DBRS Downgrades Eight Classes of ML-CFC Commercial Mortgage Trust, Series 2006-1

DBRS has today downgraded eight classes of the ML-CFC Commercial Mortgage Trust, Series 2006-1 (the Trust) as follows:

Class AJ from A (high) (sf) to A (low) (sf)
Class AN-FL from A (high) (sf) to A (low) (sf)
Class B from BBB (sf) to BBB (low) (sf)
Class C from BBB (low) (sf) to BB (low) (sf)
Class D from BB (sf) to B (sf)
Class E from B (sf) to CCC (sf)
Class F from CCC (sf) to C (sf)
Class G from CCC (sf) to C (sf)

DBRS has also placed Class D on trend Negative. Classes AJ, AN-FL, B and C have Stable trends. Trends are not assigned for classes rated CCC and below. Class F, Class G, Class H and Class J remain designated as Interest in Arrears.

Nine rated classes in the transaction were confirmed with Stable trends as follows:

Class A-1A at AAA (sf)
Class A-2 at AAA (sf)
Class A-3 at AAA (sf)
Class A-3FL at AAA (sf)
Class A-3B at AAA (sf)
Class A-4 at AAA (sf)
Class A-SB at AAA (sf)
Class A-M at AAA (sf)
Class X at AAA (sf)

In addition, two classes were confirmed with no trends as follows:

Class H at C (sf)
Class J at C (sf)

Of the original 152 loans at issuance, 128 remain in the pool, with a weighted-average DSCR for the trust loans of 1.27 times (x) and a weighted-average debt yield of 8.49%, as calculated on the outstanding trust balances as of the July 2012 remittance report and the most recent year-end NCF figures available for each of the trust loans.

The rating actions taken as part of this review reflect the most recent performance of the largest loans on the servicer’s watchlist and the outlook for the remaining loans in special servicing. There are 37 loans (35.74% of the pool) on the servicer’s watchlist as of the July 2012 remittance report; seven of those loans, representing 24.56% of the pool, are in the top fifteen loans in the pool. Two of the loans in the top fifteen on the watchlist are performing loans that are being monitored for the upcoming maturities in August and September 2012. Excluding those two loans, the weighted-average DSCR for the other 35 loans on the watchlist was 0.53x with a weighted-average debt yield of 3.82%, as calculated on the most recent year-end NCF figures for each loan as of the July 2012 remittance report. The weighted-average NCF decline from the issuer’s underwritten figure is high for those 35 loans, at approximately -20.26%.

There were 12 delinquent loans as of the July 2012 remittance report, representing 8.36% of the pool; 11 of those loans (8.0% of the pool) are in special servicing. As of the July 2012 remittance report, cumulative losses since issuance totaled $54.04 million, with 15 loans liquidated since issuance. Eight of those loans have been liquidated within the last 12 months, at a weighted-average loss severity of 53.68% as of the July 2012 remittance report. The largest of those loans is Prospectus ID #18, Colonial Mall Glynn Place. As a result of the liquidation of that loan in April 2012, the trust experienced a loss of $15.29 million (with a loss severity of 58.27%).

The largest loan in special servicing is Prospectus ID #8, Inglewood Park (1.78% of the pool). At issuance, this loan was collateralized by seven buildings (five office/industrial flex buildings and two mid-rise office buildings) located in Largo, Maryland, approximately ten miles east of Washington, D.C. The combined occupancy for the portfolio was low at issuance, at 67%, with a $5.2 million holdback that was to be released once lease-up hurdles were met. The loan transferred to the special servicer in 2009, and as the occupancy never improved to the required levels, the loan balance was paid down by the amount of the holdback in early 2010. After the loan’s transfer, one of the original seven buildings was sold to its single tenant in December 2010, resulting in an additional $5.3 million in proceeds that was applied to the outstanding principal balance.

A receiver has been in place since early 2011, assuming property management duties, directing lease-up efforts and overseeing capital improvement projects. According to the servicer, the remaining six properties had a combined leased rate of 57.7% as of the June 2012 rent roll, with over 15 leases signed to new and renewing tenants since early 2011. The servicer has recently invested significantly in capital improvements to the properties as part of necessary roof repairs and other property upgrades. The servicer has also funded tenant improvements for GSA, who recently signed a lease for approximately 40,700 sf through 2021.

As of the July 2012 remittance report, the servicer’s outstanding advances were relatively significant, at $12.96 million. According to the servicer, approximately $6.0 million of those advances were made to complete improvement projects and the remainder is outstanding for taxes, interest and legal fees. The July 2010 appraisal valued the property at $29.55 million and the most recent appraisal, from October 2011, showed an improvement to $35.75 million (approximately $75 psf). Given the trust’s exposure of approximately $42.28 million as of the July 2012 remittance report, there is potential for significant loss on the asset unless further stabilization is achieved over the near term.

The largest loan on the servicer’s watchlist for performance issues is Prospectus ID #8, CNL Cirrus MOB Portfolio (II) (3.40% of the pool). This loan is secured by a portfolio of six medical office properties located across three states. Four properties are located in Texas and the other two are in Missouri and Arizona. In Q3 2011, the portfolio was sold and the trust loan was assumed by the new owner. The loan was added to the servicer’s watchlist in October 2011 for a low DSCR. The decline in cash flow can be partially attributed to tenant departures; the YE2011 combined occupancy rate was 77%, down from 81% at YE2010.

The Missouri property, located in the St. Louis suburb of Creve Coeur, represents 34.90% of the allocated loan balance. That property lost a significant tenant in late 2010, causing occupancy to decline to 49%, down from previous levels that hovered near 90%. Additionally, the servicer reports that the Denton, Texas (suburb of Dallas) property, which represents 25.80% of the allocated loan balance, is suffering from a dispute among the physicians occupying the property, resulting in a decline in referrals and a drop in the overall property performance. The allocated DSCR for the Creve Coeur and Denton properties was 0.11x and 0.32x at YE2011, respectively. The overall DSCR at YE2011 was 0.53x, down from 1.26x at YE2010 and the issuer’s underwritten DSCR of 1.38x, with a NCF decline of -61.78% since issuance for this loan. The loan was structured with an interest-only period for the first five years of the ten-year term, resulting in a relatively high trust exposure of approximately $170 psf as of the July 2012 remittance report.

For additional details on the DBRS viewpoint for this transaction, and for details on the largest loans in the pool, the loans in special servicing and the loans on the servicer’s watchlist, please see the July 2012 Monthly Surveillance Report for this transaction, which will be published shortly.

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

The applicable methodologies are CMBS Rating Methodology (January 2012) and CMBS North American Surveillance Methodology (May 2011), which can be found on our website under Methodologies.