Morningstar DBRS Downgrades Credit Ratings on Four Classes of JP Morgan Chase Commercial Mortgage Securities Trust 2011-C3

DBRS Limited (Morningstar DBRS) downgraded its credit ratings on the Commercial Mortgage Pass-Through Certificates, Series 2011-C3 issued by JP Morgan Chase Commercial Mortgage Securities Trust 2011-C3 as follows:

-- Class B to A (high) (sf) from AAA (sf)
-- Class C to BBB (high) (sf) from AA (low)
-- Class D to CCC (sf) from BBB (high) (sf)
-- Class E to C (sf) from B (sf)

Morning DBRS also confirmed the credit ratings on the remaining classes as follows:

-- Class F at C (sf)
-- Class G at C (sf)
-- Class H at C (sf)
-- Class J at C (sf)

The trend on Classes B and C was changed to Negative from Stable. Classes D, E, F, G, H, and J have credit ratings that do not generally carry a trend in commercial mortgage-backed security (CMBS) credit ratings. The credit rating actions reflect the increased loss expectations for the two remaining loans in the pool, both of which have previously been modified and are backed by regional malls with declining performance. In addition, Morningstar DBRS notes the increased propensity for interest shortfalls given the likelihood that both loans will become delinquent in the near term, at which point there will be no distributable interest available to the bonds.

Although the transaction is in wind-down with significant credit support in the remaining structure for the most senior certificates, Morningstar DBRS notes that the two remaining loans in the pool exhibit increased credit risks because of expected or recent defaults that have resulted in an extremely concentrated risk profile. Both of these loans are secured by regional malls located in tertiary markets, and are owned and operated by affiliates of Pyramid Management Group, a privately held shopping mall developer that owns and operates 15 shopping centers, many of which have been in and out of delinquency and faced significant value declines over the past few years. The analysis for this review considered liquidation scenarios for both loans and based on those scenarios, Morningstar DBRS’ projected losses may reach the Class D certificate. The resulting reduction in credit support, Morningstar DBRS’ recoverability outlook on weak malls outside core markets, and increased likelihood of shorted interest in the near to medium term support the credit rating actions with this review.

As of the January 2024 remittance, the transaction had an aggregate balance of $217.9 million, representing a collateral reduction of 85.4% since issuance. The remaining loans in the pool are Holyoke Mall (Prospectus ID#1; 76.4% of the current pool balance) and Sangertown Square (Prospectus ID#6; 23.6% of the current pool balance).

Holyoke Mall is secured by a 1.6 million square foot (sf) regional mall in Holyoke, Massachusetts, anchored by collateral tenants Target (11.6% of the net rentable area (NRA), lease expiry in January 2025), JCPenney (11.0% of the NRA, lease expiry in May 2028), and non-collateral tenant Macy’s. A collateral anchor space that was previously occupied by Sears remains vacant. Other major tenants include Burlington Coat Factory (4.7% of the NRA, lease expiry in February 2025) and Best Buy (3.8% of the NRA, lease expiry in January 2025). There is $35.0 million of mezzanine debt that amortizes pro rata with the $215.0 million first mortgage debt. The loan was originally scheduled to mature in February 2021 but was granted maturity extension until February 2024. However, the loan transferred to the special servicer on January 18, 2024, for imminent maturity default.

The property was reappraised in August 2020 at a value of $200.0 million, representing a 50% decline from the issuance appraised value of $400.0 million. The updated value represents a loan-to-value (LTV) ratio of 83.2% based on the outstanding senior note and a whole-loan LTV of 100.7% when factoring in the $35.0 million mezzanine loan. Occupancy at the subject fell following the 2018 departure of anchor tenant Sears. The June 2023 occupancy rate was reported at 61.0% compared with the YE2021 occupancy rate of 69.1%. The debt service coverage ratio (DSCR) for the trailing six-month period ended June 30, 2023, was reported at 1.05 times (x), compared with the YE2021 DSCR of 1.40x. Additional concerns include concentrated upcoming rollover, with leases representing approximately 28.6% of the NRA scheduled to expire in the next 12 months, including three of the top five tenants. As part of the loan’s previous modification, there is a cash sweep in effect until all amounts due on the loan have been paid in full. As of the December 2023 remittance, the loan has an aggregate reserve balance of $6.7 million. Given the year-over-year occupancy rate and cash flow declines, and significant near-term rollover risk, it is likely the property value has deteriorated further since the 2020 appraisal. Given the recent default and transfer to the special servicer, the workout strategy is uncertain at this time. Based on a liquidation scenario that considered a haircut to the 2020 appraisal, Morningstar DBRS projects a loss severity nearing 50% in the event of default.

