S. Structured Finance Transactions (June 9, 2023) https://www.dbrsmorningstar.com/research/415687

North American Commercial Mortgage Servicer Rankings (August 23, 2023; https://www.dbrsmorningstar.com/research/419592)

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

A description of how DBRS Morningstar analyzes structured finance transactions and how the methodologies are collectively applied can be found at https://www.dbrsmorningstar.com/research/417279.

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