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

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

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

DBRS also confirmed the ratings on three classes as follows:

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

All trends are Stable.

The upgrades reflect the overall strong performance of the pool, including the recent defeasance of two of the three largest loans, representing 25.8% of the total pool balance, in November 2018. These loans – Prospectus ID#3, Inland/Centro JV Portfolio I and Prospectus ID#5, Inland/Centro JV Portfolio II – were defeased in late November 2018, which will be reflected in a corrected December 2018 remittance in the near term. As of the November 2018 remittance report, the trust balance was $704.0 million, representing collateral reduction of 49.7% since issuance. The principal reduction is the result of scheduled amortization and loan repayments as 35 of the original 57 loans remain in the pool. With two recently defeased loans, there are 19 loans, representing 48.2% of the pool balance, that are fully defeased. As of the November 2018 remittance, there are no loans in special servicing and there have been no losses for the pool to date.

As of November 2018, all non-defeased loans reported YE2017 and partial-year 2018 financials. The pool reported a strong weighted-average (WA) YE2017 debt service coverage ratio (DSCR) and debt yield of 2.41 times (x) and 17.5%, respectively, compared with the WA DBRS Term DSCR and DBRS Debt Yield of 1.86x and 12.2%, respectively, which were derived at issuance. Overall, cash flow growth has been strong with the non-defeased loans in the top 15 reporting a WA net cash flow (NCF) growth of 31.9% at YE2017 over the DBRS NCF figures derived at issuance. The pool is concentrated by property type with 83.8% of the non-defeased pool balance secured by retail properties. The risk is partially mitigated by strong credit metrics with these loans reporting a YE2017 DSCR and debt yield of 2.41x and 17.5%, respectively.

Per the November 2018 remittance, four loans, representing 29.1% of the pool balance, were on the servicer’s watchlist. Three of these loans were placed on the watchlist for deferred maintenance, which included the two recently defeased loans (Inland/Centro JV Portfolio I & II). Only the Towne Crossing loan (Prospectus ID#35), representing 1.3% of the pool balance, was placed on the watchlist for monitoring as a result of increased credit risk in the upcoming lease expiry for Bed Bath & Beyond, Inc.; however, the servicer noted that, in October 2018, the tenant exercised its five-year renewal option commencing in February 2019, suggesting that the loan will be removed from the watchlist in the near term.

At issuance, DBRS assigned an investment-grade shadow-rating for the Oxford Valley Mall (Prospectus ID#7) loan, currently representing 8.7% of the pool. That loan is secured by a regional mall and adjacent power center in Middletown Township, Pennsylvania, approximately 25 miles northeast of the Philadelphia central business district. DBRS has been monitoring the loan since Sears recently announced the location’s closure at the end of the year as part of the company’s bankruptcy filing. The closure will leave the mall with two vacant anchor boxes (the former Boscov’s space was vacant at issuance and is not collateral for the loan) and remaining anchors in JCPenney and Macy’s; however, in-line sales remain generally flat from issuance at approximately $350 per square foot (psf) and sales and occupancy trends at the power-center portion of the property have been healthy historically. The power center recently backfilled the former hhgregg space with three restaurant tenants, a needed addition to the property according to the manager, Simon Property Group, Inc. (Simon).

Although the property’s pending occupancy decline is noteworthy, DBRS also notes the loan’s strong sponsorship in Simon and Kravco Company, LLC, Simon’s strong property management and leasing abilities as well as the loan’s low leverage point with the trust’s exposure currently at $49 psf. The loan is amortizing and, at maturity in 2020, exposure will fall to $46 psf. Finally, the loan is structured with a cash flow sweep provision that will trap all excess cash in the event the DSCR falls below 1.71x. At Q2 2018, the loan reported a DSCR of 3.02x and DBRS estimates the DSCR will fall to approximately 2.05x when the Sears rent payments are excluded; however, this does not account for additional revenue with the recent leasing.

DBRS believes the mall portion of the property will ultimately benefit from redevelopment, given the healthy in-line and power-center sales as well as the prominent location within the area. If the loan sponsors do not invest the funds necessary to redevelop the Sears box or other portions of the property, DBRS is confident that the low leverage would be conducive to an easy sale of the collateral at or prior to maturity. As part of the subject review, DBRS confirmed the investment-grade shadow-rating, but will continue to monitor closely for developments as plans for vacating Sears emerge. For additional information on this loan, please see the loan commentary on the DBRS Viewpoint platform, for which information is provided below.

Class X is an interest-only (IO) certificate that references a single rated tranche or multiple rated tranches. The IO rating mirrors the lowest-rated applicable reference obligation tranche adjusted upward by one notch if senior in the waterfall.

All ratings will be subject to ongoing surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed or discontinued by DBRS.

For more information on this transaction and supporting data, please log into www.viewpoint.dbrs.com. DBRS will continue to monitor this transaction with periodic updates provided in the DBRS Viewpoint platform.

As part of this review, DBRS has provided updated analysis and in-depth commentary in the DBRS Viewpoint platform for the following loans in the transaction:

-- Prospectus ID#4 – Cape Cod Mall (12.6% of the pool balance)
-- Prospectus ID#7 – Oxford Valley Mall (8.7% of the pool balance)
-- Prospectus ID#35 – Towne Crossing (1.3% of the pool balance)

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrs.com. The platform includes issuer and servicer data for the entire commercial mortgage backed securities (CMBS) universe as well as deal and loan-level commentary for all DBRS-rated transactions.

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

The principal methodology is North American CMBS Surveillance, which can be found on dbrs.com under Methodologies & Criteria. For a list of the Structured Finance related methodologies that may be used during the rating process, please see the DBRS Global Structured Finance Related Methodologies document on www.dbrs.com. Please note that not every related methodology listed under a principal Structured Finance asset class methodology may be used to rate or monitor an individual structured finance or debt obligation.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS had access to the accounts and other relevant internal documents of the rated entity or its related entities in connection with this rating action.

Please see the related appendix for additional information regarding the sensitivity of assumptions used in the rating process.

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