DBRS Downgrades One, Confirms Eighteen Classes in Merrill Lynch Mortgage Trust 2005-CIP1

DBRS has today confirmed the following classes of Merrill Lynch Mortgage Trust 2005-CIP1:

--Classes A-2, A-3A, A-3B, A-SB, A-4, XC and XP at AAA (sf)
--Class A-M at AA (sf)
--Class A-J at BBB (sf)
--Class B at BB (high) (sf)
--Class C at BB (low) (sf)
--Class D at B (low) (sf)
--Class E at CCC (sf)
--Classes F, G, H, J and K at C (sf)

DBRS has also downgraded Class L to D (sf) following realized trust loss which has reduced the outstanding principal balance of Class L by $103,183 as of the January 2013 remittance. The Interest in Arrears designation has been removed from Class L, and has been placed on Classes D and E, as interest payments were not distributed to those classes with the January 2013 remittance. Classes A-2 through F carry Stable trends.

These rating actions are driven mainly by the two largest loans in special servicing. The second largest loan in the pool, Highwoods Portfolio57 (Prospectus ID#2, 10.3% of the current pool balance), is also the largest loan in special servicing. This loan was originally secured by 33 suburban office properties located in Tampa, Florida, and Charlotte, North Carolina, with a combined 1.96 million square feet (sf) of space. This loan was transferred to special servicing in March 2010 after the borrower stated that it would be unable to secure new financing ahead of the loan’s original scheduled maturity in August 2010. In May 2011, a modification of the loan was executed, terms of which include a split of the loan into a $100 million A-note and a $60 million B-note, a capital infusion of $18 million, and an extension of the maturity date to May 2014, with two additional one-year extension options subject to pay-down requirements. The A-note continues to pay interest at the original note rate, while interest payable on the B-note balance accrues. In October 2012, the lender approved the possible sale of up to ten collateral properties through an auction with all proceeds going to pay down the balance of the A-note. Those properties approved for release are reported to have performance issues, including high vacancy and leasing costs, and are operating on negative cash flow. Three properties were sold and released from the collateral in Q4 2012. As of 2010, the portfolio’s appraised value had declined 55% since issuance to $91.7 million; however, it should be noted that two of the three properties released in 2012 were sold at prices above their most recent, respective appraised values. Portfolio occupancy continues to struggle, with a combined 58.6% occupancy rate for the remaining properties, per a December 2012 rent roll. Approximately 10% of the NRA is scheduled to roll before May 2014. DBRS does not expect to recover the full balance of the B-note and its associated accrued interest.

The second largest loan in special servicing is University Village (Prospectus ID#12, 2.1% of the current pool balance), which is secured by a 161,090 sf anchored retail property in Riverside, California. This loan transferred to special servicing in February 2009 and was modified in March 2011. Terms of the modification agreement include a split of the loan into a $21 million A-note and a $10.1 million B-note, a principal pay-down of $500,000 and a deposit of $900,000 into the rollover reserve. The A-note continues to pay interest at the original note rate, while interest payable on the B-note balance accrues. Currently, 50% of excess cash flow is applied to paying down the balance of the A-note, while the remaining excess is paid to the borrower. In addition, the repayment of the B-note balance is subordinate to a payment of $1.5 million to the borrower. DBRS does not expect to recover the full balance of the B-note and its associated accrued interest.

As of the January 2013 remittance, two loans have liquidated from the trust since DBRS’s last rating action. No new loans were transferred to special servicing during this time. Including the two loans mentioned above, eleven loans currently remain in special servicing, representing 18.1% of the current pool balance. As of the January 2013 remittance, the outstanding principal trust balance for these loans is $268.0 million, mostly attributed to Highwoods Portfolio57. In addition, there are 27 loans on the servicer’s watchlist, representing 26.4% of the current pool balance. The weighted-average debt-service-coverage-ratio (DSCR) and weighted-average debt yield are 1.3 times (x) and 9.7%, respectively, compared to 1.6x and 10.0% at issuance.

DBRS continues to monitor this transaction in its Monthly CMBS Surveillance Report, with additional information on the DBRS viewpoint for this transaction including details on the largest loans in the pool, the loans in special servicing and the loans on the servicer’s watchlist. The January 2013 Monthly Surveillance Report for this transaction will be published shortly. If you are interested in receiving this report, contact us at info@dbrs.com.

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

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

This rating is endorsed by DBRS Ratings Limited for use in the European Union.