Morningstar DBRS Downgrades Credit Ratings on WFRBS Commercial Mortgage Trust 2012-C10

DBRS Limited (Morningstar DBRS) downgraded the credit rating on one class of Commercial Mortgage Pass-Through Certificates, Series 2012-C10 issued by WFRBS Commercial Mortgage Trust 2012-C10 as follows:

-- Class D to C (sf) from CCC (sf)

In addition, Morningstar DBRS confirmed the following credit ratings:

-- Class B at AA (low) (sf)
-- Class X-B at BBB (high) (sf)
-- Class C at BBB (sf)
-- Class E at C (sf)
-- Class F at C (sf)

Morningstar DBRS also changed the trends on Classes X-B and C to Stable. Classes D, E, and F no longer carry a trend given all are assigned credit ratings that typically do not carry trends in commercial mortgage-backed securities (CMBS) ratings.

The credit rating downgrade reflects the increased loss projections for the four remaining loans in the pool, the largest of which is the only loan not currently in special servicing and is backed by an office property with declining performance. All specially serviced loans are past their maturity in 4Q 2022. At the last credit rating action in April 2023, Morningstar DBRS downgraded Classes E and F to C (sf). Morningstar DBRS’ analysis was based on a liquidation scenario applied to the remaining loans in the pool, which resulted in approximately $89.1 million in total losses, which would result in full write down of the nonrated Class G, as well as Classes E and F, which are rated C (sf), and a partial write down of Class D, supporting the downgrade to C (sf) with this review. The projected losses remain contained to the lower portion of the remaining capital stack, with sufficient cushion deemed to be remaining for Classes B and C, supporting the Stable trends on these Classes.

Since Morningstar DBRS’ last surveillance review, two specially serviced loans, Animas Valley Mall (Prospectus ID#6) and Towne Mall (Prospectus ID#12), were liquidated from the trust at a cumulative realized loss of $10.5 million, which was contained to the unrated Class G certificate and was collectively lower than Morningstar DBRS’ loss expectations for those two loans. In addition, an underperforming loan in Republic Plaza (Prospectus ID#1; 35.9% of the pool), was returned to the master servicer as a corrected mortgage with the loan maturity extended until March 2026.

The largest loan in special servicing, Dayton Mall (Prospectus ID#3; 31.1% of the pool) is backed by a regional mall in Dayton, Ohio, and has reported performance declines since the peak of the COVID-19 pandemic, with debt service coverage ratios (DSCRs) reported well below breakeven for the past few years. The noncollateral anchors are an operational Macy’s and a nonowned vacant Sears box that was recently sold to Crossroads Church based in Cincinnati. The collateral anchor tenant is JCPenney, which occupies 178,676 square feet (sf) (representing 22.9% of the collateral NRA), with other major tenants, including Morris Furniture, Dick’s sporting Goods and Ross Dress for Less. Per recent leasing update provided by the servicer, DSW and Dick’s Sporting Goods have extended their leases for another five years through 2028. The receiver is also working toward retaining existing tenants and increasing occupancy. Per a January 2024 rent roll, the occupancy rate has increased to 90.0%; however, Morningstar DBRS notes that the majority of the leases signed in 2023 are short term, and there is a significant number of lease expirations scheduled over the next 12 to 18 months. The August 2023 appraisal valued the property at $43.9 million, up slightly from the August 2022 value of $40.2 million; however, significantly lower than issuance value of $132 million. Morningstar DBRS maintained a stressed haircut to the most recent appraisal in a liquidation scenario, resulting in loss severity approaching 63%.

