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

DBRS, Inc. (Morningstar DBRS) confirmed its credit ratings on the COMM 2012-LTRT Commercial Mortgage Pass-Through Certificates, Series 2012-LTRT issued by COMM 2012-LTRT Mortgage Trust, as follows:

-- 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 Class D and Class E, which have credit ratings that do not typically carry a trend in commercial mortgage backed securities (CMBS) credit ratings.

The credit rating confirmations reflect Morningstar DBRS' ultimate expectation of recoverability based on the September 2022 appraisal values obtained by the servicer for both of the collateral malls backing the loans in the transaction. As Morningstar DBRS expected, property level performance has remained stagnant over the last two years as evidenced by the aggregate servicer reported YE 2023 net cash flow (NCF) of $22.8 million, which is down by $2.0 million from the YE2022 figure. While Morningstar DBRS recognizes the relatively healthy debt service coverage ratios (DSCR) for each loan of above 1.20x, there remains increased credit risk for refinancing at the upcoming October 2024 maturity dates for both loans given both of the current fixed interest rates are below 4.50% and current market rates would result in much lower DSCRs.

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. The loans are not cross collateralized or cross defaulted. Both loans were originally scheduled to mature in October 2022; however, the servicer granted a two-year extension for each and the loans now mature in October 2024. Morningstar DBRS has requested the full terms of the loan modifications from the servicer to determine the stipulated specific paydown requirements, if any; however, the servicer has not provided those to date. As of the June 2024 remittance, the loans report an aggregate senior note balance of $174.1 million, down from $192.5 million at the prior credit rating action in June 2023 and $209.7 million in October 2022 when the loan was modified. Given the reporting shows principal paydown of $35.7 million since October 2022, reducing the collateral balance by about 17.0%, Morningstar DBRS believes it is likely that 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; Morningstar DBRS inquired regarding the current mezzanine debt balance but has not yet received an update.

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 mall faces upcoming tenant rollover risk comprising 33.2% of net rentable area (NRA) in 2024 including major tenant AMC Theaters (6.8% of NRA; December 2024 lease expiration) and 5.7% of NRA in 2025, including major tenant H&M (2.4% of NRA; January 2025 lease expiration). 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 was 94.5% occupied and had in-line sales of $458 per square foot (psf). The occupancy rate has recently increased to 95.89% as of YE 2023, up from 91.0% as of YE 2022. Morningstar DBRS has not received updated sales since the September 2021 tenant sales report (TSR), which showed very low in-line sales of $240 psf. That figure is believed to be at least partially affected by the coronavirus pandemic but the cash flow trends for the property suggest performance continues to lag issuance expectations. The senior note reported a DSCR of 1.57 times (x) at YE 2023, generally in line with figures reported since 2020.

Given the continued declines in the property's cash flow performance, Morningstar DBRS maintained the previous surveillance credit rating action's approach, which was based on the September 2022 appraisal value of $149.0 million. That figure is down significantly from the appraisal value at issuance of $242.0 million. This value is also generally in line with the Morningstar DBRS value of $146.2 million, initially derived in 2020 when the credit ratings were assigned. The appraiser's value estimate implies a cap rate of 9.7% on the YE2023 NCF figure and an LTV of 63.2% on the outstanding loan balance as of the June 2024 remittance. Although the decline in cash flows in 2023 suggests the possibility that the as-is value could have declined since the 2022 appraisal, the continued paydown of the loan through the remainder of the term mitigates this risk. Should the property's financial performance continue to deteriorate, Morningstar DBRS could elect to further stress the value for future surveillance reviews.

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 by an additional five years to 2028. Former anchor 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. 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 YE 2023 financial reporting, the property was 94.0% occupied, generally flat since 2021. The most recent sales data available is as of the September 2021 TSR, which reported in-line sales of $151 psf. Although occupancy has remained relatively stable, Morningstar DBRS notes cash flows have been trending downward since peaking at YE2018. These trends were most recently demonstrated by the YE 2023 NCF of $8.4 million, down $1.5 million from the 2021 figure. Because of recent principal paydown, the senior note reported an improved YE2023 DSCR of 1.23x, compared with 1.10x for the year prior.

Given property performance remains depressed, Morningstar DBRS maintained the analysis performed at the previous credit rating action when this loan was analyzed based on the September 2022 appraisal value of $85.0 million. This figure compares with the Morningstar DBRS value of $94.1 million derived in 2020 when the credit ratings were assigned. The 2022 appraisal is down significantly from the appraisal value at issuance of $227.0 million. The appraiser's value estimate implies a cap rate of 9.8% on the YE2023 NCF figure and an LTV of 94.0% on the outstanding loan balance as of the June 2024 remittance. Similarly to the above note regarding the potential implications of further cash flow declines for the Westroads Mall property, Morningstar DBRS also notes this value could be further stressed for future reviews should cash flow trends continue to deteriorate.

Morningstar DBRS considers the ongoing principal paydown by Brookfield, albeit likely a condition of maturity extensions for both loans, demonstrates an increased level of commitment to the subject malls. However, Morningstar DBRS remains cautiously optimistic given Brookfield's willingness to turn other underperforming properties, similar to the Oaks Mall, which is the larger of the two malls, in its portfolio back to the lenders for other assets backing CMBS loans. In addition, the three classes rated below investment grade together have an aggregate balance of $50.5 million, providing significant cushion against loss for the two outstanding classes most senior in the waterfall.

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 (January 23, 2024; https://dbrs.morningstar.com/research/427030).

Classes X-A is an interest-only (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 credit ratings are subject to surveillance, which could result in credit ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by Morningstar DBRS.

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 Morningstar DBRS credit ratings on the Class A2, Class B, 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 both malls and uncertain timeline for the property's ultimate stabilization coupled with the upcoming maturity date. 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, Inc.
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Chicago, IL 60602 USA
Tel. +1 312 332-3429

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

North American Single-Asset/Single-Borrower Ratings Methodology (March 1, 2024; https://dbrs.morningstar.com/research/428799)

Rating North American CMBS Interest-Only Certificates (December 13, 2023; https://dbrs.morningstar.com/research/425261)

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)

Legal Criteria for U.S. Structured Finance (April 15, 2024; https://dbrs.morningstar.com/research/431205/legal-criteria-for-us-structured-finance)

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