DBRS Changes Trend on Five Classes; Releases Performance Update Report for Morgan Stanley Capital I Trust, Series 2005-HQ6

DBRS has today changed the trend to Negative from Stable on Classes M through Q of the Morgan Stanley Capital I Trust, Series 2005-HQ6 transaction.

The trend change reflects the negative outlook for two large retail loans (Tanasbourne Town Center and Arrowhead Crossing), which together represent 3.9% of the pool. Tanasbourne Town Center, located approximately eight miles outside of Portland, Oregon, has experienced a decline in occupancy after Linens ‘n Things vacated following bankruptcy. At the same time, Arrowhead Crossing (located approximately 15 miles northwest of Phoenix, Arizona) recently had three of its top five tenants vacate, including Linens ‘n Things and Circuit City. Even with these vacancies, both properties should continue to generate sufficient cash flow from the tenants in place to meet debt service obligations. Each loan is co-sponsored by Developers Diversified Realty/DRA Advisors and, while these experienced sponsors may be able to fill the vacancies through established retail contacts and avoid existing co-tenancy clauses, re-leasing will be difficult given the current market environment. In addition, these two interest-only loans will have added refinance risk as they approach maturity on August 1, 2010.

DBRS has also removed the BBB (low) shadow rating of Coronado Center (4.6% of the pool), as the loan no longer meets investment-grade parameters. The property lost its former largest tenant (Mervyn’s, 22.5% of NRA) following bankruptcy and the loan’s sponsor, General Growth Properties, has been suffering capital constraints. The loan is scheduled to mature in June 2010 and may face challenges refinancing given its large balloon balance and low coupon, coupled with downward pressure on cash flow. The loan’s B-Note provides loan-specific credit enhancement and upon maturity, the A-Note portion will have amortized down by 7.3% from issuance. Ultimately, DBRS expects that the loan will obtain financing, but may need additional time to do so.

Overall, eight loans have been added to DBRS’s HotList, five of which are secured by retail assets. These loans have begun to experience declining performance as a result of the current economy and going forward, DBRS expects that additional retail properties in the transaction will report declines in occupancy and net cash flow. In total, the transaction has significant retail exposure, with 75 retail properties representing 47.5% of the current pool balance.

Currently, three loans are in special servicing (combined, they represent 0.5% of the current pool balance). The largest loan, Lake City Medical Office, has been transferred twice in the past two years and the most recent appraisal value is $2.2 million below the current outstanding balance. The special servicer is reportedly working toward a foreclosure on the property but any losses to the trust from the loan would be contained to Class S (not rated by DBRS). The remaining two loans were transferred to the special servicer in November 2008 for imminent default and the special servicer is currently evaluating resolution options. Also, as of the February reporting, one HotList loan (Point Plaza Shopping Center) is now categorized as 30 days delinquent. DBRS will continue to closely monitor these loans through its Global Monthly Surveillance CMBS Report.

The majority of the remaining loans in the transaction have maintained stable performance since issuance, reporting a weighted-average debt service coverage ratio (WADSCR) of 1.46 times (on a whole-loan and P&I basis). There has also been little change to the pool’s underlying collateral since issuance, as all of the original 168 loans remain; six loans (2.0%) have fully defeased and one loan, Lincoln Square Retail, has partially defeased. As of January 2009, the transaction has a total balance of $2,679,73,6257, representing a cumulative collateral reduction of 2.7% since issuance.

The transaction has one small investment-grade shadow-rated loan, FRIS Chkn Portfolio Roll-up (0.9% of the pool). This loan continues to exhibit strong performance in line with its respective shadow-rating.

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

The applicable methodology is CMBS Rating Methodology, which can be found on our website under Methodologies.

This is a Structured Finance rating.

The full performance update report providing additional analytical detail is available by clicking the link below or by contacting us at info@dbrs.com.