DBRS Upgrades Four Classes of GS Mortgage Securities Trust, Series 2011-GC3

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

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

DBRS also confirmed the ratings of three classes as follows:

-- Class A-4 at AAA (sf)
-- Class B at AAA (sf)
-- Class X at AAA (sf)

All trends are Stable.

These rating actions reflect the strong performance of the transaction, which has experienced collateral reduction of 44.0% since issuance, with 38 of the original 57 loans remaining in the pool as of the June 2016 remittance report. The 19 loans that have paid out were repaid at their respective maturity dates, with two of those loans, representing approximately 2.42% of the pool balance, repaid in March 2016, following the most recent review of this transaction conducted by DBRS in February 2016, when Classes C and D were upgraded and Classes E and F were confirmed with Positive trends. The bulk of the remaining loans in the pool were structured with ten-year terms and will mature in 2020 and 2021.

At the time of the DBRS review in February 2016, there were only a few loans reporting YE2015 metrics; as of the June 2016 remittance, approximately 89.1% of the pool reported a YE2015 debt service coverage ratio (DSCR) figure. Based on the servicer’s reported figures, the transaction benefits from strong overall credit metrics with a weighted-average (WA) DSCR of 2.00 times (x) and WA debt yield of 14.4%; 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 24.4% over the DBRS underwritten figures at YE2015 and a WA DSCR of 1.92x for those 13 loans. The transaction also benefits from four defeased loans in the pool, which represent 7.50% of the overall balance, with two defeased loans in the Top 15.

As of the June 2016 remittance report, there are no loans in special servicing and two loans representing 4.0% of the pool balance on the servicer’s watchlist. None of the loans are being monitored for cash flow declines. One of the loans is on the watchlist because of major tenant rollover occurring in the next six months (the servicer recently advised that all tenants in question have renewed), and the other is on the watchlist because of relatively minor deferred maintenance noted on the most recent inspection, with the servicer recently advising that all outstanding items have been resolved. The remaining transaction balance is heavily concentrated in retail properties, with 77.8% of the pool secured by anchored retail properties and regional malls. The two regional malls in the transaction are Cape Cod Mall and Oxford Valley Mall. These two loans are detailed below.

The Cape Cod Mall loan (Prospectus ID #4, 11.83% of the pool) 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 in Cape Cod and is anchored by Macy’s (not collateral), Sears (25.6% 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 YE2015 figures show the cash flow declined slightly in 2015, with a DSCR of 1.71x and a WA NCF growth over the DBRS underwritten figure of 16.7%. The decline in NCF from YE2014 was driven by a minor decline in the occupancy rate to 93.9% 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 more 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 $946.00 psf, down 1.5% YOY. Marshalls reported sales of $312.00 psf, down 2.4% YOY and Barnes & Noble reported sales of $214.00 psf, down 2.2% YOY. Regal Cinema reported sales of $303,333 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 (Prospectus ID #7, 8.23% of the pool) is secured by a regional mall located in Middletown Township, Pennsylvania. The property is owned by a JV between the Kravco Company and Simon, which operates the mall. 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 14.0% of the collateral NRA) and JCPenney (18.3% 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, up from an average of $332.00 psf at issuance, but down 4.2% YOY. 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. JCPenney showed positive YOY sales growth with sales of $84.00 psf, up 10.1% from this time last year.

The overall occupancy rate for the loan collateral as of the YE2015 rent roll was 83.9%, up from 77.9% at YE2014, but down from 85.7% at issuance. The occupancy decline for YE2014 was driven by tenant departures in Lane Bryant, Limited Too, Williams-Sonoma, and Ann Taylor, among other smaller tenants, in addition to space reductions for The Gap, Gap Kids and Forever 21. There has been positive leasing traction at the power center portion of the property, which recently signed Neiman Marcus Last Call for the formerly vacant Thomasville Furniture space, which comprises approximately 26,000 sf. News reports indicate that the store was scheduled to open earlier 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 $52.00 psf and will continue to decline as the loan amortizes, and the strong in-place DSCR for the loan, which was at 2.85x at YE2015.

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 (March 2016) and CMBS North American Surveillance (December 2015), which can be found on our website under Methodologies.

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