DBRS Morningstar Downgrades Ratings on Four Classes of UBS-Citigroup Commercial Mortgage Trust, Series 2011-C1

DBRS Morningstar (DBRS Limited) downgraded its ratings on four classes of the Commercial Mortgage Pass-Through Certificates, Series 2011-C1 (the Certificates) issued by UBS-Citigroup Commercial Mortgage Trust, Series 2011-C1, as follows:

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

Classes E, F, and G were removed from Under Review with Negative Implications, where they were placed on August 6, 2020. The trends for Classes C and D have been changed to Negative from Stable. Classes E and F have been assigned ratings that do not carry trends.

DBRS Morningstar also confirmed the ratings on the following classes as follows:

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

The trends for the confirmed classes remain Stable, with the exception of Class G, which has a rating that does not carry a trend. DBRS Morningstar placed Interest in Arrears designations for Classes E, F, and G.

The rating downgrades and trend changes generally reflect DBRS Morningstar’s loss expectations for two top-10 loans in special servicing: Poughkeepsie Galleria (Prospectus ID#2, 15.8% of the pool) and Marriott Buffalo Niagara (Prospectus ID#9, 5.5% of the pool). Both loans have been on the DBRS Morningstar Hotlist because of cash flow declines and both were transferred to special servicing in April 2020 because of imminent monetary default. According to the servicer, the respective sponsors each cited the Coronavirus Disease (COVID-19) pandemic as the primary contributor to the defaults. In addition to these two loans, there are another four loans in special servicing as of the April 2021 remittance, three of which are backed by hospitality property types. In total, the specially serviced loans represent 37.8% of the pool balance. A relatively small number of loans are on the servicer’s watchlist, with just three loans representing 5.2% of the pool, all of which are being monitored for low debt service coverage ratios (DSCRs) and were analyzed with elevated probability of default (PoD) figures to increase the expected loss for this review .

The Poughkeepsie Galleria loan is split pari passu across the subject and the UBS 2012-C1 transaction, not rated by DBRS Morningstar. The loan is secured by a regional mall in Poughkeepsie, New York. As of the April 2021 remittance, the loan was over 121 days delinquent, with the servicer noting that a resolution strategy has yet to be determined. According to the November 2020 appraisal, the property was valued at $68.6 million, a drastic decline compared with the issuance appraised value of $237.0 million and well below the outstanding principal balance on the whole loan of just over $137.0 million. The value decline is largely the result of sustained cash flow declines from issuance, as well as the presence of two dark anchor boxes and a significantly higher cap rate assumed by the appraiser for the 2020 valuation as compared with cap rate assumed in the issuance appraisal. As of year-end (YE) 2020, the subject loan reported a DSCR of 0.42 times (x), down from the YE2019 DSCR of 0.89x, and the YE2018 DSCR of 1.06x.

Collateral anchors at issuance included Sears and JCPenney, but both retailers closed their locations at the subject mall in 2020 and both spaces remain vacant. Remaining anchors include a collateral Regal Cinemas, which remains temporarily closed, and a non-collateral Target and Macy’s. The loan sponsor is The Pyramid Companies (Pyramid), a privately held company that owns 16 regional malls totaling 17.8 million square feet (sf) located in the Northeast United States. Pyramid has several commercial mortgage-backed securities (CMBS) loans backed by malls within its portfolio and most are in special servicing. The firm has been widely reported to be in financial distress, brought on by the pandemic, but DBRS Morningstar believes the problems were likely brewing well before 2020 given the firm’s portfolio, which is largely composed of regional mall properties in tertiary markets that have been particularly vulnerable amid the changes in shopper habits that have driven traffic away from mall property types.

Given the sharp decline in appraisal value for Poughkeepsie Galleria and the other factors contributing to significantly increased risks for this loan including the low occupancy rate with two dark anchor boxes, the sponsor’s relatively limited access to capital as a private company with a regionally concentrated portfolio and the generally poor outlook for the mall’s prospects going forward in the face of the changing retail landscape, DBRS Morningstar liquidated the loan in the analysis for this review, with a loss severity in excess of 75.0%.

