DBRS Morningstar Confirms all Ratings on MSC 2011-C3 Mortgage Trust

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

-- Class C at AAA (sf)
-- Class D at AA (low) (sf)
-- Class E at BBB (sf)
-- Class F at BB (high) (sf)
-- Class X-B at B (sf)
-- Class G at B (low) (sf)

All trends are Stable.

The rating confirmations reflect the overall stable performance of the transaction since DBRS Morningstar’s last review in June 2022. As of the January 2023 remittance, five of the original 63 loans remain in the pool, with an aggregate principal balance of $171.9 million, representing a collateral reduction of 88.5% since issuance. There are two loans, representing 44.1% of the pool balance, on the servicer’s watchlist and there are no delinquent or specially serviced loans.

The largest loan is Westfield Belden Village (Prospectus ID#2; 53.3% of the pool), which is secured by a portion of a regional mall in Canton, Ohio. The loan was previously in special servicing in May 2020 for imminent monetary default related to a downgrade of Israeli bonds that backed the subject and other Starwood Retail Partners 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 (IO) payments from July 2021 through December 2022, as well as a maturity extension to July 2026. The loan returned to the master servicer in April 2022 and as of the January 2023 remittance, the borrower has resumed its principal and interest (P&I) payments. The modification also required the loan to be cash managed, with excess funds swept and held for a minimum of 18 months from the November 2021 execution date or until a 1.25 times (x) debt service coverage ratio (DSCR) threshold is met for six consecutive months. The last reported cash flow is for the YE2021 reporting period, when the DSCR was 1.43x; no updated financials were reported since.

According to the June 2022 rent roll, the collateral occupancy was 91.7%. The mall is anchored by Macy’s (collateral) and Dillard’s (noncollateral). The noncollateral anchor Sears downsized from approximately 190,000 square feet (sf) to 73,000 sf in 2019, and the remaining space was substantially backfilled by a combination of three tenants in Dave & Buster’s, Dick’s Sporting Goods, and Golf Galaxy. Based on the trailing 12 months (T-12) ended November 30, 2022, tenant sales report, in-line tenants occupying less than 10,000 sf reported T-12 sales of $439 per square foot (psf), compared with the T-12 ended November 30, 2021, sales of $451 psf. Tenants occupying more than 10,000 sf reported T-12 ended November 30, 2022, sales of $416 psf, compared with sales of $429 psf for the same period in November 2021.

The most recent appraisal obtained by the special servicer, dated August 2021, valued the property on an as-is basis at $81.6 million, which suggests a loan-to-value in excess of 100% on the current loan balance of $91.6 million. In addition, the August 2021 value is well below the issuance value of $159.0 million. While DBRS Morningstar acknowledges the positive developments for this loan in the resumption of P&I payments and the relatively healthy occupancy rate, the challenges for regional malls in secondary markets continue to persist and will likely continue to hinder the sponsor’s ability to refinance the subject loan without significant equity investment.

The second-largest loan, Oxmoor Center (Prospectus ID#3; 41.5% of the pool), is secured by a regional mall in Louisville, Kentucky. The loan was previously in special servicing in June 2021 for maturity default but was returned to the master servicer in February 2022 after a loan modification was approved to extend the loan’s maturity through June 2023. The loan is currently on the watchlist because of the upcoming maturity and the servicer reported that the borrower is working on the refinance.

Based on the September 2022 rent roll, the property was 77.9% occupied, which is in line with the YE2021 occupancy rate 78.6%. Occupancy has been depressed since the departure of Sears in 2018; however, the space has since been repurposed for Topgolf, which opened in November 2022, suggesting the occupancy rate has improved to approximately 93%. Other anchors at the subject include Macy’s, Von Maur, and Dick’s Sporting Goods. According to the T-9 ended September 30, 2022, financials, the loan reported a DSCR of 1.23x, compared with the YE2021 DSCR of 1.20x and YE2020 DSCR of 1.02x.

The sponsor is an affiliate of Brookfield Property Partners L.P. (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. The Mall St. Matthews loan also transferred to special servicing for a 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 DBRS Morningstar notes that Brookfield was at one time expressing interest in transferring the title for Mall St. Matthews to the lender, according to previous special servicer commentary. The special servicer never reported an interest to transfer the title for the Oxmoor Center property, which is the superior property between the two by a significant margin based on tenancy, sales, and general position in the submarket.

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 decline is less likely to be drastic as compared to other malls given the subject’s strong tenant mix, the recent development of Topgolf taking over the former Sears space, and Brookfield’s recent investment in constructing additional outparcel space for restaurant tenants. In addition, it was reported that the sponsor is seeking to convert approximately 28,000 sf of space to office use on the mall’s second floor. Given these factors, DBRS Morningstar expects Brookfield will continue to show commitment to the loan, even if another maturity extension is required amid the challenges commercial property owners are facing with higher interest rates and lower lending appetites for some property types and markets.

ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
There were no Environmental/Social/Governance factor 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).

Class X-B is an 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.

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

The principal methodology is 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 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.

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

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