DBRS Downgrades 14 Classes of Morgan Stanley Capital I Trust, Series 2005-HQ6

DBRS has today downgraded 14 classes of the Morgan Stanley Capital I Trust, Series 2005-HQ6 transaction as follows:

Class AJ from AA (low) to A (low)
Class B from A (high) to BBB (high)
Class C from A to BBB
Class D from A (low) to BBB (low)
Class E from BBB to BB (high)
Class F from BBB to BB (low)
Class G from BBB (low) to B

The trends for the above classes are Stable.

Class H from BB (high) to CCC
Class J from BB (low) to CCC
Class K from B (low) to C
Class L from CCC to C
Class N from CCC to C
Class M from CCC to C
Class O from CCC to C

DBRS has also confirmed 11 other classes in the transaction with Stable trends as follows:

Class A-1A at AAA
Class A-2A at AAA
Class A-2B at AAA
Class A-3 at AAA
Class A-4A at AAA
Class A-4B at AAA
Class A-AB at AAA
Class P at C
Class Q at C
Class X-1 at AAA
Class X-1 at AAA

DBRS also notes that the following classes have interest in arrears as of the June 2011 remittance report:

Class K
Class L
Class M
Class N
Class O
Class P
Class Q

The unrated Class S also has interest in arrears as of the June 2011 remittance report.

This rating action is primarily due to the outlook for the largest loans currently in special servicing in the pool, with particular concern for Prospectus ID#13, Oviedo Marketplace. This loan currently represents 2.13% of the outstanding pool balance, as of the June 2011 remittance report. The loan transferred to special servicing in April 2009, because of the bankruptcy of the parent company of the borrower, General Growth Properties, Inc. (GGP). Since the loan’s transfer, GGP has signed a deed-in-lieu of foreclosure, with the servicer taking title in November 2010.

The collateral for this loan consists of 557,000 sf of in-line and cinema space in a regional mall located 13 miles northeast of Orlando. The cinema space is occupied by Regal Cinemas, on a lease that expires in 2018; the other three anchors are Macy’s, Dillard’s, and Sears. Those three tenants own their own parcels and operate on Reciprocal Easement Agreements (REAs), which expire in 2019. The Q3 2009 DSCR of 0.93x reflected a 15% drop from the 2008 levels for the in-line occupancy to 70% for that period. In addition to lower occupancy, there was substantial rollover in 2008, with leases representing 44% of issuance EGI expiring. This was the result of the property having been completed in 1998 and the predominance of ten-year leases. While many of these expiring leases were renewed, the renewal rental rates were often at least 25% lower than the previous rate. Also, there are many tenants that now pay percentage rent in lieu of base rent, which is often an indication of poor sales levels. The most recent in-line occupancy reported by the servicer in May 2011 was 40.15%, excluding temporary tenants; for the same period, the overall mall occupancy was 63.66%, also excluding temporary tenants. The mall faces competition from another regional mall located 15 miles to the west, Alamonte Mall, which has the same three anchors plus a JC Penney and a movie theater operated by AMC.

The special servicer reported plans for upgrades to the exterior lighting and signage in the near term; the mall is also being renamed “Oviedo Mall”. Although the current vacancy at the property is being heavily marketed, there have been no permanent leases signed outside of the renewals in recent months. The special servicer also reports the property is in the process of being prepared to be marketed for sale. DBRS anticipates interest in the mall will be minimal due to the mall’s poor sales performance in the past two years. Furthermore, the most recent appraisal, from August 2010, valued the property at $16.1 million, indicating a significant decline from issuance, when the property was valued at $92.1 million. That value is supported by the May 2011 NOI figure for the property, as provided by the special servicer. As such, DBRS foresees a significant loss will be taken on this loan, which currently has a balance of $49.8 million, all of which is held by the trust.

The second largest loan in special servicing is Prospectus ID#23, County Line Commerce Center, which represented 1.03% of the outstanding pool balance, as of the June 2011 remittance report. This loan was transferred to the special servicer in March 2009, because of imminent default, and the property became REO in September 2010. The collateral consists of five industrial and office buildings, with a total of 400,000 sf located north of Philadelphia. As of the June 2011 remittance report, the property was 73% occupied. Although the most recent occupancy is a decline from 81% at Q3 2009, the most recent NOI figure projected by the servicer, as of June 2011, is indicative of a 35% decline from the underwritten figure, with the property 74% occupied at issuance. The subject is located in the Bucks County submarket, which had a Q1 2011 availability rate for office of 19.8%, according to Reis.