The Marriott Buffalo loan is secured by a full-service hotel in Amherst, New York, located within the Buffalo metropolitan statistical area and approximately 20 miles southeast of Niagara Falls. According to the March 2021 appraisal obtained by the special servicer, the property was valued at $14.0 million, another drastic decline compared with the issuance appraised value of $57.2 million. Like the Poughkeepsie Galleria, the subject loan was also showing significant performance declines prior to the onset of the coronavirus pandemic, with these trends contributing to the sharp drop off in property value. The servicer reported a DSCR of 1.32x as of September 2019, which was below the already declined DSCR figures in previous years that hovered near 1.50x. At issuance, the DBRS Morningstar DSCR was 2.26x.

Hotel revenues were initially above the issuance figures for the first few years of the life of the loan, but began falling in 2014 and have continued to show year-over-year declines for every year since. Although the loan was above water, the coronavirus pandemic delivered an insurmountable challenge in the lack of bookings and the sponsor has advised the servicer that additional equity will no longer be contributed to the property or the loan and the servicer appears to be working to initiate foreclosure proceedings. The challenges for the hotel are significant and DBRS Morningstar does not expect there to be any meaningful recovery in the property’s as-is value through the workout and disposition process. Based on a haircut to the March 2021 valuation, the loan was liquidated in the analysis for this review, with a loss severity in excess of 54.0%.

As previously mentioned, there are three additional loans in special servicing backed by hospitality property types, including the DoubleTree Chattanooga loan (Prospectus ID #10, 4.5% of the pool), which is secured by a full-service hotel in Chattanooga, Tennessee, and is listed as current as of the April 2021 remittance. The special servicer is processing a maturity extension request for the June 2021 maturity date and the sponsor appears to be cooperating with the special servicer. This loan was generally performing in line with expectations prior to 2019, when cash flows dipped slightly because of a combination of slightly lower revenues and increased expenses as compared with prior years. Given the stable performance prior to the pandemic and the lack of significant delinquency since the onset of the coronavirus pandemic, DBRS Morningstar expects an agreement for a maturity extension will be reached. There has been no updated appraisal obtained by the special servicer to date, but the amortization since issuance has reduced the trust’s exposure to $17.9 million, suggesting the issuance valuation of $33.0 million would have to be reduced by nearly half to suggest the a loan-to-value ratio (LTV) in excess of 100.0%.

The other two hotel loans in special servicing, Hospitality Specialists Portfolio – Pool 1 (Prospectus ID #12, 4.3% of the pool) and Hospitality Specialists Portfolio – Pool 2 (Prospectus ID #11, 4.5% of the pool), are each backed by portfolios of three limited-service hotel properties, all six of which are located in tertiary markets in Michigan and Illinois. The loans transferred to special servicing in February 2021 and the special servicer’s commentary suggests negotiations are in the initial stages for both. The performance for the Pool 1 loan has generally been in line with issuance expectations but the Pool 2 loan began reporting cash flow declines in 2017, when the YE2017 DSCR was reported at 1.16x, where it remained in 2018 before falling to 0.87x at YE2019. Given the performance declines for Pool 2, and the outstanding delinquency and transfer to special servicing for both loans, both were analyzed with an elevated PoD to increase the expected losses for this review .

As of the April 2021 remittance, 24 of the original 32 loans remained in the subject pool, representing a collateral reduction of 41.8% since issuance. 12 of the remaining loans are fully defeased, representing 50.2% of the pool balance. All of the remaining loans are scheduled to mature by the end of 2021 and there has been one loan resolved with a loss to date in the Holiday Inn Express Cooperstown loan, which was disposed with a nominal loss of approximately $81,000 in 2016. The remaining pool is concentrated in retail and hotel properties, which represent 32.8% and 20.0% of the pool, respectively. The defeasance insulates top two remaining classes but the likelihood of significant losses for the two largest loans in special servicing as previously outlined, as well as the increased risks for the remaining loans in special servicing and those on the servicer’s watchlist support the rating downgrades and trend changes with this review.

ESG CONSIDERATIONS
A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at https://www.dbrsmorningstar.com/research/373262.

Class X-A 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 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#2 – Poughkeepsie Galleria (15.8% of the pool)
-- Prospectus ID#9 – Marriott Buffalo Niagara (5.5% of the pool)
-- Prospectus ID#18 – Beta Center (3.3% 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 (March 26, 2021), 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 [email protected].

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.

For more information on this credit or on this industry, visit www.dbrsmorningstar.com or contact us at [email protected].

DBRS Limited
DBRS Tower, 181 University Avenue, Suite 700
Toronto, ON M5H 3M7 Canada
Tel. +1 416 593-5577