The second remaining loan in special servicing, Rogue Valley Mall (Prospectus ID#5;19.9% of the pool) is secured by a mall in Medford, Oregon. The property was 82.7% occupied per September 2023 financials with a DSCR of 1.13 times (x), down from 92.9% occupancy and 1.39x DSCR in YE2021. The special servicer is currently dual-tracking foreclosure while continuing negotiations with the borrower regarding a possible extension to allow time to refinance the loan. The largest collateral tenant is JCPenney (18.9% of NRA, lease expiry October 2026). Noncollateral tenants include Macy’s and Kohl’s. The property was reappraised in February 2023 for an appraised value of $32.5 million, which represents a 59.4% decline from the issuance value of $80.0 million. Morningstar DBRS’ analysis included a liquidation scenario based on a stress to the most recent appraised value, resulting in a projected loss severity exceeding 50%.

The largest loan in the pool, Republic Plaza, is secured by a 1.3 million-sf, Class A office property in downtown Denver. The building also features 48,371 sf of ground-floor retail space. The loan transferred to special servicing in November 2022 for imminent default. A modification was finalized in June 2023, the terms of which included an extension of the maturity date to March 2026 and a change to interest-only debt service payments through the extended term. The loan transferred back to the master servicer as a corrected mortgage, which also called for the loan to be cash managed through maturity. The borrower also made a principal payment of $6 million and contributed equity to the leasing reserve. According to the March 2024 loan-level reserve report, the loan had approximately $20.3 million held between replacement and leasing reserves.

The property has been reporting occupancy declines for the past several years because of tenant departures and downsizing with additional leases scheduled to roll by YE2024. Per the YE2023 financials, the DSCR was reported at 1.16x with an occupancy rate of 67%, down from the YE2022 occupancy rate of 79% and DSCR of 1.29x. At last review, Morningstar DBRS had projected the occupancy to decline based on high rollover and tenant downsizing in 2023. 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. Per the Cushman and Wakefield website, there is approximately 371,933 sf (27.8% of the NRA) being marketed for lease at an average rental rate of $28 per sf (psf). As per Reis, office properties in the Central Business District submarket reported a vacancy rate of 25.0% with an average effective rental rate of $34.9 psf as of YE2023. The December 2022 appraisal value of $298.1 million represents a 44.3% decline from the issuance value of $535.4 million. Although the loan has been modified and is back with the master servicer, Morningstar DBRS believes a loss at resolution remains likely. As such, the loan was analyzed with a liquidation scenario, which is based on a stressed haircut to the most recent appraised value given the upcoming tenant rollover, resulting in a loss severity approaching 17%.

Using these value estimates, Morningstar DBRS concluded that there are likely to be sufficient funds to repay classes B and C, with losses affecting Classes D, E, F, and G. Morningstar DBRS notes that given the pool concentration and prior default of the remaining loans, there is increased propensity of interest shortfalls for investment-grade rated bonds. Should the performance of the assets deteriorate further and vacancies remain unfilled, Morningstar DBRS’ value estimates may be reduced, and classes could be subject to downgrade pressure.

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

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://dbrs.morningstar.com/research/427030 (January 23, 2024).

Class X-B 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 credit ratings are subject to surveillance, which could result in credit ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by Morningstar DBRS.

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

The principal methodology is North American CMBS Surveillance Methodology (March 1, 2024), https://dbrs.morningstar.com/research/428798.

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

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.

Morningstar DBRS 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. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The Morningstar DBRS Long-Term Obligation Rating Scale definition indicates that credit 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.

DBRS Limited
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Tel. +1 416 593-5577

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

-- North American CMBS Multi-Borrower Rating Methodology (March 1, 2024), https://dbrs.morningstar.com/research/428797
-- North American CMBS Insight Model version 1.2.0.0 (March 1, 2024), https://dbrs.morningstar.com/research/428797
-- DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 22, 2023), https://dbrs.morningstar.com/research/420982
-- North American Commercial Mortgage Servicer Rankings (August 23, 2023), https://dbrs.morningstar.com/research/419592
-- Rating North American CMBS Interest-Only Certificates (December 13, 2023), https://dbrs.morningstar.com/research/425261
-- Legal Criteria for U.S. Structured Finance (December 7, 2023), https://dbrs.morningstar.com/research/425081

A description of how Morningstar DBRS analyzes structured finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/417279. (July 17, 2023)

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