DBRS Morningstar Downgrades Ratings on Five Classes of WFRBS Commercial Mortgage Trust 2012-C10

DBRS Limited (DBRS Morningstar) downgraded its ratings on five classes of Commercial Mortgage Pass-Through Certificates, Series 2012-C10 issued by WFRBS Commercial Mortgage Trust 2012-C10 as follows:

-- Class X-B to BBB (high) (sf) from A (sf)
-- Class C to BBB (sf) from A (low) (sf)
-- Class D to CCC (sf) from BBB (low) (sf)
-- Class E to CCC (sf) from BB (low) (sf)
-- Class F to CCC (sf) from B (low) (sf)

In addition, DBRS Morningstar confirmed its ratings on the remaining classes as follows:

-- Class A-3 at AAA (sf)
-- Class A-FL at AAA (sf)
-- Class A-FX at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class A-S at AAA (sf)
-- Class X-A at AAA (sf)
-- Class B at AA (low) (sf)

The trends on all classes are Stable, with the exception of Classes D, E, and F, which carry no trend because of the distressed ratings. The rating downgrades reflect significant binary risk presented by the regional mall exposure and DBRS Morningstar's stressed value estimates relative to the overall recovery expectations for the pool's remaining loans. All loans are scheduled to mature in 2022, and DBRS Morningstar expects that some loans may default at maturity.

As of the January 2022 remittance, 68 of the original 85 loans remain in the pool, with an aggregate principal balance of $964.8 million, representing a collateral reduction of 26.1% since issuance. There are 21 loans, representing 15.8% of the current trust balance, that are fully defeased. The transaction is concentrated by property type as 18 loans, representing more than 40.0% of the current trust balance, are secured by retail properties. Five of these loans, representing 30.8% of the pool, are secured by regional malls. There is one loan, representing 7.9% of the current trust balance, in special servicing and 15 loans, representing 27.3% of the pool, are being monitored on the servicer’s watchlist.

The transaction’s only specially serviced loan, Dayton Mall (Prospectus ID#3, 7.9% of the pool), is secured by 778,487 square feet (sf) of a 1.4 million-sf regional mall in Dayton, Ohio. The loan transferred to special servicing in July 2021 after Washington Prime Group filed for bankruptcy. The sponsor has deemed the mall a noncore asset and has indicated that it does not intend to retain ownership of the property, and a receivership order was entered at the beginning of December 2021. The mall lost both its noncollateral anchor tenants in 2018, and both of those spaces remain vacant. The mall’s in-line space was approximately 92% occupied based on the September 2021 rent roll, with leases representing 14.2% of the net rentable area (NRA) scheduled to roll in the next 12 months. The loan reported a Q1 2021 debt service coverage ratio (DSCR) of 0.58 times (x), down from 0.90x at YE2020 and 0.99x at YE2019. The property has experienced a 69.1% decline in net cash flow since issuance. DBRS Morningstar expects a delayed disposition process given the challenges in backfilling two empty anchor boxes, nearby market competition, and the loan’s declining performance metrics as its September 2022 maturity approaches. DBRS Morningstar’s analysis included a liquidation scenario that assumed a loss severity in excess of 50.0%.

The Towne Mall loan (Prospectus ID#12, 2.0% of the pool) is secured by a Macerich-operated regional mall in Elizabethtown, Kentucky, 45 miles south of Louisville. This loan was added to the servicer’s watchlist in January 2020 for low occupancy and DSCR. The mall’s collateral Sears tenant (19.6% of NRA) vacated in 2018 and, outside of a seasonal Halloween tenant, the space has remained vacant. Cash flow has decreased year over year since issuance and as of Q3 2021, the DSCR was reported at 0.48x with an occupancy rate of 68.5%. The majority of the mall’s vacancies are concentrated in the former Sears wing of the mall, posing challenges to re-leasing efforts. Although the subject lacks direct competition in the immediate market, the loan faces increased refinance risk given the property’s tertiary market location, continued occupancy declines, and upcoming rollover, in addition to the current lack of liquidity for regional malls. DBRS Morningstar analyzed this loan with an elevated probability of default.

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/373262.

DBRS Morningstar materially deviated from its North American CMBS Insight Model when determining the rating assigned to Class D as the quantitative results suggested a higher rating. The material deviation is warranted given the uncertain loan-level event risk related to the loans secured by regional mall collateral, most of which have struggled amid the pandemic and may face difficulties refinancing at their respective maturity dates in 2022.

Classes X-A and X-B are interest-only (IO) certificates 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 ratings are subject to surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by DBRS Morningstar.

DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for the following loans in the transaction:

-- Prospectus ID#3 – Dayton Mall (7.9% of the pool) - DBRS Morningstar Hotlist Loan
-- Prospectus ID#5 – Rogue Valley Mall (5.1% of the pool) - DBRS Morningstar Hotlist Loan
-- Prospectus ID#6 – Animas Valley Mall (4.4% of the pool)
-- Prospectus ID#12 – Towne Mall (2.0% of the pool)

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com. The platform includes issuer and servicer data for most outstanding CMBS transactions (including non-DBRS Morningstar rated), as well as loan-level and transaction-level commentary for most DBRS Morningstar-rated and -monitored transactions.

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

The principal methodology is North American CMBS Surveillance Methodology (March 26, 2021), which can be found on dbrsmorningstar.com under Methodologies & Criteria. For a list of the structured-finance-related methodologies that may be used during the rating process, please see the DBRS Morningstar Global Structured Finance Related Methodologies document, which can be found on dbrsmorningstar.com in the Commentary tab under Regulatory Affairs. Please note that not every related methodology listed under a principal structured finance asset class methodology may be used to rate or monitor an individual structured finance or debt obligation.

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/baseline-macroeconomic-scenarios-application-to-credit-ratings.

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 info@dbrsmorningstar.com.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The DBRS Morningstar long-term rating scale definition indicates that 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.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at info@dbrsmorningstar.com.

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