DBRS Morningstar Confirms All Classes and Changes Trend to Negative on One Class of GS Mortgage Securities Trust, Series 2011-GC3

DBRS Limited (DBRS Morningstar) confirmed the ratings on all classes of Commercial Mortgage Pass-Through Certificates Series 2011-GC3 issued by GS Mortgage Securities Trust, Series 2011-GC3 as follows:

-- Class C at AAA (sf)
-- Class D at AAA (sf)
-- Class E at A (sf)
-- Class F at BBB (low) (sf)

DBRS Morningstar changed the trend on Class F to Negative from Stable. The trends on all other classes remain Stable. In addition, DBRS Morningstar discontinued the ratings on Class B, as it has been paid in full, and on Class X, as the transaction has had a collateral reduction of 86.0% as of the March 2021 remittance and the applicable reference obligations are expected to cease in the near term.

The rating confirmations and Stable trends on all but the lowest-rated class reflect the significant paydown of the transaction since issuance and the generally stable outlook for the remaining three loans in the pool, all of which are secured by regional mall properties. All three loans are with the special servicer and all are categorized as nonperforming matured balloon loans. As of the most recent updates provided, the special servicer is in various stages of negotiations for loan modifications with all three sponsors.

The two largest loans, Cape Cod Mall (Prospectus ID#4; 43.0% of pool) and Whalers Village (Prospectus ID#6; 40.7% of the pool), were scheduled to mature in March and February 2021, respectively. The smallest loan, Oxford Valley Mall (Prospectus ID#7; 16.3% of the pool), was scheduled to mature in November 2020 and is the only property of the three that has reported an updated valuation showing a significant decline in value to $39.9 million as of January 2021 from $255.0 million at issuance, a primary factor in changing the trend on the lowest rated bond to Negative with this review.

Of the three remaining loans in the pool, the Whalers Village loan is the largest and generally the most stable, given the significant cash flow growth from issuance that has meant a debt service coverage ratio (DSCR) in excess of 4.0 times (x) since 2018. The collateral property is an outdoor shopping mall in Lahaina on the west coast of Maui in Hawaii. The sponsor and special servicer appear to be nearing an extension of the loan maturity to 2022 and the loan is expected to be returned to the master servicer in the near term.

The second-largest loan, Cape Cod Mall, is secured by a 522,000 square foot (sf) portion of a 722,000 sf regional mall located in Hyannis, Massachusetts, owned and operated by Simon Property Group (Simon). The loan transferred to special servicing with the February 2021 remittance for imminent default on the March 2021 maturity date. The servicer has begun negotiations with Simon regarding the workout, but it is worth noting that Simon recently reclassified several malls backing CMBS loans as “Other Properties” (defined as those noncore to the company’s business) in its Q4 2020 reporting and the subject mall was not included in that list, suggesting the sponsor remains committed to the property and loan. According to the financials for the trailing nine months ended September 30, 2020, the property was 91.0% occupied, with the loan reporting a DSCR of 1.58x, which is generally in line with the issuance figures. The mall’s noncollateral anchors include Macy’s and Macy’s Home. The former collateral anchor Sears closed in 2018, but the space was quickly backfilled by Target and Dick’s Sporting Goods, which now represent 15.3% and 8.7%, respectively, of the net rentable area for the collateral portion of the mall.

Given the stable coverage and sponsor’s ability to draw in desirable replacements for the former anchor Sears, DBRS Morningstar believes the servicer and sponsor will come to an agreement that extends the loan maturity. Although the increased stress on retail properties, particularly regional malls located in secondary and tertiary markets such as the subject, is noteworthy, there are mitigating factors for this loan in the property’s destination status in the area with a diverse anchor mix that is likely well suited for the location and consumer base.

The smallest remaining loan, Oxford Valley Mall, is secured by a portion of a two-level regional mall (76.5% of the total collateral), an adjacent power center (16.4% of the total collateral), and an office building (7.1% of the total collateral), located in Middletown Township, Pennsylvania. The loan was conservatively structured with a going-in loan-to-value ratio of 27.8% at issuance with no interest-only (IO) period, which has further reduced the trust exposure over the 10-year loan term. The loan sponsor is a joint venture between Kravco Company and Simon, and the loan was transferred to special servicing in October 2020 following the sponsor’s relief request submitted as a result of the Coronavirus Disease (COVID-19) pandemic. The loan matured in December 2020 and, according to the most recent update from the special servicer, negotiations for a loan modification remain ongoing as of March 2021.

According to a January 2021 appraisal, the property was valued at $39.9 million, a sharp decline compared with the issuance appraised value of $255.0 million. Although the value decline is very high, the figure suggests there remains value slightly outside of the trust exposure of $32.2 million as of the March 2021 reporting period. As of June 2020, the subject reported an occupancy rate of 70.0% and a DSCR of 2.65x compared with the YE2019 occupancy of 69.0% and DSCR of 2.56x. Although the in-place coverage remains quite high, the cash flows are down significantly from issuance when the issuer’s DSCR was 3.20x and the DBRS Morningstar DSCR was 2.78x. During 2018, Sears vacated the property, leaving two anchors in a noncollateral Macy’s and a collateral JCPenney. Based on the most recent valuation, a liquidation scenario suggests a loss severity approaching 50.0% for this loan, which would be contained to the unrated Class G certificate but would significantly reduce credit support to the lowest rated Class F certificate, supporting the trend change to Negative on that class with this review.

ESG CONSIDERATIONS
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.

Class X 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.

DBRS Morningstar provides issuance metrics and all historical surveillance commentary on the DBRS Viewpoint platform.

For complimentary access to this content, please register for the DBRS Viewpoint platform at www.viewpoint.dbrsmorningstar.com. The platform includes issuer and servicer data for most
outstanding CMBS transactions (including non-DBRS Morningstar rated), as well as loan-level and transaction-level commentary for most DBRS Morningstar-rated and -monitored transactions.

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

The principal methodology is North American CMBS Surveillance Methodology (March 6, 2020), 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.

For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/357883.

For more information regarding structured finance rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/358308.

For more information regarding the structured finance rating approach and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release: https://www.dbrsmorningstar.com/research/359905.

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 info@dbrsmorningstar.com.

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 info@dbrsmorningstar.com.

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