NEW YORK--(BUSINESS WIRE)--Fitch Ratings has upgraded one class and affirmed 15 classes of Deutsche Bank Securities (DBUBS) commercial mortgage pass-through certificates series 2011-LC3. A full list of rating actions follows at the end of this release.
KEY RATING DRIVERS
The upgrade is the result of increased credit enhancement as a result of amortization, loan payoffs at maturity, and prepayments since Fitch's last rating action. The affirmations are due to the transaction's overall stable performance. The ratings reflect a stressed analysis, which included increased cash flow haircuts, cap rates and default probabilities. Expected losses for the current review are in-line with Fitch's analysis at issuance.
There were variances from criteria related to classes C through F where Fitch's surveillance criteria would indicate that additional upgrades are possible. However, further upgrades were not warranted based on the increased pool concentration, and the recent transfer of the 2nd largest loan (12%) to special servicing as it did not payoff at its June 6, 2016 maturity. Additionally, the third largest loan, Providence Place Mall (25%), has seen a decline in occupancy as a result of JC Penney, vacating in August 2015; certain tenants, including Apple and True Religion have co-tenancy clauses, which may come into effect.
As of the June 2016 distribution date, the pool's aggregate principal balance has been reduced by 34.6% to $1.08 billion from $1.65 billion at issuance. As noted, the transaction continues to be highly concentrated with the top five and 10 largest loans accounting for 61% and 77%, respectively. Additionally, the transaction has a large retail concentration (48%), with seven of the top 15 loans being secured by retail properties. Two loans (6% of the pool) are defeased. Fitch has designated five loans as Fitch Loans of Concern (30.4%).
The largest contributor to expected losses is the Quadrus Office Park loan (12.7% of the pool), which is secured by a 20.4 acre, 222,517 square foot (sf), eight-building office campus located on Sand Hill Road in Menlo Park, CA. The property is located two miles from the Stanford University Campus. Major tenants are The Henry J. Kaiser Family Foundation (10%), lease expiration in June 2021; Evercore Partners Services (8%), lease expiration May 2024; Samsung SemiConductor (7%), lease expiration May 2016; and Mayfield Fund, LLC (5%), lease expiration July 2023. As of December 2015, the property's occupancy declined to 72.1% from 79.4% in the previous year with current average rent at $83 sf. There is approximately 18% rollover in 2016. An update on leasing activity and lease renewals has been requested but not yet received. Per REIS, as of 1st quarter (1Q) 2016, the San Francisco metro office market vacancy rate is 10.1% with average asking rent of $50 sf. The South San Mateo office submarket vacancy rate is 14.8% with average asking rent of $51 sf.
The next largest contributor to expected losses is the One Biscayne loan (9.9%), which is secured by a 684,563 sf office building located in downtown Miami, FL. The building is in close proximity to the Federal and County courthouses, American Airlines Arena, and Bayfront Park. The largest tenants are Terremark Worldwide Inc (7%), lease expiration June 2019; Foley & Lardner LLP (5%), lease expiration June 2023; Broad & Cassel (4%), lease expiration May 2016; Feldman Gale PA (4%), lease expiration April 2019. At Fitch's last rating action, most of the new leases had rent concessions which eroded the effective occupancy of the property, but they have seen tenant demand improve and concessions lessen in recent proposals. The property is 80% occupied as of December 2015 with average rent of $32 psf. An update on leasing activity and lease renewals has been requested but not yet received. There is approximately 12% rollover in 2016. Per REIS as of 1Q 2016, the Miami office market Metro vacancy rate is 14.5% with asking rent of $32.65 psf. The downtown Miami office submarket vacancy rate is 16.4% with asking rent of $35 sf. The loan matures Aug. 1, 2016.
The largest loan of concern is the Times Square Hotel Portfolio (15.7%), which is secured by two limited-service hotels consisting of 488 rooms (244 rooms each) located in New York, NY. Per the April 2016 STR reports, the Sheraton Four Points Midtown Times Square Hotel occupancy is 96%, with average daily rate (ADR) $258, and Revenue Per Available Room (RevPAR) $219 compared to 94% occupancy, ADR $229, and RevPAR $216 for its competitive set. The Fairfield Inn & Suites NY Manhattan Times Square Hotel occupancy is 88%, with ADR $235, RevPAR $207 compared to 96% occupancy with ADR $228, and RevPAR $218 for its competitive set. Per the master servicer, the loan did not payoff at its June 6, 2016 maturity date and is in the process of being transferred to the special servicer.
Rating Outlooks on classes A-2 through P-M5 remain Stable due to the overall stable performance of the pool. An upgrade to class C is possible should the loans with 2016 maturities payoff at maturity. Downgrades are considered unlikely, but are possible should there be any significant performance declines.
DUE DILIGENCE USAGE
No third party due diligence was provided or reviewed in relation to this rating action.
Fitch upgrades the following class:
--$75.2 million class B to 'AAAsf' from 'AAsf'; Outlook Stable.
Fitch affirms the following classes:
--$213.6 million class A-2 at 'AAAsf'; Outlook Stable;
--$97.3 million class A-3 at 'AAAsf'; Outlook Stable;
--$112.1 million class A-4 at 'AAAsf'; Outlook Stable;
--$127.6 million class A-M at 'AAAsf'; Outlook Stable;
--Interest-only class X-A at 'AAAsf'; Outlook Stable;
--$54.2 million class C at 'Asf'; Outlook Stable;
--$73.4 million class D at 'BBB-sf'; Outlook Stable;
--$19.2 million class E at 'BBsf'; Outlook Stable;
--$19.2 million class F at 'Bsf'; Outlook Stable;
--$125.4 million class PM-1 at 'AAAsf'; Outlook Stable;
--Interest-only class PM-X at 'AAAsf'; Outlook Stable;
--$32.9 million class PM-2 at 'AAsf'; Outlook Stable;
--$28.9 million class PM-3 at 'Asf'; Outlook Stable;
--$26.5 million class PM-4 at 'BBBsf'; Outlook Stable;
--$20.9 million class PM-5 at 'BBB-sf'; Outlook Stable.
Classes PM-1 through PM-5 are secured by Providence Place Mall on a stand-alone basis. The class A-1 certificates have paid in full. Fitch does not rate the class G certificates.
Additional information is available at www.fitchratings.com.
Counterparty Criteria for Structured Finance and Covered Bonds (pub. 14 May 2014)
Criteria for Rating Caps and Limitations in Global Structured Finance Transactions (pub. 16 Jun 2016)
Global Structured Finance Rating Criteria (pub. 06 Jul 2015)
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Dodd-Frank Rating Information Disclosure Form