DBRS Upgrades Five Classes of UBS-Citigroup Commercial Mortgage Trust, Series 2011-C1

DBRS Limited (DBRS) has today upgraded five classes of UBS-Citigroup Commercial Mortgage Trust, Series 2011-C1 as follows:

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

In addition, DBRS has confirmed the remaining classes in the transaction as follows:

-- Class A-2 at AAA (sf)
-- Class A-3 at AAA (sf)
-- Class A-AB at AAA (sf)
-- Class A-S at AAA (sf)
-- Class X-A at AAA (sf)
-- Class X-B at AAA (sf)
-- Class G at B (sf)

All trends are Stable except for Class G, which had its trend changed to Positive from Stable.

The rating upgrades and trend change to Class G reflect the strong performance of the transaction, which has experienced collateral reduction of 27.4% since issuance with 28 of the original 32 loans remaining in the pool as of the September 2016 remittance. Based on the servicer’s reported YE2015 figures, the transaction benefits from strong overall credit metrics with a weighted-average (WA) debt service coverage ratio (DSCR) of 1.60 times (x) and WA debt yield of 12.6%. These metrics compare well with the issuance levels of 1.35x and 10.0%, respectively. The performance for the largest 13 non-defeased loans in the top 15 remains stable with WA net cash flow growth of 16.4% over DBRS underwritten (UW) figures and a WA DSCR of 1.56x, according to YE2015 figures. The transaction also benefits from defeasance collateral as three loans, representing 17.3% of the current pool balance, are fully defeased.

The largest non-defeased loan in the pool is Prospectus ID #2, Poughkeepsie Galleria (13.6% of the pool). This loan is secured by a 691,325 sf portion of a 1.2 million sf regional mall in Poughkeepsie, New York. The mall is anchored by JC Penney, Macy’s, Sears and Target; however, only JC Penney, which has a lease expiry at August 2017, and the land beneath the Sears store serve as collateral for the loan. Other major tenants included in the collateral are Regal Galleria and Dick’s Sporting Goods, whose leases expire in December 2025 and February 2018, respectively.

According to the YE2015 operating statement analysis report (OSAR), the DSCR was 1.33x, an increase from 1.17x at DBRS UW, and a slight decrease from 1.36x at YE2014. As of the June 2016 rent roll, the collateral portion of the loan was 88.3% occupied, a slight decrease from 89.0% at YE2015 and 91.0% at YE2014. According to the YE2015 tenant sales report, JC Penney’s sales were $81.00 per square foot (psf), a significant decline of 33.0% from issuance. According to estimates provided by the servicer, Macy’s and Target’s sales remained in line with issuance levels, which were $284.00 psf and $325.00 psf, respectively. Regal Galleria’s sales were $515,403 per screen, Dick’s Sporting Goods sales were $237.00 psf and DSW’s sales were $275.00 psf.

As of the September 2016 remittance report, there is one loan on the servicer’s watchlist and two loans, representing 5.2% of the pool, in special servicing. The watchlisted loan is Prospectus ID #26, Preston Lloyd Shopping Center (1.3% of the pool), which was placed on the watchlist originally in May 2014 because of a low DSCR. This loan is secured by a 54,000 sf unanchored retail center in Dallas, Texas, approximately 18 miles north of the central business district. As of the June 2016 rent roll, the property was 62.7% occupied, an increase from 59.5% at June 2015, but below the 78.7% occupancy rate at issuance. Occupancy decreased significantly when the former largest tenant, Classy Canine Day Care, which occupied 24% of net rentable area (NRA), vacated the property in October 2013, lowering occupancy to 59.0%. According to the YE2015 OSAR, the DSCR was 0.95x, down from 1.21x at YE2014. This decrease is primarily driven by the depressed occupancy rate as rental revenue and expense reimbursements are well below underwritten levels. The loan remains current, but it is concerning that there has been minimal positive leasing activity in recent years. According to CoStar, retail properties in the Dallas/Fort Worth – Far North Dallas Submarket reported a vacancy rate of 6.4% and triple net rent of $18.22 psf compared with the average rental rate of $18.32 psf shown on the June 2016 rent roll.

The largest loan in special servicing is Prospectus ID #13, the Chicago Portfolio (3.8% of pool). This loan is secured by two Class B office buildings and a 240-space parking garage in Chicago, totalling 184,750 sf. The two office properties are located in the River North neighbourhood and the parking garage is located in the South Loop neighbourhood. This loan transferred to special servicing in April because of delinquency. According to the servicer, multiple default notices were sent to the borrower for a lack of financial reporting and the borrower has remained uncooperative. As a result, DBRS has not received any updated documents since 2013 when the loan reported a year-end DSCR of 1.32x. According to CoStar, a combined 27.7% of the NRA at the two office properties is available for lease.

According to the special servicer and multiple news reports, the borrower has pled guilty to loan fraud and is also being sued by investors related to the collateral. According to these reports, the borrower took advantage of his position as manager by giving discounts on rent to businesses in which he had a stake and borrowing millions of dollars in unauthorized loans against the collateral for his other companies without the approval of his investors. The special servicer is currently pursuing foreclosure; however, it is unclear at this time how long the process will take, given the borrower’s ongoing and previous litigation history. The portfolio has yet to be reappraised from the issuance value of $31.5 million (loan-to-value ratio of 63.4%); however, it is DBRS’s opinion that the larger issue with the loan is the litigious borrower rather than the physical improvements of the three collateralized properties.

The other loan in special servicing is Prospectus ID #23, Holiday Inn Express Cooperstown (1.4% of pool). This loan is secured by the Holiday Inn Express Cooperstown, which was constructed in 2004 and is a 74-room, limited-service hotel situated in Cooperstown, New York. This loan was transferred to the special servicer because of a maturity default as the loan was scheduled to mature on June 7, 2016. The servicer stated that the loan is expected to be paid in full in the coming weeks as the borrower was granted a short-term extension to refinance the loan.

DBRS considers a material deviation to be a rating differential of three or more notches between the assigned rating and the rating implied by the quantitative model that is a substantial component of a rating methodology; in this case, the assigned ratings reflect the sustainability of loan performance trends not demonstrated.

The ratings assigned to Classes D and G materially deviates from the higher ratings implied by the quantitative results. DBRS considers a material deviation to be a rating differential of three or more notches between the assigned rating and the rating implied by the quantitative model that is a substantial component of a rating methodology; in this case, the assigned ratings reflect the sustainability of loan performance trends not demonstrated.

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

The related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

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.

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