DBRS Morningstar Confirms Ratings on Two Classes of DBUBS 2011-LC2 Mortgage Trust

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

-- Class FX at B (sf)
-- Class F at B (low) (sf)

All trends are Stable.

The rating confirmations and Stable trends reflect DBRS Morningstar’s view of the remaining two loans in the pool, as further described below. Although there remains a significant amount of cushion in the unrated Class G first loss certificate, which had a balance of just over $37.0 million as of the June 2022 remittance, there are challenges for each loan. These challenges supported DBRS Morningstar’s conservative approach for this review.

As of the June 2022 remittance, there are two loans remaining in the trust, with an aggregate balance of $52.3 million. The pool has been paid down by 97.6% since issuance. The smaller of the two loans, The Tower (Prospectus ID#28, 35.3% of the pool balance), is in special servicing, and the larger loan, Magnolia Hotel Houston (Prospectus ID#16, 64.7% of the pool balance), is on the servicer’s watchlist. One loan, Louisiana Tower, was recently liquidated from the pool, which resulted in a loss of $3.5 million to the Class G certificate. The loss amount was in line with DBRS Morningstar’s expectations.

The Tower is secured by a mixed-use complex (predominantly office space) composed of three buildings in downtown Fort Worth, Texas. The former largest tenant, Alcon (38.1% of the net rentable area), exercised its termination option and vacated the property in January 2021. The loan subsequently transferred to special servicing in June 2021 for maturity default, and the trust ultimately obtained title to the properties in January 2022. The special servicer’s commentary as of June 2022 stated the collateral had been sold through an auction held in April 2022, with the transaction expected to close by the end of June 2022. The May 2021 appraisal valued the complex at $32.4 million, down 6% from the issuance value of $34.5 million. However, according to the servicer, the property was less than 50% occupied the last time it was calculated, suggesting a sale price could be diluted given current challenges for leasing large blocks of vacant office space. Given these factors, DBRS Morningstar assumed a haircut to the 2021 value that resulted in a loss of $5.1 million (loss severity in excess of 25%) in the analysis for this review.

The Magnolia Hotel Houston loan is secured by a 314-key full-service hotel in downtown Houston. The loan was previously in special servicing for payment default following the borrower’s relief request associated with the Coronavirus Disease (COVID-19) pandemic. A loan modification was executed, which allowed for reduced payments between May 2021 and July 2021, and the loan maturity was extended to June 2023 from June 2021. In addition, all default interest and late fees were waived. The loan was returned to the master servicer in February 2022 and will be cash managed through loan maturity.

According to the September 2020 appraisal, the property was valued at $46.6 million, down 27% from the issuance value of $63.7 million, representing a loan-to-value (LTV) ratio of 72.8%, compared with the issuance LTV of 65.9%. Performance has been depressed for several years with the debt service coverage ratios reporting below breakeven. This was primarily driven by the extensive property improvement plan renovations required to align the property with Starwood Tribute brand standards, a factor compounded by the general challenges within the oil and gas industry in previous years and more recently by the effects of the pandemic. According to the March 2022 STR, Inc. report, the property reported a trailing 12 months ended March 31, 2022, occupancy rate, average daily rate, and revenue per available room (RevPAR) of 40.9%, $155.63, and $63.72, respectively, with a RevPAR penetration rate of 77.7%. Although the sustained performance declines are concerning, DBRS Morningstar believes property performance should tick up over the near to moderate term as leisure travel continues to pick up and the energy sector benefits from recent increases in gas prices. The sponsor appears committed to the property and the subject loan, and the 2020 appraisal suggests the trust remains relatively well insulated from loss should a liquidation ultimately occur.

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/dbrs-morningstar-criteria-approach-to-environmental-social-and-governance-risk-factors-in-credit-ratings.

Class FX 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.

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 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. 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].

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