DBRS Morningstar Confirms Ratings on MSC 2011-C3 Mortgage Trust, Removes Three Ratings from Under Review with Negative Implications

DBRS Limited (DBRS Morningstar) confirmed the ratings on the Commercial Mortgage Pass-Through Certificates, Series 2011-C3 issued by MSC 2011-C3 Mortgage Trust as follows:

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

The trends on Classes F, X-B, and G are Negative while the trends on all other classes are Stable. DBRS Morningstar also removed its ratings on Classes F, X-B and G from Under Review with Negative Implications, where they were placed on August 6, 2020.

The rating confirmations reflect the overall stable performance of the transaction. The Negative trends on Classes F, X-B, and G reflect the continued performance issues facing loans secured by retail and hotel properties, which the ongoing Coronavirus Disease (COVID-19) pandemic has disproportionately affected. These loans represent 50.7% of the current pool balance. As of November 2020 reporting, two loans are in special servicing, representing 18.2% of the current pool balance, and nine loans are on the servicer’s watchlist, representing 20.9% of the current pool balance.

The transaction currently consists of 82 loans totalling $637.8 million as 24 of the original 63 loans have been repaid, resulting in collateral reduction of 38.1%, including loan amortization. Eleven loans, representing 18.4% of the current pool balance, are fully defeased. The pool benefits from healthy leverage metrics with a weighted-average (WA) loan-to-value ratio of 55.9% as of November 2020 compared with 61.6% at issuance. In addition, there is a concentration of office collateral as 12 loans, representing 34.6% of the current pool balance, are secured by office properties, which have shown greater resilience to cash flow declines during the pandemic.

The largest loan in special servicing and in the pool, Westfield Belden Village (Prospectus ID#2; 14.6% of the current pool balance) transferred to special servicing for imminent monetary default in May 2020 and is now 121+ days delinquent with modification listed as the workout strategy. The loan is secured by a portion of a single-level regional mall in Canton, Ohio, which originally served to refinance existing debt for the Westfield Group (Westfield); however, Starwood Capital Group (Starwood) assumed the loan in 2013 as part of its acquisition of seven malls from Westfield. To refinance the portfolio, Starwood raised a significant amount of capital through Israeli-backed bonds that have defaulted, triggering an accelerated payment clause enabling the bondholders to seize control of the assets. According to a The Real Deal article published on September 29, 2020, the joint venture between Pacific Retail Capital Partners and Golden East Investors has won the bid to take over the malls. While the transition to new ownership and restructuring of senior debt will likely take some time, there have been some positive developments in recent months. The loan had historically been monitored for the departure of the noncollateral Sears, which originally downsized to 73,000 square feet (sf) in 2018 from 196,000 sf and then subsequently vacated. While there was a period of increased vacancy, Seritage Growth Properties has since redeveloped and backfilled most of the space with three tenants—Dave & Buster’s (opened in November 2019), Dick’s Sporting Goods (opened in October 2020), and Golf Galaxy (opened in October 2020). Despite some issues with rent collections and struggling retailers amid the ongoing pandemic, collateral occupancy was reported at 96.2% per the September 30, 2020, rent roll.

The second loan in special servicing, Park Place Power (Prospectus ID#16; 3.6% of the current pool balance) transferred in June 2020 for imminent default at the borrower’s request for coronavirus relief. As of November 2020 reporting, the loan was current and listed with a workout strategy of discounted payoff. Collateral is secured by a Class A office property in the central business district of Birmingham, Alabama, which has been 67.0% occupied since Hand Ardenall Harrison Sale LLC’s departure (10.3% of the net rentable area (NRA)) in January 2017. As of November 2020, occupancy has further declined to 57.5% as a result of a number of departures and downsizing. The loan reported an annualized coverage of 1.09 times (x) as of Q2 2020; however, there is some near-term rollover in the next six months that could further stress in-place coverage, most notably Frost Cummings Tidwell Group, LLC (7.1% of the NRA; expiring February 2021). The property has been listed for sale since July 2020 and it appears that the servicer’s primary strategy is to work with the borrower to sell the property in line with market value. The secondary strategy is foreclosure. Given performance to date, DBRS Morningstar expects the value of the property has dropped precipitously from the issuance level, and with the noted workout strategy being a discounted payoff, the loan is expected to take a loss

Of the nine loans on the servicer’s watchlist, six loans (19.2% of the current pool balance) were added for performance-related declines, primarily attributed to increased vacancy as a result of the coronavirus. Based on Q2 2020 reporting, these loans had a WA debt service coverage ratio (DSCR) of 1.12x compared with 1.83x as of year-end 2019, reflecting a 39.3% decline. Despite the performance declines, all six loans remain current as of the November 2020 remittance. The remaining three loans (1.7% of the current pool balance) were watchlisted as a result of ongoing renovations and deferred maintenance.

While neither specially serviced nor on the watchlist, the Oxmoor Center (Prospectus ID#3; 12.6% of the current pool balance) in Louisville, Kentucky, poses some concern following Sears’ departure. While there have been ongoing legal challenges from residents in the surrounding area, Topgolf has signed a lease through May 2040 for 65,000 sf of the 139,000 sf space that Sears vacated. The tenant’s lease is not scheduled to commence until November 2022, but this reflects its extensive redevelopment plans. While the loan reported an annualized DSCR of 1.01x as of Q2 2020 reporting, the figure is artificially low as the annual ground-rent expense has been charged. Adjusting the figure to account for this results in an annualized DSCR of 1.18x, in line with the Q2 2019 annualized DSCR of 1.14x. The Brookfield Property Partners L.P. property is anchored by Macy’s, Von Maur, and Dick’s Sporting Goods. As of the most recent tenant sales report for the trailing 12-month period ended December 2018, reported in-line sales for tenants that occupy less than 10,000 sf is $481 per sf.

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.

Class X-A is an interest-only (IO) certificate that references 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 loan in the transaction:

-- Prospectus ID#2 – Westfield Belden Village (14.6% of the pool balance)
-- Prospectus ID#16 – Park Place Tower (3.6% of the pool balance)
-- Prospectus ID#18 – Briargate Office Park (3.3% of the pool balance)

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 (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 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 under Related Documents or by contacting us at info@dbrsmorningstar.com.

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.

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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