DBRS Upgrades Two Classes of GS Mortgage Securities Trust, Series 2011-GC3, and Changes Trends on Two Classes

DBRS, Inc. (DBRS) has today upgraded two classes of Commercial Mortgage Pass-Through Certificates Series 2011-GC3 issued by GS Mortgage Securities Trust, Series 2011-GC3 as follows:

-- Class C to AA (high) (sf) from AA (low) (sf)
-- Class D to A (sf) from BBB (sf)

Class A-2 has fully repaid and, as such, DBRS has discontinued the rating. DBRS also confirmed the ratings of the six remaining classes as follows:

-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class B at AAA (sf)
-- Class E at BB (high) (sf)
-- Class F at B (sf)
-- Class X at AAA (sf)

Additionally, DBRS has changed the trends on Classes E and F to Positive from Stable. All remaining trends are Stable. DBRS does not rate the first lost piece, Class G.

These rating actions reflect the strong performance of the transaction, which has experienced collateral reduction of 42.2% since issuance, with 40 of the original 57 loans remaining in the pool as of the February 2016 remittance report. The 17 loans that have paid out were repaid at their respective maturity dates. There are two loans scheduled for a March 2016 maturity date in Prospectus ID #21, Doubletree San Diego (2.0% of the pool) and Prospectus ID #52, Harper Crossing (0.42% of the pool). As both loans are exhibiting healthy credit metrics with DBRS Exit Debt Yields of 24.6% and 9.9%, respectively, based on the YE2014 cash flows. As such, DBRS expects that both will repay at their scheduled maturity dates. The bulk of the remaining loans in the pool were structured with ten-year terms and will mature in 2020 and 2021.

The transaction benefits from strong overall credit metrics with a weighted-average (WA) debt service coverage ratio (DSCR) of 2.10 times (x) and WA debt yield of 15.0% as of the YE2014 figures; these metrics compare with the issuance levels of 1.80x and 12.0%, respectively. The performance for the largest 13 non-defeased loans has also been quite strong since issuance with WA net cash flow (NCF) growth of 25.9% over the DBRS underwritten figures at YE2014 and a WA DSCR of 2.49x for those 13 loans. The annualized Q3 2015 figures show that these trends continued into 2015 and DBRS expects the full year-end reporting for 2015 to show similar growth and performance patterns for the pool overall. The transaction also benefits from four defeased loans in the pool, which represent 7.10% of the overall balance and include two loans in the Top 15.

As of the February 2016 remittance report, there are no loans in special servicing and five loans representing 16.6% of the pool balance on the servicer’s watchlist. None of the loans are being monitored for cash flow declines; however, two of the loans were placed on the watchlist for monitoring through the upcoming March 2016 maturity dates and the other three were placed on the watchlist for relatively minimal rollover at single properties within a portfolio loan or for deferred maintenance items. The remaining transaction balance is heavily concentrated in retail properties, with 78.36% of the pool secured by anchored retail properties and regional malls. The two regional malls in the transaction are Prospectus ID #4, Cape Cod Mall (11.54% of the pool) and Prospectus ID #7, Oxford Valley Mall (8.04% of the pool). These two loans are detailed below.

The Cape Cod Mall loan is secured by 522,000 square feet (sf) of a 722,000 sf regional mall located in Hyannis, Massachusetts. The subject is the only mall on Cape Cod and is anchored by Macy’s (not collateral), Sears (25.9% of the collateral net rentable area (NRA) on a lease through November 2019) and Regal Cinema (9.3% of the collateral NRA on a lease through December 2019). Other notable tenants include Best Buy, Marshalls and Barnes & Noble. The property is owned and operated by a joint venture (JV) with Simon Property Group, Inc. (Simon), J.P. Morgan Chase’s Commingled Pension Fund and Teachers Insurance and Annuity Association of America. Simon is the managing member and operates the property. The YE2014 DSCR for the loan was 1.73x, with WA NCF growth over the DBRS underwritten figure of 18.4%. The annualized Q3 2015 figures show the cash flow declined slightly in 2015 with a DSCR of 1.68x. The decline in NCF was driven by a minor decline in the occupancy rate to 94.9% at Q3 2015 from 95.4% at YE2014. Occupancy has improved since issuance, however, when it was 87.8%.

