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Rating Action: Moody's affirms seven classes of UBSCM 2017-C3
Global Credit Research - 15 Jan 2021
Approximately $561.9 million of structured securities affected
New York, January 15, 2021 -- Moody's Investors Service, ("Moody's") has affirmed the ratings on seven classes in UBS Commercial Mortgage Trust 2017-C3, Commercial Mortgage Pass-Through Certificates, Series 2017-C3:
Cl. A-1, Affirmed Aaa (sf); previously on Feb 19, 2020 Affirmed Aaa (sf)
Cl. A-2, Affirmed Aaa (sf); previously on Feb 19, 2020 Affirmed Aaa (sf)
Cl. A-3, Affirmed Aaa (sf); previously on Feb 19, 2020 Affirmed Aaa (sf)
Cl. A-4, Affirmed Aaa (sf); previously on Feb 19, 2020 Affirmed Aaa (sf)
Cl. A-S, Affirmed Aa2 (sf); previously on Feb 19, 2020 Affirmed Aa2 (sf)
Cl. A-SB, Affirmed Aaa (sf); previously on Feb 19, 2020 Affirmed Aaa (sf)
Cl. X-A*, Affirmed Aaa (sf); previously on Feb 19, 2020 Affirmed Aaa (sf)
* Reflects interest-only class
The ratings on the six P&I classes were affirmed because the transaction's key metrics, including Moody's loan-to-value (LTV) ratio, Moody's stressed debt service coverage ratio (DSCR) and the transaction's Herfindahl Index (Herf), are within acceptable ranges.
The rating on the IO class, Cl. X-A, was affirmed based on the credit quality of the referenced classes.
The coronavirus outbreak, the government measures put in place to contain it, and the weak global economic outlook continue to disrupt economies and credit markets across sectors and regions. Our analysis has considered the effect on the performance of commercial real estate from the current weak US economic activity and a gradual recovery for the coming months. Although an economic recovery is underway, it is tenuous, and its continuation will be closely tied to containment of the virus. As a result, the degree of uncertainty around our forecasts is unusually high. Stress on commercial real estate properties will be most directly stemming from declines in hotel occupancies (particularly related to conference or other group attendance) and declines in foot traffic and sales for non-essential items at retail properties.
We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.
Moody's rating action reflects a base expected loss of 7.3% of the current pooled balance compared to 5.2% at Moody's last review. Moody's base expected loss plus realized losses is now 7.1% of the original pooled balance compared to 5.1% at the last review. Moody's provides a current list of base expected losses for conduit and fusion CMBS transactions on moodys.com at http://www.moodys.com/viewresearchdoc.aspx?docid=PBS_SF215255.
FACTORS THAT WOULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The performance expectations for a given variable indicate Moody's forward-looking view of the likely range of performance over the medium term. Performance that falls outside the given range can indicate that the collateral's credit quality is stronger or weaker than Moody's had previously expected.
Factors that could lead to an upgrade of the ratings include a significant amount of loan paydowns or amortization, an increase in the pool's share of defeasance or an improvement in pool performance.
Factors that could lead to a downgrade of the ratings include a decline in the performance of the pool, loan concentration, an increase in realized and expected losses from specially serviced and troubled loans or interest shortfalls.
METHODOLOGY UNDERLYING THE RATING ACTION
The principal methodology used in rating all classes except interest-only classes was "Approach to Rating US and Canadian Conduit/Fusion CMBS" published in September 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1244778 . The methodologies used in rating interest-only classes were "Approach to Rating US and Canadian Conduit/Fusion CMBS" published in September 2020 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1244778 and "Moody's Approach to Rating Structured Finance Interest-Only (IO) Securities" published in February 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBS_1111179 . Please see the list of ratings at the top of this announcement to identify which classes are interest-only (indicated by the *). Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of these methodologies.
As of the December 15, 2020 distribution date, the transaction's aggregate certificate balance has decreased by 2.2% to $692.8 million from $708.6 million at securitization. The certificates are collateralized by 42 mortgage loans ranging in size from less than 1% to 7.4% of the pool, with the top ten loans (excluding defeasance) constituting 56.7% of the pool.
Moody's uses a variation of Herf to measure the diversity of loan sizes, where a higher number represents greater diversity. Loan concentration has an important bearing on potential rating volatility, including the risk of multiple notch downgrades under adverse circumstances. The credit neutral Herf score is 40. The pool has a Herf of 23, compared to 24 at Moody's last review.
As of the December 2020 remittance report, loans representing 84.4% were current or within their grace period on their debt service payments, 11.4% were 30 to 69 days delinquent, and 4.1% were 90 + days delinquent or in foreclosure.