Sangertown Square is secured by an 894,127-sf regional mall in New Hartford, New York, approximately halfway between Syracuse and Albany. The two active anchor tenants are Boscov's (19.3% of the NRA, lease expiry in January 2037) and Target (14.1% of the NRA, lease expiry in January 2028). The remaining two anchor spaces, previously occupied by JCPenney and Macy’s, remain vacant. The loan was modified in July 2021, and the terms of which include a conversion to interest-only (IO) payments for a 24-month period through May 2023. Upon completion of the IO period, the loan was again transferred to the special servicer for imminent monetary default. As per the January 2024 remittance, the loan, which was scheduled to mature in January 2024, remains current on its debt obligations; however, the borrower has requested a three-year maturity extension, which is currently being reviewed. The special servicer is also dual tracking foreclosure.

The property was 57.0% occupied as of September 2023, down significantly from the occupancy rate of 76.0% at YE2020 because of the 2021 departure of JCPenney. A tenant sales report indicated in-line sales of $319.80 per sf (psf) for the trailing 12-month period ended June 20, 2023, compared with $338.20 psf for the year prior. The most recent appraisal, dated November 2021, valued the property at $19.1 million, representing a decline of 82.1% from the issuance appraised value of $107.0 million. Given the loan's declining year-over-year performance and prolonged vacancy of two anchor spaces, it is likely the value of the property has declined further. Although the loan is current as of the January 2024 remittance, Morningstar DBRS considered a haircut to the 2021 appraisal and expects a loss severity exceeding 80.0% in the event of default.

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

A description of how Morningstar DBRS considers ESG factors within the Morningstar DBRS analytical framework can be found in the Morningstar DBRS Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (January 23, 2024; https://dbrs.morningstar.com/research/427030).

All credit ratings are subject to surveillance, which could result in credit ratings being upgraded, downgraded, placed under review, confirmed, or discontinued by Morningstar DBRS.

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

The principal methodology is the North American CMBS Surveillance Methodology (March 16, 2023; https://dbrs.morningstar.com/research/410912).

Other methodologies referenced in this transaction are listed at the end of this press release.

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 credit rating was initiated at the request of the rated entity.

The rated entity or its related entities did participate in the credit rating process for this credit rating action.

Morningstar DBRS had access to the accounts, management, and other relevant internal documents of the rated entity or its related entities in connection with this credit rating action.

This is a solicited credit rating.

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

The conditions that lead to the assignment of a Negative or Positive trend are generally resolved within a 12-month period. Morningstar DBRS’ outlooks and credit ratings are monitored.

DBRS Limited
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Tel. +1 416 593-5577

The credit rating methodologies used in the analysis of this transaction can be found at: https://dbrs.morningstar.com/about/methodologies.

-- North American CMBS Multi-Borrower Rating Methodology (November 3, 2023)/North American CMBS Insight Model v 1.2.0.0, https://dbrs.morningstar.com/research/422859

-- Interest Rate Stresses for U.S. Structured Finance Transactions (June 9, 2023) https://dbrs.morningstar.com/research/415687

-- DBRS Morningstar North American Commercial Real Estate Property Analysis Criteria (September 22, 2023) https://dbrs.morningstar.com/research/420982

-- North American Commercial Mortgage Servicer Rankings (August 23, 2023) https://dbrs.morningstar.com/research/419592

-- Legal Criteria for U.S. Structured Finance (December 7, 2023) https://dbrs.morningstar.com/research/425081

A description of how Morningstar DBRS analyzes structured finance transactions and how the methodologies are collectively applied can be found at: https://dbrs.morningstar.com/research/417279.

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