DBRS Downgrades Six Classes and Confirms 19 Classes of Morgan Stanley Capital I Trust 2005-HQ6

DBRS has today downgraded six classes of the Morgan Stanley Capital I Trust 2005-HQ6 as follows:

• Class B from BBB (high) (sf) to BBB (sf)
• Class C from BBB (sf) to BBB (low) (sf)
• Class D from BBB (low) (sf) to BB (high) (sf)
• Class E from BB (high) (sf) to BB (sf)
• Class F from BB (low) (sf) to B (sf)
• Class G from B (sf) to B (low) (sf)

All six of the downgraded classes have Stable trends.

The following 19 classes were confirmed as follows:

• Class A-1A at AAA (sf)
• Class A-2A at AAA (sf)
• Class A-2B at AAA (sf)
• Class A-3 at AAA (sf)
• Class A-AB at AAA (sf)
• Class A-4A at AAA (sf)
• Class A-4B at AAA (sf)
• Class A-J at A (low) (sf)
• Class X-1 at AAA (sf)
• Class X-2 at AAA (sf)
• Class H at CCC (sf)
• Class J at CCC (sf)
• Class K at C (sf)
• Class L at C (sf)
• Class M at C (sf)
• Class N at C (sf)
• Class O at C (sf)
• Class P at D (sf)
• Class Q at D (sf)

Classes A-1A, A-2A, A-2B, A-3, A-AB, A-4A, A-4B, A-J, X-1 and X-2 have Stable trends.

These rating actions reflect the continued decline in the outlook for the largest loans in special servicing and the decline in key performance metrics in DSCR and LTV for the pool overall since issuance.

DBRS conducted its last full surveillance review of this transaction in July 2011. Since that time, eight loans have liquidated out of the pool at a cumulative loss of $17.4 million to the trust and a weighted-average loss severity of approximately 63% as of the March 2012 remittance report. The realized losses have been in line with the DBRS projections at the time of the July 2011 review. Cumulative losses for the pool were in excess of $52 million, with interest shortfalls of $6.9 million as of the March 2012 remittance report.

There were 12 loans remaining in special servicing as of the March 2012 remittance report, representing 7.9% of the outstanding pool balance. Only one of those loans is a new transfer since the time of the last review in July 2011: Prospectus ID #169 (Sun Commercial Center), which transferred in January 2012 and represents 0.07% of the transaction. DBRS generally projected losses for the specially serviced loans based on the most recent appraisals and projected fees and advances due at liquidation or repayment at maturity for loans remaining in the pool following a modification. The special servicer provided the most recent workout status for each loan, and that information was also incorporated into the respective loss projections. In total, DBRS anticipates losses in excess of $90 million could be realized as these 12 loans are liquidated or modified.

The two largest loans in special servicing as of the March 2012 remittance report, Prospectus ID #13 (Oviedo Marketplace) and Prospectus ID #23 (County Line Commerce Center), have both been real estate owned (REO) since 2010 and represent approximately $55 million of the DBRS loss projection for this pool combined.

Prospectus ID #13 (Oviedo Marketplace) is secured by 557,000 sf of a 953,000 sf regional mall located in the Orlando, Florida, suburb of Oviedo. The property is anchored by Macy’s, Dillard’s, Sears and Regal Cinemas. The property was owned and operated by General Growth Properties, Inc. (GGP), who turned the property over to the special servicer after filing for bankruptcy in 2010. The property’s occupancy and revenues have suffered since 2009, with the March 2012 in-line occupancy at 49%, according to the servicer. The June 2010 appraisal valued the property at $16.1 million and the June 2011 appraisal valued the property even lower, at $11.6 million. Both figures represent a drastic decline from the property’s value of $92.1 million at issuance. The trust loan balance is approximately $49 million with outstanding advances approaching $4 million as of the March 2012 remittance report.

Based on the sharp value decline and the property’s inability to secure new tenancy despite a strong operator appointed by the special servicer in Urban Retail Properties, DBRS projects a loss in excess of $44 million could be realized at liquidation. The special servicer is working to stabilize the property and plans to market the asset for sale in the near term.

Prospectus ID #23 (County Line Commerce Center) is secured by a mixed-use (office and industrial) property comprising five buildings located in the Philadelphia suburb of Warminster, Pennsylvania. The loan transferred to special servicing in 2009 for monetary default and the property occupancy and revenues have suffered since. Occupancy fell from 85% at Q3 2009 to 65% by YE2011, and the servicer reports the property was 68% leased as of March 2012. The property was 74% occupied at issuance, with an underwritten NCF figure of $2.5 million. The special servicer reported a YE2011 NCF figure for the property of $1.8 million. According to the property manager, the center suffers from its location in a tertiary market with limited access to public transportation and below-average proximity to regional transportation arteries. The property also has a history of electrical and mechanical problems, with maintenance and capital projects ongoing to address those issues. The June 2010 appraisal valued the property at $20.5 million, and the June 2011 appraisal lowered the value slightly, to $20 million. At issuance, the property was valued at $37.5 million. The servicer reports a B-note in the amount of $2.8 million is outstanding in addition to the $23.7 million trust loan. The servicer’s advances for this loan were just below $2 million as of the March 2012 remittance report.

Given the recent years of difficulty, the property’s below-average marketability and the value decline since issuance, DBRS projects a loss in excess of $10 million could be realized at liquidation. The servicer is working to stabilize the asset with the intention of marketing the property for sale following stabilization.

There are 47 loans on the servicer’s watchlist, representing 48.9% of the outstanding pool balance, as of the March 2012 remittance report. The two largest loans in the pool, Prospectus ID #1 (Lincoln Square Retail) and Prospectus ID #2 (1500 Broadway), are on the watchlist for a low DSCR resulting from occupancy fluctuations at the respective properties. Both loans are secured by trophy properties located in strong submarkets and are expected to rebound in the near term.

Since issuance, the pool balance has been reduced by 17.1%, with 143 of the original 172 loans remaining as of the March 2012 remittance report. At issuance, DBRS calculated a weighted-average term DSCR of 1.40 times (x) and weighted-average debt yield of 9.0% for the pool, with a weighted-average LTV of 71.5%. As of the most recent year-end reporting on file for the remaining loans in the pool, the weighted-average DSCR was 1.30x and the weighted-average debt yield was 9.1% while the most recent weighted-average LTV was 80.8%. The weighted-average debt yield based on the most recent NCF is considered low (less than 11%) and could increase the difficulty in securing replacement financing for the loans maturing over the next few years.

One loan in the pool, Prospectus ID #24 (FRIS Chkn Roll-up), is shadow-rated investment grade by DBRS. That shadow rating was confirmed by DBRS as part of this review. The loan represents 0.96% of the transaction as of the March 2012 remittance report and has performed well since issuance.

As part of this surveillance review, DBRS analyzed the loans on the servicer’s watchlist, the specially serviced loans, and the Top Fifteen loans in the pool. Combined, these loans represent 90% of the outstanding pool balance as of the March 2012 remittance report.

For additional detail on the current status and DBRS viewpoint for the largest loans in the pool, the loans in special servicing and the loans on the servicer’s watchlist, please see the March 2012 Monthly Surveillance Report for this transaction, which will publish shortly.

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

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