Thirteen loans, constituting 25.7% of the pool, that currently are on the master servicer's watchlist. The watchlist includes loans that meet certain portfolio review guidelines established as part of the CRE Finance Council (CREFC) monthly reporting package. As part of Moody's ongoing monitoring of a transaction, the agency reviews the watchlist to assess which loans have material issues that could affect performance.
No loans have been liquidated from the pool and there have been no realized losses to the trust. Three loans, constituting 15.2% of the pool, are currently in special servicing, all of which transferred to special servicing since March 2020.
The largest specially serviced loan is the TZA Multifamily Portfolio 1 Loan which is discussed in further detail below. Due to the historical performance, Moody's has included this loan in the conduit statistics.
The second largest specially serviced loan is the JW Marriott Chicago Loan, ($28.5 million -- 4.1% of the pool) which represents a pari passu portion of a $79.3 million mortgage loan. The asset is encumbered with $124.2 million of subordinate B-Note financing held outside the trust as well as $66.5 million of mezzanine financing. The loan is secured by a 610-guestroom, luxury hotel located in Chicago, Illinois. The borrower's condominium unit comprises part of a larger 22-story, mixed-use building that occupies a full city block in the Central Loop of the Chicago Central Business District. Collateral for the loan consists of the hotel that occupies the lobby level through the 12th floor, as well as two lower levels. In April 2020, the loan transferred to special servicing due to imminent default as a result of being over 90 days delinquent. The borrower and the servicer were able to reach a relief agreement and the loan was subsequently modified in August 2020. A subsequent relief request was submitted by the borrower that was executed in December 2020. Due to the historical performance, Moody's has included this loan in the conduit statistics with a Moody's LTV of 66%. However, these metrics are based on return of both leisure and group and meeting demand which may lag that of the overall US pace of recovery.
The third largest specially serviced loan is the IC Leased Fee Hotel Portfolio Loan, ($27.0 million -- 3.9% of the pool) which represents a pari passu portion of a $62.5 million mortgage loan. The loan is secured by a first priority fee mortgage encumbering the land (leased fee) under seven full-service hotels located in seven states. Each IC Leased Fee Hotel Portfolio property is encumbered by a 99-year term ground lease. The loan transferred to special servicing due to payment default in June 2019 and the borrower filed chapter 11 bankruptcy in July 2019. The borrower defaulted on the property tax payment in April 2019 and triggered cash management. The cash collateral order expired in June 2020. Subsequently, the servicer and the borrower were unable to reach an agreement on the extension. As such, six of the seven hotels were transitioned to their respective leasehold lenders with the last remaining asset in receivership; four of these hotels were closed due to deferred maintenance and impact of the coronavirus pandemic. The lender and debtor have proposed competing plans and an evidentiary hearing regarding this loan is scheduled in April 2021.
The credit risk of loans is determined primarily by two factors: 1) Moody's assessment of the probability of default, which is largely driven by each loan's DSCR, and 2) Moody's assessment of the severity of loss upon a default, which is largely driven by each loan's loan-to-value ratio, referred to as the Moody's LTV or MLTV. As described in the CMBS methodology used to rate this transaction, we make various adjustments to the MLTV. We adjust the MLTV for each loan using a value that reflects capitalization (cap) rates that are between our sustainable cap rates and market cap rates. We also use an adjusted loan balance that reflects each loan's amortization profile. The MLTV reported in this publication reflects the MLTV before the adjustments described in the methodology.
Moody's received full year 2019 operating results for 100% of the pool, and partial year 2020 operating results for 85% of the pool (excluding specially serviced and defeased loans). Moody's weighted average conduit LTV is 113%, compared to 112% at the last review. Moody's conduit component excludes loans with structured credit assessments, defeased and CTL loans, and specially serviced and troubled loans. Moody's net cash flow (NCF) reflects a weighted average haircut of 22.1% to the most recently available net operating income (NOI). Moody's value reflects a weighted average capitalization rate of 10.3%.
Moody's actual and stressed conduit DSCRs are 1.69X and 1.02X, respectively, compared to 1.63X and 1.01X at last review. Moody's actual DSCR is based on Moody's NCF and the loan's actual debt service. Moody's stressed DSCR is based on Moody's NCF and a 9.25% stress rate the agency applied to the loan balance.
