DBRS Morningstar Downgrades Three Classes of MSC 2011-C3 Mortgage Trust, Changes Trends on Four Classes to Stable From Negative

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

-- Class F to BB (high) from BBB (low) (sf)
-- Class X-B to B (sf) from BB (low) (sf)
-- Class G to B (low) from B (high) (sf)

In addition, the following ratings were confirmed:

-- Class C at AAA (sf)
-- Class D at AA (low) (sf)
-- Class E at BBB (sf)

The trends on Classes E, F, G, and X-B have been changed to Stable from Negative. All other trends remain Stable.

The rating downgrades reflect DBRS Morningstar’s expectation that the value for the collateral mall backing the largest remaining loan in the pool, Westfield Belden Village (Prospectus ID #2, 52.6% of the pool), will likely remain well below the issuance figure even if performance improvements are achieved through the extended maturity term. The pool has been reduced to just five outstanding loans, with the bulk of the remaining balance in the aforementioned loan and Oxmoor Center (Prospectus ID#3, 42.0% of the pool), which were both specially serviced until recent transfers back to the master servicer.

The trust consists of five of the original 63 loans, with an aggregate principal balance of $173.9 million, reflecting a collateral reduction of 88.3% since issuance. As of the June 2022 reporting, there are two loans, representing 55.4% of the pool, on the servicer’s watchlist. There are no specially serviced or delinquent loans.

The Westfield Belden Village loan is secured by a portion of a regional mall in Canton, Ohio. The loan previously transferred to special servicing in May 2020 for imminent monetary default related to a downgrade of Israeli bonds that backed the subject and other Starwood malls. The loan was ultimately resolved when an agreement was reached to allow holders of the Israeli bonds to take control of the subject mall. The trust loan was brought current under the modification agreement, with terms including interest-only payments from July 2021 through December 2022, as well as a maturity extension to July 2026. The loan was transferred back to the master servicer in April 2022. There is a cash flow sweep in place as part of the loan modification, with the servicer’s watchlist commentary as of June 2022 stating the sweep account has a balance of $4.0 million. The funds will not be released until a 1.25 times (x) debt service coverage ratio threshold is met for six consecutive months and 18 months from the November 2021 execution date. The property was 95.5% occupied at year-end (YE) 2021, and reported positive cash flows, which remained in line with the previous year. There is limited rollover risk within the next 12 months, with only 10.7% of net rentable area (NRA) expected to roll, including the second-largest collateral tenant, Forever 21 (2.7% of the NRA), which has a lease expiration in January 2023. An affiliate of Pacific Retail Capital Partners is operating the mall, which is most recently known as Belden Village Mall.

The special servicer’s most recently obtained appraisal, dated August 2021, valued the property on an as-is basis of $81.6 million, which suggests a loan to value (LTV) on the current loan balance of $91.8 million of over 100% and is sharply below the issuance value of $159.0 million. While DBRS Morningstar acknowledges the positive developments for this loan over the last year in the resolution of the outstanding defaults, the extension of the maturity, and the high occupancy rate near 100% that was maintained in 2021, the challenges for regional malls in secondary markets, even those that have generally performed well, persist and could cause difficulty over the remaining term and at the extended maturity date. Prior to the onset of the Coronavirus Disease (COVID-19) pandemic, revenues for the subject property were stable, but those trends began to reverse in 2019 and the reported figure for 2021 of $14.6 million is below the issuance figure of approximately $15.3 million. Given these factors, DBRS Morningstar believes it is unlikely the mall will achieve a materially improved as-is value from the August 2021 figure and considered a hypothetical liquidation scenario based on a haircut to that value in the analysis for this review. The hypothetical loss amount was just over $30.0 million, supporting the downgrades to the two lowest-rated bonds in the transaction.

The second-largest loan, Oxmoor Center (Prospectus ID#3, 42.0% of the pool), is secured by a regional mall in Louisville, Kentucky. The loan previously transferred to special servicing in June 2021 for maturity default, returned to the master servicer in February 2022, and a loan modification was approved to extend the loan’s maturity through June 2023. The sponsor is an affiliate of Brookfield Property Partners (Brookfield), which also owns another mall in the immediate vicinity, Mall St. Matthews, which secures a CMBS loan held across two 2013 transactions, including the DBRS Morningstar-rated GS Mortgage Securities Trust 2013-GCJ14. That loan also transferred to special servicing for maturity default and was ultimately resolved with a five-year maturity extension. Both that mall and the subject mall have historically performed well overall, but the Mall St. Matthews loan differs in that Brookfield was reportedly interested in the possibility of transferring the title for that mall to the respective trusts, according to special servicer commentary. Those suggestions were never made for the subject, and DBRS Morningstar has held that should Brookfield walk from one of the two properties, it would be the Mall St. Matthews property given its inferior tenant mix and generally less stable outlook. The successful loan modifications for both loans appear to suggest Brookfield remains committed to both properties.

As the Oxmoor Center loan never became delinquent on its debt service payments, the special servicer did not report an updated appraisal during the time in special servicing. It is noteworthy that Mall St. Matthews reported an updated appraisal showing the as-is value as of August 2021 of $83.0 million, nearly $200 million below the issuance value of $280.0 million. While DBRS Morningstar believes it is likely that the as-is value for Oxmoor Center has declined from issuance, the expectation is that the decline is not as substantial as has been reported for other malls in the wake of the coronavirus pandemic. This is a result of the strong tenant mix, which includes many high-end retailers and eateries, preferred status within the Louisville market, and the recent development that will be bringing Topgolf to the former Sears space, with construction currently underway. Since Sears closed in 2018, the occupancy rate at the mall has been depressed, but that is expected to stabilize once Topgolf is open. Brookfield has also recently invested in constructing additional outparcel space for new restaurants, including Capital Grille. It has also been reported that the sponsor is seeking to convert approximately 28,000 sf of space to office use on the mall’s second floor, with leasing efforts ongoing. Given these factors, DBRS Morningstar believes a successful takeout will be likely at or shortly after the extended loan maturity in 2023, supporting the rating confirmations and Stable trends with this review.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factors that had a significant or relevant effect on the credit analysis.

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/396929.

Class X-B 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 this transaction.

The DBRS Viewpoint platform provides additional information on this transaction and underlying loans including DBRS Morningstar metrics, commentary, servicer-reported cash flows, and other performance-related data. For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com.

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

The principal methodology is the North American CMBS Surveillance Methodology (March 4, 2022), 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.

The DBRS Morningstar Sovereign group releases baseline macroeconomic scenarios for rated sovereigns. DBRS Morningstar analysis considered impacts consistent with the baseline scenarios as set forth in the following report: https://www.dbrsmorningstar.com/research/384482.

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.

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 [email protected].

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