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

DBRS, Inc. (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 underlying collateral for the remaining loan in the pool, as further described below. Although there is a significant amount of cushion in the unrated Class G first loss certificate of $32.6 million and Class F is likely to be repaid with a small balance of $1.3 million, the uncertainty with regard to the final workout terms for the remaining loan was the primary driver for DBRS Morningstar’s conservative approach with this review.

Since the last rating action, one loan, The Tower, was liquidated from the pool. This action resulted in a loss of $4.6 million to the Class G certificate, which was in line with DBRS Morningstar’s expectations. Interest shortfalls of $1.8 million are affecting the nonrated Class G certificate.

The Magnolia Hotel Houston loan is secured by a 314-key full-service hotel in downtown Houston. A loan modification was executed after the loan transferred to special servicing because of a payment default near the timing of the borrower’s relief request associated with the Coronavirus Disease (COVID-19) pandemic. The loan modification terms include reduced payments between May 2021 and July 2021, a loan maturity extension to June 2023 from June 2021, and waived default interest and late fees. The loan was returned to the master servicer in February 2022 and will continue to be cash managed through loan maturity, although it is unlikely that meaningful funds would be trapped considering the loan has been reporting debt service coverage ratios (DSCRs) well below breakeven for the last several years. Property performance declines were initially driven by the extensive property improvement plan renovations required to align the property with Starwood Tribute brand standards. The declines were then compounded by the general challenges within the oil and gas industry, which were further exacerbated by the effects of the pandemic.

According to the September 2020 appraisal, the property was valued at $46.6 million, a 27% decline from the issuance value of $63.7 million. This represents a loan-to-value (LTV) ratio of 72.8%, compared with the issuance LTV of 65.9%. According to the most recent reporting for the trailing 12 months ended September 30, 2022, the occupancy rate, average daily rate, and revenue per available room (RevPAR) were 47.1%, $166.47, and $78.41, respectively. Performance continues to lag when compared with pre-pandemic levels, as the YE2019 RevPAR was $136.57.

Although the 2020 appraisal is above the outstanding loan balance, other commercial mortgage-backed securities loans secured by Houston hotels have exhibited steeper value declines from issuance, suggesting the current value of the property may have decreased further. The sponsor appears to be committed to the property; however, given the subject had performance issues and reported low DSCRs prior to the pandemic, it will be challenging for the subject’s performance to rebound near issuance expectations, supporting DBRS Morningstar’s conservative approach.

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 (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.

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

The principal methodology is the North American CMBS Surveillance Methodology (October 3, 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 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.

DBRS Morningstar notes that a sensitivity analysis was not performed for this review as the transaction is in wind down, with only one remaining loan. In these cases, the DBRS Morningstar ratings are typically based on a recoverability analysis for the remaining loan.

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

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