The first loan with a structured credit assessment is the Del Amo Fashion Center ($50.0 million -- 7.2% of the pool), which represents a pari passu portion of a $459.3 million senior mortgage loan. The loan is also encumbered with $125.7 million in subordinate debt. The loan is secured by a 1.8 million square feet (SF) portion of a 2.5 million SF enclosed super-regional mall located in Torrance, California. The mall has undergone extensive renovations and additions across three separate yet interconnected property components. JC Penney and Nordstrom's ground leased parcels are part of the loan's collateral while Macy's and Sears are excluded. The property was 88% leased as of June 2020, compared to 85% at securitization. Performance has been in line with expectations at securitization. The loan is interest only throughout the entire 10-year loan term. Moody's structured credit assessment and stressed DSCR are baa2 (sca.pd) and 1.20X, respectively.
The second loan with a structured credit assessment is the Park West Village Loan ($30.0 million -- 4.3% of the pool), which represents a pari passu portion of a $120 million senior mortgage loan. The loan is encumbered with $18.8 million in subordinate debt and $186.3 million in mezzanine interests. The loan is secured by an 852-unit, high-rise multifamily complex located in New York, New York. The collateral improvements consist of three, 16-story apartment buildings situated upon a 1.59-acre site. The property was originally built between 1950 and 1963 and the sponsor invested approximately $19.7 million ($23,097 per unit) in capital improvements over the four years prior to securitization. As of June 2020, the property was 89% occupied, compared to 97% as of March 2019, and 96% at securitization. The property contains 424 market rate units and 428 rent-stabilized units. Performance has been stable since securitization. The loan is interest only throughout the entire 5-year loan term. Moody's structured credit assessment and stressed DSCR are baa1 (sca.pd) and 1.17X, respectively.
The top three conduit loans represent 20.8% of the pool balance. The largest loan is the Ionis Pharmaceuticals - Gazelle Ct Loan ($51.3 million -- 7.4% of the pool), which is secured by a two-story, office and research and development facility located in Carlsbad, California, approximately 35 miles north of downtown San Diego. The property consists of approximately 114,400 SF of office space and 61,600 SF of lab space. The building was built-to-suit for the sole tenant, Ionis Pharmaceuticals Inc, in 2011 as part of a sale-leaseback with Biomed Realty. As part of the sale-leaseback, Ionis entered a 20-year lease for 100% of the NRA. Due to the single tenant nature of the property, Moody's analysis incorporates a lit-dark analysis. Moody's LTV and stressed DSCR are 87% and 1.24X, respectively, the same as at the last review.
The second largest loan is the TZA Multifamily Portfolio I Loan ($50.0 million -- 7.2% of the pool), which represents a pari passu portion of a $108 million senior mortgage loan. The loan is secured by a cross-collateralized portfolio of 14 garden-style multifamily properties located across western, central, and northern Florida. In aggregate, the portfolio contains 2,382 units. The properties are Class B in quality and were built between 1961 and 1995. The portfolio was 93% occupied as of October 2020, compared to 94% occupied as of March 2019 and 95% at securitization. The loan transferred to special servicing in July 2020 for imminent default as it was over 90+ days delinquent. Property performance has been impacted as a result of the coronavirus outbreak and rent collections have declined. A cash trap sprung in June 2020; subsequently the June and July payments were made from the lockbox. The special servicer approved a forbearance modification with the borrower to include three months of interest deferral and 12 months of principal and replacement reserve deferral. The cash trap will remain in place through entire term of proposed modification. Moody's LTV and stressed DSCR are 141% and 0.76X, respectively.
The third largest loan is the American Cancer Society Center Loan ($43.0 million -- 6.2% of the pool), which represents a pari passu portion of a $116.2 million senior mortgage loan. The loan is secured by a nine-story, Class A office and data center building located in downtown Atlanta, Georgia. The property features include a nine-story atrium-style lobby and a four-story subterranean garage containing 926 parking spaces. As of June 2020, the property was 89% occupied, compared to 86% at securitization. Performance has been stable. Moody's LTV and stressed DSCR are 110% and 0.98X, respectively, the same as at the last review.
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
The analysis includes an assessment of collateral characteristics and performance to determine the expected collateral loss or a range of expected collateral losses or cash flows to the rated instruments. As a second step, Moody's estimates expected collateral losses or cash flows using a quantitative tool that takes into account credit enhancement, loss allocation and other structural features, to derive the expected loss for each rated instrument.
Moody's did not use any stress scenario simulations in its analysis.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1243406.
At least one ESG consideration was material to the credit rating action(s) announced and described above.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the UK and is endorsed by Moody's Investors Service Limited, One Canada Square, Canary Wharf, London E14 5FA under the law applicable to credit rating agencies in the UK. Further information on the UK endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.
Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.
Ashton Khan Associate Lead Analyst Structured Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Matthew Halpern VP - Senior Credit Officer Structured Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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