DBRS Morningstar Takes Rating Actions on JP Morgan Chase Commercial Mortgage Securities Trust 2011-C3
CMBSDBRS, Inc. (DBRS Morningstar) downgraded five classes of Commercial Mortgage Pass-Through Certificates, Series 2011-C3 issued by JP Morgan Chase Commercial Mortgage Securities Trust 2011-C3 as follows:
-- Class E to BBB (sf) from BBB (high) (sf)
-- Class F to BB (high) (sf) from BBB (low) (sf)
-- Class G to B (sf) from BB (sf)
-- Class H to CCC (sf) from B (sf)
-- Class J to CCC (sf) from B (low) (sf)
In addition, DBRS Morningstar confirmed the remaining classes as follows:
-- Class A-4 at AAA (sf)
-- Class B at AAA (sf)
-- Class X-A at AAA (sf)
-- Class C at AA (low) (sf)
-- Class D at A (sf)
With this review, DBRS Morningstar removed Classes C, D, E, F, G, H, and J from Under Review with Negative Implications, where it placed them on August 6, 2020. The trends on Classes E, F, and G are Negative. Classes H and J have ratings that do not carry trends. All other trends remain Stable.
The rating downgrades and Negative trends reflect DBRS Morningstar’s concerns with the ongoing performance challenges for the underlying collateral, particularly the largest loans in special servicing, much of which has been affected by the Coronavirus Disease (COVID-19) global pandemic. In addition to loans representing 51.0% of the pool being in special servicing as of the November 2020 remittance, the pool has a high concentration of retail and hospitality properties, representing 56.1% and 4.1% of the pool balance, respectively. These property types have been the most severely affected by the initial impact of the coronavirus pandemic and, as such, those concentrations suggest slightly increased risks for the pool.
The transaction is concentrated by property type as four loans, representing 56.1% of the current trust balance, are secured by retail assets, whereas two loans, representing 36.1% of the current trust balance, are secured by office assets. Lodging collateral makes up the third-largest concentration, representing one loan and 4.1% of the current trust balance.
According to the November 2020 remittance, there are two loans, representing 51.0% of the current trust balance, in special servicing. Both loans are secured by regional mall assets: Holyoke Mall (Prospectus ID#1; 39.3% of the current trust balance) and Sangertown Square (Prospectus ID#6; 11.5% of the current trust balance). Both properties are owned and operated by affiliates of the Pyramid Companies. According to the servicer’s commentary, both loans have reached successful modification agreements. The general terms of the modification include: deferral of debt service payments for four months commencing in May 2020, converting the loans to interest-only (IO) payments for six months commencing September through the end of February 2021, all deferred amounts of debt service to be repaid over a 12-month period commencing January 2021, and a three-year loan extension.
Holyoke Mall is secured by a 1.56 million-sf regional mall in Holyoke, Massachusetts, and was transferred to the special servicer in May 2020 given the ongoing effects of the coronavirus pandemic. The loan is more than 90 days delinquent according to the November 2020 remittance report. The property reported a June 2020 occupancy rate of 77.1%, in line with the YE2019 and YE2018 occupancy rates of 74.5% and 73.5%, respectively. The largest collateral tenants include JCPenney (expires October 2025), Target (expires January 2025), Burlington Coat Factory (expires February 2022), Forever 21, Best Buy, and Hobby Lobby (all expire February 2023). Before the coronavirus pandemic, the net cash flow (NCF) has dropped each year since 2014, and in November 2018, the Sears closed as part of the retailer's bankruptcy filing. The subject reported a YE2019 and YE2018 NCF debt service coverage ratio (DSCR) of 1.12 times (x) and 1.26x, respectively. In addition to the declining cash flows in recent years, there are additional challenges surrounding the redevelopment of Sears’ previous space and the potential risk of JCPenney vacating prior to lease expiry. There has been no updated appraisal to date, but the as-is value has likely declined significantly from the issuance figure of $400.0 million. Given these increased risks from issuance, the loan’s delinquency status, concerns with existing tenants such as JCPenney, DBRS Morningstar liquidated the loan in the analysis for this review, with an implied loss severity of 18.7%.
Sangertown Square is secured by a 894,127-sf regional mall in New Hartford, New York, and was also transferred to the special servicer in May 2020 given the ongoing effects of the coronavirus pandemic. The loan is more than 90 days delinquent according to the November 2020 remittance report. The property reported a June 2020 occupancy rate of 93.47%, in line with the YE2019 and YE2018 occupancy rates of 95.48% and 94.43%, respectively. The largest collateral tenants include Macy's (expires January 2021), Target (expires January 2023), and Boscov's (expires January 2037), which took over Sears' space in October 2016. JCPenney closed its store in October 2020, three years prior to its October 2023 lease expiration as part of its Chapter 11 bankruptcy filing. The October departure of JCPenney’s reduced occupancy to roughly 76%. Before the coronavirus pandemic, the property had maintained strong occupancy but the DSCR has remained near breakeven. The subject reported a YE2019 and YE2018 NCF DSCR of 1.09x and 1.09x, respectively. With JCPenney vacating prior to lease expiry, there are additional challenges surrounding the redevelopment of JCPenney’s previous space and the potential risk of Macy’s vacating at lease expiry. There has been no updated appraisal to date, but the as-is value has likely declined significantly from the issuance figure of $107.0 million. Given these increased risks from issuance, the loan’s delinquency status, concerns with existing tenants such as Macy’s, DBRS Morningstar liquidated the loan in the analysis for this review, with an implied loss severity of 19.7%.
As of the November 2020 remittance, only eight of the original 45 loans remain in the pool, representing a collateral reduction of 69.2% since issuance. One loan, representing 3.8% of the current pool balance, is fully defeased. Additionally, there are four loans, representing 33.8% of the current trust balance, on the servicer’s watchlist. The servicer is monitoring these loans for a variety of reasons, including low DSCR, occupancy, and deferred maintenance issues; however, the primary reason for many of the more recent transfers is for hospitality properties with a low DSCR stemming from disruptions related to the coronavirus pandemic. Based on the November 2020 remittance, the pool reported a weighted-average DSCR of 0.95x, compared with the issuer’s issuance DSCR of 1.63x.
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 North American CMBS Insight Model when determining the ratings assigned to Class C, as the quantitative results suggested a higher rating on the Class. The material deviation is warranted given the uncertain loan-level event risk with the loans in special servicing and on the servicer’s watchlist, in addition to the increased concentration of the pool in terms of the number of loans remaining.
Class X-A is 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 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#1 – Holyoke Mall (39.3% of the pool)
-- Prospectus ID#6 – Sangertown Square (11.5% of the pool)
For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com The platform includes loan-level 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 (March 6, 2020), 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.
For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.
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. Please note a sensitivity analysis is not performed for CMBS bonds rated CCC or lower. The DBRS Morningstar long-term rating scale definition indicates that ratings of CCC or lower are assigned when the bond is highly likely to default or default is imminent, thereby prevailing over a sensitivity analysis.
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.
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