DBRS Upgrades Four, Confirms Eight and Changes Trend on Two Classes of MSC 2011-C3 Mortgage Trust

DBRS Limited (DBRS) has today upgraded the ratings of four classes of Commercial Mortgage Pass-Through Certificates, Series 2011-C3 issued by the MSC 2011-C3 Mortgage Trust as follows:

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

Additionally, DBRS has confirmed the ratings on the remaining classes in the transaction as follows:

-- Class A-2 at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-J at AAA (sf)
-- Class X-A at AAA (sf)
-- Class X-B at AAA (sf)
-- Class F at BBB (low) (sf)
-- Class G at B (high) (sf)

Classes F and G have been assigned Positive trends, while the remaining trends are Stable.

The rating upgrades and Positive trend assignments reflect the strong overall performance of the pool, with cash flows remaining generally in line with, or higher than, the DBRS underwritten (UW) levels. The pool has experienced a collateral reduction of 35.6% since issuance, with 47 of the original 63 loans remaining as of the August 2016 remittance. Based on the 97.7% of the pool that reported YE2015 financials, the weighted-average (WA) debt service coverage ratio (DSCR) and WA debt yield for the pool is 1.80 times (x) and 12.4%, respectively, compared with the DBRS UW WA DSCR and debt yield of 1.70x and 10.8%, respectively. The loans in the Top 15, which represent 77.4% of the pool, showed a WA net cash flow (NCF) growth of 18.9% at YE2015 over the DBRS UW figures, with a WA DSCR of 1.81x. This figure is actually depressed because of a variance of -46.1% for Prospectus ID #13, Washington Tower (4.16% of the pool), for which cash flows were temporarily down in 2015 and are expected to rebound to historical levels in the near term. Excluding that loan, the WA NCF growth for the Top 15 is 22.6% over the DBRS UW figures and pushes the WA DSCR up to 1.84x. The transaction also benefits from defeasance collateral, as two loans, representing 0.9% of the current pool balance, are fully defeased.

As of the August 2016 remittance, there are no loans in special servicing and eight loans on the servicer’s watchlist, representing 14.5% of the pool balance. Two of the loans are on the servicer’s watchlist for upcoming maturity. One Top 15 loan and the largest loan on the watchlist are highlighted below.

The One Briarlake Plaza loan (Prospectus ID#4), which represents 8.2% of the current pool balance, is secured by a 20-storey, 502,410-square foot (sf) Class A office building in Houston, Texas, situated approximately 12 miles west of the central business district in the northern portion of the city in the Westchase submarket. The property’s largest tenant, Apache Corporation (Apache), representing 41.8% of the net rentable area (NRA), vacated its space in October 2015, ahead of its 2024 lease expiration. According to the servicer, Apache subleased half of its space (21.1% of the NRA) to Fieldwood Energy on a lease that expires in October 2023. Apache continues to pay its contractual rent as the lease is still in effect.

As of the March 2016 rent roll, the property was 89.5% leased with a physical occupancy rate of 68.8%. However, physical occupancy is expected to decline further, as the second-largest tenant at the property, Nexen/P66 (Nexen), which occupies 12.6% of the NRA, will also be vacating the subject at lease expiration in May 2017. According to the servicer, the borrower has executed a lease for Lubrizol to occupy a majority of the Nexen space once Nexen vacates for a total of 50,208 sf, representing 10.0% of the NRA. Vacancy and availability rates in the Westchase submarket were reported by CoStar at 22.8% and 30.5%, respectively, likely driven by the concentration of oil and gas tenants in the area. According to YE2015 financials, the loan reported a DSCR of 1.94x compared with 2.08x at YE2014. DBRS modeled the loan with a stressed cash flow to account for the increased vacancy at the subject and in the overall market.

The largest loan on the watchlist, Royal Ridge (Prospectus ID#7), represents 3.9% of the pool and is secured by a portfolio of four Class B office buildings totalling 505,948 sf and located in Irving, Texas. This loan was added to the servicer’s watchlist after Capital One (123,740 sf, 25.0% of the portfolio NRA), which occupied 100.0% of one of the four buildings, Royal Ridge III, closed its call centre in July 2015 and fully vacated the property in December 2015 at lease expiry. According to the servicer, the borrower has reached an agreement with American Airlines to take occupancy of the entire building under a 60-month lease. According to YE2015 financials, the loan reported a DSCR of 1.27x compared with the YE2014 DSCR of 1.57x. The decline in DSCR appears to be largely due to an annualized vacancy loss adjustment for Capital One. As of the March 2016 rent roll, the portfolio was 75.0% occupied and reported an average rental rate of $20.37 psf. The portfolio’s largest tenant in place, Verizon, occupies 100.0% of the Royal Ridge A building and represents 28.6% of the portfolio NRA on a lease scheduled to expire in September 2017. CoStar reported an average rental rate of $24.55 psf, a vacancy rate of 17.8% and an availability rate of 16.5% for the Dallas/Ft. Worth-DFW Freeport/Coppell submarket.

At issuance, DBRS shadow-rated the Park City Center (Prospectus ID#1, 14.9% of the current pool balance), Washington Tower (Prospectus ID#13, 4.2% of the current pool balance) and 420 East 72 Street Co-op (Prospectus ID#33, 1.1% of the current pool balance) loans as investment grade. DBRS has today confirmed that the performance of the loans remains consistent with investment-grade loan characteristics.

The ratings assigned to Classes F and G differ from the higher ratings implied by the quantitative model. DBRS considers this difference to be a material deviation, and in this case, the ratings reflect that the sustainability of loan performance trends has not been demonstrated.

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.