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

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

-- Class A to AA (low) (sf) from AAA (sf)
-- Class B to BBB (low) (sf) from BBB (sf)
-- Class C to B (low) (sf) from BB (sf)
-- Class D to CCC (sf) from B (low) (sf)

Morningstar DBRS changed the trends on Classes A, B, and C to Negative from Stable. Class D has a credit rating that does not carry a trend in commercial mortgage-backed securities (CMBS).

The rating downgrades and Negative trends are reflective of the elevated risk of potential loss to the trust given the updated appraised value reported for the regional mall that secures the trust's only loan. The loan transferred to special servicing in April 2024 at the borrower's request, ahead of its August 2024 maturity. In August 2024, the loan was modified, extending loan maturity by two years to August 2026. As part of the modification, the borrower paid down the loan by $16.0 million and is required to further deleverage the loan by an additional $5.5 million, spread over the loan's remaining 24-month term. The loan will also be subject to an excess cash flow sweep with funds to be used for leasing costs and capital expenditures.

An updated appraisal completed in June 2024 valued the property at $353.0 million, down 48.1% from the issuance appraisal of $680.0 million. The updated value reflects a loan-to-value ratio (LTV) of 94.6% and implies a cap rate of 7.2% based on the YE2023 NCF, which Morningstar DBRS views as slightly aggressive for regional malls in the current interest rate and investment sales environments. As such, Morningstar DBRS applied a stressed haircut to the appraised value to account for any outstanding servicing advances, fees, and the potential for further value decline. Morningstar DBRS' concluded value of $317.7 million implies an 8.0% cap rate based on the YE2023 net cash flow (NCF) and represents a decrease of 13.5% from Morningstar DBRS' previous value of $367.3 million, derived at the time of the November 2023 credit rating action. The updated Morningstar DBRS value indicates the increased propensity for loss to the Class D certificate and high sensitivity to the Class C certificate should the value decline further. Morningstar DBRS also considered the high Morningstar DBRS LTV of 105.1%, which indicates significant downward pressure on the senior-most bonds. These considerations were the primary drivers of the downgrades and Negative trends.

The 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 the increase in foot traffic to brick-and-mortar retail as well as increasing interest rates.

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, which the sponsors purchased in 2017 with the intention of redeveloping it as part of a comprehensive expansion and renovation of the property and surrounding area. As per the June 2024 rent roll, the collateral was 92.6% occupied. The largest collateral tenants include American Multi-Cinema (AMC; 7.3% of the net rental area (NRA), lease expiry in March 2034), Forever 21 (2.4% of the NRA, lease expiry in April 2025), and Lucky Strike (1.8% of the NRA, lease expiry in January 2026). Upcoming rollover risk on the remaining collateral tenants is moderate as only 15.5% of the collateral NRA has lease expirations through YE2025.

The servicer reported NCF of $25.3 million for YE2023 compared with $28.1 million for YE2022 and $33.6 million for pre-pandemic YE2019. According to the tenant sales report for the trailing 12 months (T-12) ended June 30, 2024, in-line tenants reported sales of $938 per square foot (psf). When Apple and Tesla were removed, in-line sales were reported at $641 psf, a significant improvement when compared with $554 psf for the T-12 ended June 30, 2023. During the same period, the 16-screen AMC reported sales of just less than $414,000 per screen, an improvement from the reported sales of $323,000 per screen in June 2023.

The Morningstar DBRS ratings assigned to Classes A and B are higher than the results implied by the LTV sizing benchmarks. The variance is warranted given that Morningstar DBRS considers the bonds to be well insulated from loss. While Morningstar DBRS remains concerned about the loan's high leverage point and potential for further value decline, there have been positive developments over the past year, including the finalization of the loan modification and a principal curtailment, which help to offset near-term default risk and indicate continued sponsor commitment, as well as the property-level performance that continues to stabilize.

Morningstar DBRS' credit ratings on the applicable classes address the credit risk associated with the identified financial obligations in accordance with the relevant transaction documents. Where applicable, a description of these financial obligations can be found in the transactions' respective press releases at issuance.

Morningstar DBRS' long-term credit ratings provide opinions on risk of default. Morningstar DBRS considers risk of default to be the risk that an issuer will fail to satisfy the financial obligations in accordance with the terms under which a long-term obligation has been issued. The Morningstar DBRS short-term debt rating scale provides an opinion on the risk that an issuer will not meet its short-term financial obligations in a timely manner.

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 Factors in Credit Ratings (August 13, 2024), at https://dbrs.morningstar.com/research/437781.

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 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.

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS' outlooks and credit ratings are monitored.

DBRS, Inc.
22 West Washington Street
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 (September 19, 2024), https://dbrs.morningstar.com/research/439699

-- Legal Criteria for U.S. Structured Finance (April 15, 2024), https://dbrs.morningstar.com/research/431205

-- Morningstar DBRS North American Commercial Real Estate Property Analysis Criteria (September 19, 2024), https://dbrs.morningstar.com/research/439702

-- North American Commercial Mortgage Servicer Rankings (August 23, 2024), https://dbrs.morningstar.com/research/438283

For more information on this credit or on this industry, visit https://dbrs.morningstar.com or contact us at info-DBRS@morningstar.com.