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New York, September 15, 2022 — Moody’s Investors Service, (“Moody’s”) has affirmed the ratings on six classes in UBS Commercial Mortgage Trust 2017-C3, Commercial Mortgage Pass-Through Certificates, Series 2017-C3 as follows:
Cl. A-2, Affirmed Aaa (sf); previously on Jan 15, 2021 Affirmed Aaa (sf)
Cl. A-3, Affirmed Aaa (sf); previously on Jan 15, 2021 Affirmed Aaa (sf)
Cl. A-4, Affirmed Aaa (sf); previously on Jan 15, 2021 Affirmed Aaa (sf)
Cl. A-S, Affirmed Aa2 (sf); previously on Jan 15, 2021 Affirmed Aa2 (sf)
Cl. A-SB, Affirmed Aaa (sf); previously on Jan 15, 2021 Affirmed Aaa (sf)
Cl. X-A*, Affirmed Aaa (sf); previously on Jan 15, 2021 Affirmed Aaa (sf)
* Reflects interest-only class
RATINGS RATIONALE
The ratings on five principal and interest (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 interest-only (IO) class, Cl. X-A, was affirmed based on the credit quality of the referenced classes.
Moody’s rating action reflects a base expected loss of 7.3% of the current pooled balance, the same as Moody’s last review. Moody’s base expected loss plus realized losses is now 6.4% of the original pooled balance, compared to 7.1% 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 "US and Canadian Conduit/Fusion Commercial Mortgage-Backed Securitizations Methodology” published in July 2022 and available at https://ratings.moodys.com/api/rmc-documents/391056. The methodologies used in rating interest-only classes were "US and Canadian Conduit/Fusion Commercial Mortgage-Backed Securitizations Methodology” published in July 2022 and available at https://ratings.moodys.com/api/rmc-documents/391056 and “Moody’s Approach to Rating Structured Finance Interest-Only (IO) Securities” published in February 2019 and available at https://ratings.moodys.com/api/rmc-documents/59126. 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 https://ratings.moodys.com for a copy of these methodologies.
DEAL PERFORMANCE
As of the August 17, 2022 distribution date, the transaction’s aggregate certificate balance has decreased by 11.8% to $625 million from $709 million at securitization. The certificates are collateralized by 40 mortgage loans ranging in size from less than 1% to 8.2% of the pool, with the top ten loans (excluding defeasance) constituting 54.3% of the pool. One loan, constituting 8% of the pool, has an investment-grade structured credit assessment. Seven loans, constituting 20.5% of the pool, have defeased and are secured by US government securities.
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 18, compared to 23 at Moody’s last review.
Eighteen loans, constituting 37.7% of the pool, 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.
Two loans have been liquidated from the pool; however, the trust has not incurred any losses to date. Four loans, constituting 22.4% of the pool, are currently in special servicing.
The largest specially serviced loan is the 245 Park Avenue Loan ($38.0 million – 6.1% of the pool), which represents a pari passu portion of a $1.08 billion senior mortgage and is the largest loan in the pool. The property is also encumbered with $120.0 million of B-note and $568.0 million of subordinated and non-pooled mezzanine debt. The loan is secured by a 44-story Class A office tower located in New York, New York. As of the March 2022 rent roll, the property was 90% leased however there is significant lease rollover in 2022. The largest in-place tenant is Société Générale, which executed a sublease from JPMorgan Chase Bank for approximately 560,000 square feet (SF) through October 31, 2022 and executed a 10-year direct lease with a start date in November 2022. Excluding Société Générale, JPMorgan leases an additional 225,000 SF through 2022, the majority of which have been subleased to various tenants. Another major tenant at securitization, Major League Baseball (MLB), leases approximately 13% of the net rentable area through October 2022, and previously indicated that they would relocate prior to their lease expiration and would therefore vacate on or before their scheduled lease expiration. The loan structure included a cash flow sweep if the MLB fails to renew substantially all of its space 12 months prior to lease expiration (capped at $85 PSF for their space). The loan transferred to special servicing in November 2021 due to the borrower, which is controlled by HNA of China, filing for Chapter 11 bankruptcy. The special servicer indicated they had agreed on a final cash collateral order (“CCO”) which required the borrower to remain current on all debt service and reserve payments as stipulated within the loan documents, including all of the Lenders collection costs, legal fees, and any monthly servicer fees, as accrued, so essentially no advances are to be made by the Trust. The Newmark Group took over as property manager in January 2022 from SL Green. The loan remains current and due to the historical performance and asset quality, the loan was included in the conduit statistics with a Moody’s LTV of 112%.
