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

DBRS Limited (DBRS Morningstar) downgraded its ratings on two 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 B (low) (sf) from BB (high) (sf)
-- Class D to CCC (sf) from B (sf)

DBRS Morningstar also confirmed the ratings on the following classes:

-- Class E at C (sf)
-- Class F at C (sf)
-- Class G at C (sf)

The trend on Class C was changed to Stable from Negative while Classes D, E, F, and G have ratings that generally do not carry trends in commercial mortgage-backed securities (CMBS). DBRS Morningstar removed the Interest in Arrears designation on Class C as interest shortfalls were repaid with the September 2022 remittance but maintained the designation on Classes D, E, F, and G as interest shortfalls remain outstanding for those classes.

The rating downgrades for Classes C and D are reflective of DBRS Morningstar’s continued concerns for the two largest loans in special servicing, both of which are distressed assets with significant value declines from issuance. As noted at last review when Negative trends were maintained for those classes, DBRS Morningstar believes that with the economic dynamics in place over the last few years amid the Coronavirus Disease (COVID-19) pandemic, finding prospective buyers of the two distressed assets will likely be difficult, increasing the prospects for a significant loss at resolution, which would also generally erode the remaining credit support for the classes downgraded with this review. In addition, the periodic reoccurrence of shortfalls on Class C and the sustained shortfalls for Class D beyond the DBRS Morningstar threshold were also a consideration that supported the rating downgrades.

The trend change for Class C is reflective of the proposed workout strategy for the smallest remaining loan in special servicing, Hospitality Specialists Portfolio – Pool 2 (Prospectus ID#11, 17.3% of the pool), which noted that a forbearance agreement is being worked upon to help facilitate a full payoff of the loan by year-end 2022, per the servicer’s September 2022 commentary.

As of the September 2022 remittance, three of the original 32 loans remain in the pool, representing a collateral reduction of 85.2% since issuance with a current trust balance of $99.9 million. All three loans are in special servicing.

The largest loan in the pool, Poughkeepsie Galleria (Prospectus ID#2, 61.3% of the pool), is secured by the borrower's fee-simple interest in a 691,325-square-foot regional mall in Poughkeepsie, New York. The loan transferred to special servicing in April 2020 as a result of imminent monetary default. A foreclosure complaint and subsequent receivership were filed in August 2022. According to the December 2021 appraisal, the property was valued at $69.2 million, a minor increase from the November 2020 valuation of $68.6 million, but well below the issuance value of $237.0 million. The loan continues to report a stressed debt service coverage ratio (DSCR) well below break-even, with the trailing six-month ended (T-6) June 30, 2022, DSCR at 0.4 times (x). Prior to the pandemic, the loan reported YE2019 and YE2018 DSCRs of 0.88x and 1.05x, respectively.

The collateral reported a June 2022 occupancy rate of 57.0%, which remains depressed from the YE2021 and YE2020 occupancy rates of 66.0% and 61.0%, respectively. Occupancy remains significantly reduced compared with the YE2019 occupancy of 85.2% and the issuance occupancy rate of 87.7%. The largest collateral tenants include Regal Cinemas (10.2% of the NRA, lease expiring in December 2026), which reopened in May 2021, and Dick’s Sporting Goods (7.8% of the NRA, lease expiring in February 2028). The property was previously anchored by collateral tenants Sears and JCPenney, but both tenants closed in 2020. The remaining anchors include a noncollateral Target and Macy’s. Given the depressed value, the secondary location of the subject property, extended period of delinquency, and lack of recent leasing traction, the risks for significant loss to the trust at resolution are quite high, with DBRS Morningstar’s liquidation scenario continuing to show a loss severity will likely be realized in excess of 65.0%.

The second-largest loan in special servicing, Marriott Buffalo Niagara (Prospectus ID#9, 21.4% of the pool), is secured by the borrower's fee-simple interest in a 356-key full-service hotel in Amherst, New York. The loan transferred to special servicing in April 2020 for imminent monetary default ahead of its September 2021 maturity date. A foreclosure sale occurred in April 2022 and the property became real estate owned (REO) as of May 2022. The special servicer notes that a new management company was engaged and the hotel will continue to operate under the Marriott flag.

Based on the July 2022 appraisal, the collateral was valued at $18.2 million, representing an increase from the March 2021 and May 2020 values of $14.0 million and $17.4 million, respectively. Despite this increase, it is still well below the issuance value of $57.2 million. The loan continues to report negative net cash flows and with this review, DBRS Morningstar maintained a liquidation scenario with an implied loss severity in excess of 35.0%.

Although the loss severities for the two loans analyzed with liquidation scenarios suggested losses will be contained to Classes E and below, DBRS Morningstar notes significant uncertainty with regard to the marketability of the those two collateral properties in an underperforming Class B mall located in a tertiary market and a full-service hotel property located in a challenged market that was experiencing declines prior to the pandemic. These concerns suggest loss severities could ultimately come in higher, a factor that provided support for the rating downgrades through the Class C certificate.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor(s) 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/373262 (May 17, 2022).

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 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.

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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