The YE2015 tenant sales report shows sales for Sears and three major tenants in Best Buy, Marshalls and Barnes & Noble are down year over year (YOY), with Regal Cinema and in-line tenants with less than 10,000 sf showing sales growth over 2014. Sears reported sales of $140.00 per square foot (psf), down 8.3% YOY and Best Buy reported sales of $961.00 psf, down 1.5% YOY. Marshalls reported sales of $320.00 psf, down 2.4% YOY and Barnes & Noble reported sales of $219.00 psf, down 2.2% YOY. Regal Cinema reported sales of $286,833 per screen, up 5.8% YOY, and in-line stores averaged sales of $211.00 psf, up 2.8% YOY. Although the sales performance is not positive for Sears and major tenants, in-line sales growth is healthy and the overall cash flow growth from issuance is reflective of the occupancy gains made since closing and of the healthy overall performance for the mall, which benefits from strong sponsorship in Simon as well as its relative distance from competing regional malls.

The Oxford Valley Mall loan is secured by a regional mall located in Middletown Township, Pennsylvania. The property is owned and operated by a JV with Simon. The collateral for the loan includes an adjacent power center and an office building that comprises approximately 110,000 sf. The mall is anchored by Macy’s (not collateral for this loan), Sears (whose lease runs through February 2017 after a three-year renewal in 2014 for 12.4% of the collateral NRA) and JC Penney (16.2% of the collateral NRA on a lease through August 2018 after a five-year renewal was signed in 2013). There is also a dark non-collateral anchor space for the former Boscov’s space, which has been vacant since issuance. The trailing 12-month tenant sales report as of January 2016 shows overall sales for tenants with less than 10,000 sf averaged $369.00 psf, down 4.2% YOY, but up from an average of $332.00 psf at issuance, and sales for tenants with greater than 10,000 sf (which includes Forever 21, H&M and Express) averaged $188.00 psf, up 6.7% from last year. Anchor sales were down for two of the three stores, with Macy’s showing sales of $123.00 psf, down 13.1% YOY and Sears showing sales of $56.00 psf, down 4.7% YOY. JC Penney showed positive YOY sales growth with sales of $84.00 psf, up 10.1% from this time last year.

Since issuance, the property has lost approximately 7.0% of its in-line tenancy with tenant departures in Lane Bryant, Limited Too, Williams Sonoma and Ann Taylor, among other smaller tenants. In addition to these retail departures, the property also had some minor office space in the mall’s interior that has since been vacated. The overall occupancy rate for the loan collateral as of the Q3 2015 rent roll was 72.8%, down from 85.7% at issuance, driven largely by a reduction in the mall’s in-line occupancy rate to 73.7% at Q3 2015 from approximately 81.0% at issuance. The in-line occupancy decline has been driven by the previously listed departures as well as space reductions for The Gap, Gap Kids and Forever 21 from issuance. There has been positive leasing traction at the power center portion of the property, which recently signed Nieman Marcus Last Call for the formerly vacant Thomasville Furniture space, which comprises approximately 26,000 sf. News reports indicate that the store is scheduled to open early this year at the property; DBRS has requested lease terms from the servicer and is awaiting the borrower’s response.

Although the weak anchor sales (particularly for Sears, whose lease expires in 2017) and the YOY decline for the in-line sales as of the January 2016 tenant sales report are somewhat concerning, DBRS believes that these are mitigated by the strong sponsorship in Simon, the low leverage for the loan, which is currently at $53.00 psf and will continue to decline as the loan amortizes, and the strong in-place DSCR for the loan, which was at 3.20x at YE2014. Although the annualized coverage fell to 2.68x at Q3 2015, the YOY NCF decline reflects (1) a decline in annualized reimbursements and percentage rents, which should normalize with year-end figures; (2) and a sharp increase in repairs and maintenance by 130% on an annualized basis, which should normalize at year-end and/or likely includes extraordinary costs, given the property’s historical YOY expense trends.

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

This rating is endorsed by DBRS Ratings Limited for use in the European Union.

The applicable methodologies are North American CMBS Rating Methodology (June 2015) and CMBS North American Surveillance (December 2015), which can be found on our website under Methodologies.