The second largest specially serviced loan is the Embassy Suites – Santa Ana Loan ($36.3 million — 5.8% of the pool) which is secured by the borrower’s fee simple interest in a 301-key full-service hotel, located in Santa Ana, California. The property was originally built in 1985, and extensively renovated in 2017. Property performance was impacted by the pandemic and the loan received a modification in May 2020. The loan transferred to special servicing in February 2022 due to payment default and delinquent franchise fees. The loan triggered a cash trap due to failing to meet NOI DSCR thresholds, and funds collected have been applied to keep the loan current, but excess cash has been insufficient to funds all of operating expenses. The borrower has requested a bring current statement and a reinstatement proposal is being negotiated. The loan has amortized by 4.6% since securitization, and is current on P&I payments as of August remittance. Due to the historical performance and asset quality, Moody’s has included this loan in the conduit statistics with a Moody’s LTV of 149%. However, these metrics are based on the return of both leisure and commercial demand which may lag that of the overall US pace of recovery.
The third largest specially serviced loan is the OKC Outlets Loan ($37.0 million – 5.9% of the pool) which represents a parri passu portion of a $86.5 million loan. The loan is secured by a 393,793 SF regional outlet shopping center located in Oklahoma City, Oklahoma, approximately 6.5 miles west of the central business district. The property consists of 10 buildings developed in three phases, with the primary phase developed in 2011 and subsequent phases developed between 2012 and 2013. The OKC Outlets is the only regional outlet mall in Oklahoma. The loan transferred to special servicing in May 2022, as it failed to pay off at maturity. A cash sweep event has been triggered and the borrower cooperated in opening the cash management account. Local counsel has been retained to file for foreclosure and/or receivership, if necessary. The lender will dual track the foreclosure process while discussing workout alternatives with borrower.
The fourth largest specially serviced loan is the JW Marriott Chicago Loan, ($28.5 million — 4.6% of the pool) which represents a pari passu portion of a $79.3 million mortgage loan. The property is also 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 at the borrower’s request in relation to the coronavirus pandemic. As of August remittance, the loan was last paid through July 2020. An updated appraisal in February 2022 indicated a market value of $255.6 million, a 60% decline in value since securitization. The asset was recently included in a foreclosure sale and sold for $251 million to Wells Fargo who was the sole bidder in the auction. The loan is past its underwritten maturity date that was in August 2022.
Moody’s has also assumed a high default probability for one poorly performing loan. The troubled loan is the Crown Plaza Memphis Downtown loan ($14.2 million – 2.3% of the deal) which is secured by the borrower’s fee interest in a limited-service hotel in Memphis, Tennessee. The property has been underperforming its competitive set and was largely dependent on revenues driven by an adjacent convention center which has been under renovations. Moody’s has estimated an aggregate loss of $16.8 million (a 21.0% expected loss on average) from these specially serviced loans and troubled loan.
As of the August 2022 remittance statement cumulative interest shortfalls were $298,816. Moody’s anticipates interest shortfalls will continue because of the exposure to specially serviced loans and/or modified loans. Interest shortfalls are caused by special servicing fees, including workout and liquidation fees, appraisal entitlement reductions (ASERs), loan modifications and extraordinary trust expenses.
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 2021 operating results for 100% of the pool, and partial year 2022 operating results for 28% of the pool (excluding specially serviced and defeased loans). Moody’s weighted average conduit LTV is 116%, compared to 113% at Moody’s 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 17.7% to the most recently available net operating income (NOI). Moody’s value reflects a weighted average capitalization rate of 10.0%.
Moody’s actual and stressed conduit DSCRs are 1.53X and 0.98X, respectively, compared to 1.69X and 1.02X at the 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 loan with a structured credit assessment is the Del Amo Fashion Center ($50.0 million – 8.0% of the pool), which represents a pari passu portion of multiple A-Notes in the aggregate original amount of $375.8 million and B-Notes in the aggregate original amount of $83.5 million (together with the A-Notes, the "Senior Loan"). The loan’s capital structure includes twelve subordinate pari passu promissory notes in the aggregate original amount of $125,700,000. The loan is secured by 1.8 million SF of rentable area as part 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. As of December 2021, collateral, inline and total mall occupancy were 80%, 70% and 86%, respectively, compared to 82%, 72% and 87% in June 2020. December 2021 NOI was approximately 8% lower than at securitization due to lower revenues combined with higher operating expenses. The loan is interest only throughout the entire 10-year loan term. Moody’s structured credit assessment and stressed DSCR is baa3 (sca. pd) and 1.13X, respectively.
The top three conduit loans represent 14.3% of the pool balance. The largest loan is the Ionis Pharmaceuticals – Gazelle Ct Loan ($51.3 million – 8.2% 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 245 Park Avenue loan ($38 million – 6.1% of the pool), which was previously discussed.
Third largest loan is the Embassy Suites – Santa Ana ($36.3 million – 5.8% of the pool), which was previously discussed.
REGULATORY DISCLOSURES
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 on https://ratings.moodys.com/rating-definitions.
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 issuer/deal page for the respective issuer on https://ratings.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 https://ratings.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://ratings.moodys.com/documents/PBC_1288235.
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 https://ratings.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 https://ratings.moodys.com.
Please see https://ratings.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 issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating.
Ashton Khan
Associate Lead Analyst
Structured Finance Group
Moody’s Investors Service, Inc.
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Romina Padhi
VP – Senior Credit Officer
Structured Finance Group
JOURNALISTS: 1 212 553 0376
Client Service: 1 212 553 1653
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