DBRS Downgrades One Class of ML-CFC Commercial Mortgage Trust, Series 2006-1

DBRS has today downgraded one class of the ML-CFC Commercial Mortgage Trust, Series 2006-1 as follows:

-- Class D from B (sf) to B (low) (sf)

In conjunction with the rating action above, DBRS has changed the trend on Class D to Stable from Negative.

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

-- Class A-1A at AAA (sf)
-- Class A-4 at AAA (sf)
-- Class A-SB at AAA (sf)
-- Class AM at AAA (sf)
-- Class AJ at A (low) (sf)
-- Class AN-FL at A (low) (sf)
-- Class B at BBB (low) (sf)
-- Class C at BB (low) (sf)
-- Class X at AAA (sf)

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

-- Class E at CCC (sf)
-- Class F at C (sf)
-- Class G at C (sf)

As of the August 2013 remittance report, 116 of the original 152 loans remain in the pool with a total pool balance of $1.3 billion, which represents a collateral reduction of 42.7% since issuance. The largest 15 loans in the pool display stable performance with a weighted-average debt service coverage ratio (DSCR) of 1.38x and a weighted-average debt yield of 10.5%, respectively.

The rating actions taken as part of this review reflect the current outlook for the nine specially serviced loans, representing 6.3% of the current pool balance, including five loans representing 3.1% of the current pool balance, which have transferred to special servicing within the past 12 months. Since issuance, 20 loans have liquidated, resulting in realized losses to the trust of $87.3 million. Within the past 12 months, six loans liquidated from the trust at a weighted-average loss severity of 47.7%, with total realized losses of $28.3 million. The most recent liquidation occurred with the July 2013 remittance report; Prospectus ID #11 Inglewood Park was liquidated at a 72.6% loss severity, resulting in a $5.7 million loss to the trust.

The largest loan in special servicing is Prospectus ID #24 Breckenridge Park Portfolio, which represents 1.4% of the pool and is secured by a portfolio of 11 Class B warehouse/office flex buildings located in Tampa, Florida. The loan was transferred to the special servicer in February 2013 for imminent default. At the time of transfer, the borrower reported that operating expenses were not being paid due to cash flow shortfalls and they would cease to cover any shortages moving forward. The loan remains delinquent and payments are due from March 2013. According to the special servicer, tenants have been vacating the property as a result of deteriorating property conditions and as a result, occupancy has steadily decreased from 77.2% at YE2011 to 65.2% at YE2012 and to 60.1% as of February 2013. The YE2012 cash flow of $1.1 million represents a 29.3% decline from issuance and is not expected to improve in the near term with the borrower’s 2013 budget estimating a $1 million net cash flow (NCF) shortfall by the end of the year. A May 2013 appraisal valued six of the buildings, representing 74.7% of the allocated loan balance, at $11.7 million, down from $16.3 million at issuance. An updated appraisal for the remaining properties has not been received, but indications suggest a decline in value for the remaining properties. The borrower has requested an interest-only payment modification, which is currently being explored by the special servicer in conjunction with foreclosure. DBRS expects there to be losses to the Trust with the resolution of this loan.

There are 32 loans on the servicer’s watchlist, representing 22.6% of the current pool balance as of the August 2013 remittance report.

The largest loan on the watchlist is Prospectus ID #8, CNL-Cirrus MOB Portfolio II, which represents 4.4% of the current pool balance. 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. The loan was added to the servicer’s watchlist in October 2011 for a low DSCR, which can be partially attributed to a decline in occupancy and the expiration of the interest-only period. Occupancy has declined from 91% at issuance to 78% in 2011. As of the March 2013 rent roll, the portfolio occupancy rate remains at 78%.

The Ballas Medical Plaza, located in the St. Louis suburb of Creve Coeur, representing 34.6% of the CNL-Cirrus MOB Portfolio II loan balance, has struggled since early 2010 when the largest tenant vacated causing occupancy to drop to 48%. As a result, the respective DSCR has steadily decreased from 0.84x at YE2010 to -0.05x at YE2012. Despite the poor performance of the Missouri property, the property in Denton, Texas, which represents 34.6% of the allocated loan balance, has experienced improved performance, offsetting the difficulties of the Missouri property. The Denton property previously suffered from a dispute among the physicians at the property, resulting in a decline in referrals and ultimately the property’s performance. The dispute has been resolved and the respective DSCR increased from 0.32x at YE2011 to 1.65x at YE2012. The portfolio DSCR has increased from 0.54x at YE2011 to 0.93x at YE2012, but still remains well below the issuer’s underwriting level of 1.38x.

DBRS has confirmed the shadow rating of one loan, representing 0.9% of the current pool balance.

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 August 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 American Surveillance Methodology (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.