DBRS Morningstar Confirms All Classes of DBUBS 2011-LC2 Mortgage Trust and Changes Trend to Negative on Three Classes

DBRS, Inc. (DBRS Morningstar) confirmed all ratings of the following classes of Commercial Mortgage Pass-Through Certificates, Series 2011-LC2 issued by DBUBS 2011-LC2 Mortgage Trust:

--Class A-1 at AAA (sf)
--Class A-1C at AAA (sf)
--Class A-1FL at AAA (sf)
--Class A-4 at AAA (sf)
--Class B at AAA (sf)
--Class X-A at AAA (sf)
--Class C at AA (high) (sf)
--Class D at BBB (sf)
--Class E at BB (sf)
--Class FX at B (sf)
--Class X-B at B (sf)
--Class F at B (low) (sf)

The trends on Classes FX, X-B, and F were changed to Negative from Stable. All remaining classes have Stable trends.

The rating confirmations reflect the overall stable performance of the underlying collateral. Trends were changed to Negative on three classes as described above, reflective of DBRS Morningstar’s ongoing concerns for two top 10 loans in the pool—Barneys Chicago (Prospectus ID#8 – 5.7% of the pool balance) and Magnolia Hotel Houston (Prospectus ID#16 – 2.9% of the pool balance)—which are exhibiting significantly increased risks from issuance. The Barneys Chicago loan is secured by a single-tenant six-story retail building in Chicago that unexpectedly lost its primary tenant, Barneys New York, Inc., after the company filed Chapter 11 bankruptcy in August 2019. The retail property is located in a desirable neighborhood of Chicago, but the unique retail property could be challenging to retenant prior to the loan’s upcoming maturity date of May 2021. Magnolia Hotel Houston is secured by a 314-key full-service hotel in the Houston central business district that has underperformed since 2015. The hotel faces strong headwinds as the Houston economy is closely tied to the oil market, which is going through a downturn, and the ongoing Coronavirus Disease (COVID-19) pandemic is also a recently introduced challenge, a worldwide event that is significantly affecting hotel operations. As the coronavirus outbreak of 2020 has resulted in sharp drop-offs in leisure and business travel across the United States and globally, hotels have suffered the immediate effects of the attempts to contain the virus’ spread.

DBRS Morningstar assumed a significant penalty to the probability of default in the analysis for both of these loans as part of this review and will continue to monitor for developments.

At issuance, the transaction consisted of 67 loans secured by 132 commercial and multifamily properties with a trust balance of $2.1 billion. As of the February 2020 remittance, there were 41 loans secured by 72 properties remaining in the trust with a trust balance of $1.2 billion, representing a 43.8% collateral reduction. Thirteen loans, representing 16.2% of the pool balance, are fully defeased. Loan maturity is concentrated as all non-defeased loans are scheduled to mature in the first half of 2021.The remaining pool is concentrated by property type with 44.9% of the pool secured by office properties and 37.3% of the pool secured by retail properties. The retail concentration is also noteworthy amid the ongoing coronavirus pandemic, as those property types are also suffering the immediate impacts of efforts instituted to curb the virus’s spread.

There are eight loans, representing 29.8% of the pool balance, that are on the servicer’s watchlist. Barneys Chicago and Magnolia Hotel Houston are on the watchlist for the aforementioned reasons. The third-largest loan in the trust, 498 7th Avenue (Prospectus ID#3 – 15.0% of the pool balance), is secured by a 25-story office property in Manhattan and has been in the servicer’s watchlist since December 2017 as the largest tenant, representing 44.7% of the net rentable area, had an upcoming lease expiration in November 2018, at which time the space was vacated. The space was re-leased and the sponsor funded an $86.0 million reserve to fund the tenant improvement work and debt service shortfalls, with the tenant in occupancy in early 2020, as confirmed by the servicer.

DBRS Morningstar notes maturity concerns for the following loans, which are each exhibiting specific risks that suggest a replacement loan would be relatively difficult to secure: Barneys Chicago, Magnolia Hotel Houston, Louisiana Tower (Prospectus ID#33 – 1.1% of the pool balance), and 38 East 61st Street (Prospectus ID#43 – 0.7% of the pool balance).

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework and its methodologies can be found at: https://www.dbrsmorningstar.com/research/357792.

DBRS Morningstar materially deviated from its related methodology when determining the rating assigned to Class C. The rating assigned to Class C materially deviates from the lower ratings implied by the quantitative results. DBRS Morningstar considers a material deviation from a methodology to exist when there may be a substantial likelihood that a reasonable investor or other user of the credit ratings would consider the material deviation to be a significant factor in evaluating the rating. The material deviation is warranted given the loan level event risk associated with the largest office and retail properties in the trust.

Classes X-A, X-B and FX are interest-only (IO) certificates that reference 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 are subject to surveillance, which could result in ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by DBRS Morningstar.

DBRS Morningstar provides updated analysis and in-depth commentary in the DBRS Viewpoint platform for the following loans in the transaction:

-- Prospectus ID#8 – Barneys Chicago (5.7% of the pool) – DBRS Morningstar Hotlist Loan
-- Prospectus ID#16 – Magnolia Hotel Houston (2.9% of the pool)
-- Prospectus ID#33 – Louisiana Tower (1.1% of the pool)

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com The platform includes issuer and servicer data for most outstanding CMBS transactions (including non-DBRS Morningstar rated), as well as loan-level and transaction-level commentary for most DBRS Morningstar-rated and -monitored transactions.

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

The principal methodology is North American CMBS Surveillance Methodology, which can be found on dbrsmorningstar.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 Morningstar Global Structured Finance Related Methodologies document, which can be found on dbrsmorningstar.com in the Commentary tab under Regulatory Affairs. 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.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

The rated entity or its related entities did participate in the rating process for this rating action. DBRS Morningstar 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.

Generally, the conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. DBRS Morningstar’s outlooks and ratings are monitored.

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

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