DBRS, Inc. (DBRS Morningstar) downgraded three classes of Commercial Mortgage Pass-Through Certificates, Series 2014-MONT issued by WFLD 2014-MONT Mortgage Trust as follows:
-- Class B to BBB (sf) from AA (low) (sf)
-- Class C to BB (sf) from A (low) (sf)
-- Class D to B (low) (sf) from BBB (low) (sf)
In addition, DBRS Morningstar confirmed one class as follows:
-- Class A at AAA (sf)
DBRS Morningstar removed all ratings from Under Review with Negative Implications as a result of this rating action. All trends are Stable.
The 10-year interest-only loan with a fixed interest rate at 3.77% is secured by the fee-simple interest in approximately 836,000 square feet (sf) of the 1.3 million-sf Westfield Montgomery Mall in Bethesda, Maryland, located 15 miles north of Washington, D.C. DBRS Morningstar downgraded three classes because of the increased term risk following sustained cash flow declines year over year since 2019. In addition, the sponsor, Unibail-Rodamco-Westfield announced earlier this year that it plans to sell off its U.S. portfolio, including this asset, by YE2023. The announcement, combined with the loan’s scheduled maturity in August 2024 and a general lack of liquidity for this property type, also points to increased refinance risk.
The mall is anchored by 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 as part of a comprehensive expansion and renovation of the property and surrounding area. Given the sponsor’s announcement to offload its portfolio of assets, including this property, DBRS Morningstar assumes these plans have been shelved.
Property occupancy has improved after dipping during the Coronavirus Disease (COVID-19) pandemic. As of June 2022, the collateral was 89.8% occupied, up from 76.6% at YE2021 and in line with 90.0% at YE2019. Occupancy at issuance was 92.0%. Year-over-year cash flow declines point to downward pressure on rents and increasing and/or ongoing concessions, which, as of June 2022, continued to stress revenue. The annualized June 2022 net cash flow (NCF) was $25.8 million, equating to a debt service coverage ratio (DSCR) of 1.94 times (x). This marks an improvement from the YE2021 NCF of $22.0 million (with a DSCR of 1.65x) but remains down from pre-pandemic years, even as occupancy is rebounding. The YE2019 NCF and DSCR were $33.6 million and 2.51x, respectively, down from $39.1 million and 2.92x at issuance. More than $3.1 million in concessions was reportedly budgeted for 2022. Even after these free rent periods burn off, DBRS Morningstar expects that, barring a significant improvement in base rental rates, the asset is unlikely to recapture pre-pandemic performance.
As a mitigant to some of the concerns surrounding sustained performance declines, DBRS Morningstar points to historically strong sales and favorable market positioning as support for the confirmation of Class A. Reported sales have remained strong even through the pandemic, indicating steady foot traffic and strong market demographics. According to the June 2022 tenant sales report, in-line tenants occupying less than 10,000 sf reported sales of $759 per sf (psf); excluding Apple Store (Apple) and Tesla, in-line sales were at $536 psf. This is comparable to $533 psf reported for YE2021 and an improvement from $375 psf for the trailing 12 months ended March 31, 2021. At issuance, in-line sales were reported to be $532 psf.
Westfield Montgomery benefits from a strong market location in one of Maryland’s most affluent counties with high barriers to entry. Based on the most recent site inspection, the property appears to be well maintained and continues to attract new tenants. The subject’s tenant roster is strong and includes tenants such as Apple, Tesla, Free People, Coach, and Sephora, as well as entertainment venues such as Lucky Strike and AMC Theatres. The nearest competing mall is Westfield Wheaton, located seven miles away; however, the subject offers a higher-end tenant mix and appears to be in better condition. Although DBRS Morningstar believes that recent cash flow trends suggest the as-is value for the mall has fallen significantly since issuance, the Class A certificate is considered to be well insulated from potential loss.
DBRS Morningstar made positive qualitative adjustments to the final loan-to-value (LTV) sizing benchmarks used for this rating analysis, totaling 4.0%, to account for property quality and market fundamentals.
The DBRS Morningstar ratings assigned to Classes A, B, C, and D are higher than the results implied by the LTV sizing benchmarks. The variance is warranted given DBRS Morningstar’s expectations that cash flow will continue to stabilize as concessions burn off and rental rates rightsize.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) 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/396929/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings (May 17, 2022).
All ratings are subject to surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by DBRS Morningstar.
All figures are in U.S. dollars unless otherwise noted.
The principal methodology is the North American CMBS Surveillance Methodology (October 3, 2022), 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.
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.
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