An appraisal from June 2010 valued the property at $20.5 million, suggesting a loss to the trust would be significant given the loan’s current balance of $24.1 million and outstanding advances in excess of $1 million as of the June 2011 remittance report. Furthermore, based on the most recent projected annual NOI figures provided by the special servicer, DBRS determined an approximate value of $22.8 million, indicating that an updated appraisal could find the property value has declined even further from issuance when it was valued at $37.5 million. The special servicer reports that the property is not currently being marketed for sale; DBRS will continue to monitor this loan closely for developments in the disposal strategy for this loan.

There are five loans in the top fifteen loans on the servicer’s watchlist. Combined, those loans represent 34.88% of the pool balance, as of the June 2011 remittance report. The three largest of those loans are detailed below.

Prospectus ID#1, Lincoln Square Retail, is collateralized by a 503,178 square foot retail center comprised of four separate buildings in Manhattan’s Upper West Side on Broadway between 66th Street and 68th Street. The loan represents 14.26% of the pool balance, as of the June 2011 remittance report, and is on the servicer's watchlist because of a low DSCR. At YE2010, the DSCR had fallen to 1.07x from 1.36x at issuance. Although some of the decline can be attributed to a drop in occupancy from 98% in 2008 and 2009 to 87 % at YE2010, after the loss of Barnes & Noble, it also appears that revenue from one tenant is significantly understated because of a form of percentage rent not being reported. The subject is well-located in a highly desirable shopping district and benefits from an experienced sponsor with significant exposure and experience with large-market retail. DBRS will continue to monitor this loan closely.

Prospectus ID#2, 1500 Broadway, is on the servicer's watchlist because the largest tenant, with 19% of the NRA, vacated at the end of its lease term in September 2009. The subject property is a 513,563 sf 33-story Class A office building located on Broadway between 43rd Street and 44th Street in New York City. In addition to office space, the NRA includes a five-story vertical space that the borrower developed and leased to a subsidiary of The Walt Disney Company. This, in part, serves as the studio for ABC's Good Morning America. Occupancy fell to 72% as of Q3 2010 when the tenant Daniel J. Edelman (19% of the NRA) vacated its space upon lease expiry in September 2009. The DSCR at Q2 2010 was still relatively healthy at 1.07x. There is a leasing reserve with a current balance of $5.6 million. This reserve amounts to $57 psf on the vacated block of space, which would help cover a significant portion of the total leasing costs associated with that space. In addition, even though CoStar's Class A Times Square submarket rental rate has decreased more than $20 psf from its peak to $68 psf, it is still significantly higher than Daniel J. Edelman's total rent (including expense recoveries) of $51 psf. DBRS does not anticipate the borrower having trouble making debt service payments in the near future.

Prospectus ID#10, Coronado Centre, comprises 5.03% of the outstanding pool balance as of the June 2011 remittance report and is on the servicer’s watchlist for monitoring after a return from the special servicer in March 2010. This loan was transferred to the special servicer when the borrower filed for bankruptcy protection in conjunction with the bankruptcy filing of it’s parent company, General Growth Properties, Inc. (GGP). The collateral for the loan is approximately 527,000 square feet of a 1.1 million square foot regional mall in Albuquerque, New Mexico. The loan was extended past its original maturity date of June 2010 to December 6, 2016. The property was previously on the watchlist because of the bankruptcy of Mervyn’s (21% of the NRA). Mervyn’s contributed only 6.6% of the annual base rent and it was known at issuance that it would be vacating the property. Other anchor tenants at the property include JC Penney, Macy’s, Foley’s and Sears. In Q1 2010, a 15-screen movie theater took the former Mervyn's space with occupancy reported at 85.5%, as of YE2010. The whole-loan DSCR at YE2010 was 1.14x, according to the servicer. There is approximately $35 million of subordinate debt outside the trust, bringing the whole loan per square foot to $308. DBRS will monitor this loan closely as the property continues to stabilize.

As of the June 2011 remittance report, the trust has experienced realized losses in excess of $34 million due to the liquidation of 14 loans between April 2009 and June 2011. The weighted-average loss severity is in excess of 50% for those loans, which is in-line with the DBRS anticipated losses on the remaining 20 loans that remain with the special servicer as of the June 2011 remittance report.

As part of the review, DBRS analyzed the servicer’s watchlist, the delinquent loans, the specially serviced loans, and the top fifteen loans in the pool. Combined, these loans represent 80.54% of the outstanding pool balance as of the June 2011 remittance report.

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

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