DBRS Upgrades Three Classes of UBS-Barclays Commercial Mortgage Trust 2012-C3

DBRS Limited (DBRS) has today upgraded the ratings on three classes of Commercial Mortgage Pass-Through Certificates, Series 2012-C3, issued by UBS-Barclays Commercial Mortgage Trust 2012-C3 as follows:

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

In addition, DBRS has confirmed the ratings for nine classes as follows:

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-S at AAA (sf)
-- Class E at BB (sf)
-- Class F at B (sf)
-- Class X-A at AAA (sf)
-- Class X-B at AAA (sf)

DBRS has changed the trends for Classes E and F to Positive; all other trends are Stable.

The rating upgrades reflect the strong overall performance of the portfolio since issuance, when the pool comprised 76 loans secured by 113 commercial properties. As of the May 2016 remittance, all 76 of the original loans remain in the pool, with one loan defeased, representing 1.3% of the transaction balance. Since issuance, there has been a collateral reduction of 5.2% as the result of scheduled amortization. As of the most recent year-end reporting for the underlying loans (approximately 75% of the pool is reporting YE2015 figures), the weighted-average (WA) debt service coverage ratio (DSCR) and WA debt yield are 1.74x and 11.8%, respectively. Those figures compare with the issuer’s WA underwritten (UW) figures of 1.60x and 10.6%, respectively, and the DBRS WA UW figures of 1.59x and 10.2%, respectively. Notably, cash flows for the smaller loans in the pool have shown the most significant improvement, with the Top 15 reporting a WA DSCR of 1.55x and the loans outside of the Top 15 reporting a WA DSCR of 1.99x. Also noteworthy is the concentration of shorter-than-average amortization schedules within the pool, with 25 loans, representing 29.1% of the pool balance, amortizing on schedules that range between 25 and 26.5 years, with an average of 24.9 years for those loans.

As of the May 2016 remittance report, there were seven loans, representing 7.1% of the pool, on the servicer’s watchlist, with no loans in special servicing. Four of those loans on the watchlist, representing 3.8% of the pool, show YE2015 coverage ratios well above 1.0x and are being monitored for rollover or other tenant-related issues. The other three loans are being monitored for cash flow declines resulting in declining coverage ratios for each. All three of those loans were modeled with an increased probability of default to capture the increased risk for each.

The pool is concentrated with retail property types, with 25 retail loans representing 35.8% of the outstanding pool balance. The largest retail loan in the pool is Prospectus ID #2, Apache Mall (9.13% of the pool), secured by approximately 634,000 square feet (sf) of a 797,000-sf regional mall located in Rochester, Minnesota. The property was originally developed in 1969 and is owned and operated by General Growth Properties (GGP) and anchored by Macy’s (non-collateral anchor), JC Penney, Herberger’s and sporting goods retailer Scheels, which replaced the former Sears anchor that was in place at issuance in early 2015. According to the YE2015 reporting, the DSCR is healthy at 1.63x, comparing well with the DBRS UW DSCR of 1.48x, with occupancy at 96.1% as of the March 2016 rent roll. That occupancy rate is inclusive of two new tenants recently signed by GGP in Torrid, which opened in May 2016, and H&M, which is scheduled to open in October 2016. Cash flow improvements over issuance have been driven by higher occupancy rates (at issuance, the property was 90.9% occupied) and rental rate growth.

The addition of Scheels to replace the former Sears anchor has been a positive development for the property, with Scheels showing sales of $230 psf for the trailing 12-month period ending March 2016, much higher than the sales at issuance for Sears of $92 psf. Overall, the mall’s sales performance is healthy, with total in-line sales of $364 psf and sales for the other collateral anchors JC Penney and Herberger’s in line with or slightly higher than levels in place at issuance at $158 psf and $163 psf, respectively. In-line sales are down from the issuance average of $394 psf, however, likely reflective of the general decline in enclosed mall sales seen throughout the country for many properties.

The largest loan on the watchlist is Prospectus ID #14, Hamptons Mixed Use Portfolio (1.8% of the pool). This loan is secured by a portfolio of seven retail and mixed-use buildings located in the state of New York. The primary use for the portfolio is retail, with lesser concentrations of office, industrial and multifamily use. According to the YE2015 figures, the DSCR was 0.56x, down from 0.79x for YE2014. The December 2015 rent roll shows the occupancy rate at 99.0%. The cash flow declines from issuance are largely expense driven, with effective gross income being largely stable year over year since issuance. As some of the sharpest expense increases are seen in repairs and maintenance, professional fees, and general and administration expenses, DBRS believes those categories likely include capital expenditures and/or non-property-related expenses incurred by the borrower, inflating the total expense figures and artificially depressing the coverage ratios.

At issuance, DBRS shadow-rated two loans investment grade, including the largest loan in the pool, Prospectus ID #1, 1000 Harbor Boulevard (11.0% of the pool) and another loan in the Top 15, Prospectus ID #8, Franklin Towne Center (2.8% of the pool). DBRS has today confirmed that the performance of the loans remains consistent with investment-grade loan characteristics.

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

The applicable methodologies are North American CMBS Rating Methodology (March 2016) and CMBS North American Surveillance (December 2015), which can be found on our website under Methodologies.

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

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