DBRS Upgrades Four Classes and Confirms Ten of COMM 2004-LNB3

DBRS has today upgraded four classes of COMM 2004-LNB3 as follows:

-- Class C to AAA (sf) from AA (high) (sf)
-- Class D to AA (high) (sf) from AA (low) (sf)
-- Class E to AA (low) (sf) from A (sf)
-- Class F to A (high) (sf) from A (low) (sf)

DBRS has also confirmed ten classes as follows:

-- Classes A-1A, A-5, B and X at AAA (sf)
-- Class G at BB (high) (sf)
-- Class H at CCC (sf)
-- Classes J, K, L and M at C (sf)

The trends on Classes A-1A through G are Stable.

The pool has experienced 52.3% of collateral reduction since issuance, with 65 of the original 94 loans still outstanding. In the last four months, five loans have repaid in full, resulting in $83.8 million of principal paydown to the trust. All but seven loans in the pool are scheduled to mature by December 31, 2014. The weighted-average debt service coverage ratio (DSCR) and Exit Debt Yield for these loans are 2.2 times (x) and 12.5%, respectively. The pool has continued to perform well overall. As of the November 2013 remittance, the weighted-average DSCR and Debt Yield were 2.0x and 14.7%, respectively. In comparison, the issuer’s weighted-average DSCR and Debt Yield were 1.6x and 10.3%, respectively, at closing. Fully defeased loans represent 28.3% of the current pool balance. There are currently 11 loans (4.3% of the current pool balance) on the servicer’s watchlist and one loan (4.4% of the current pool balance) in special servicing, which is highlighted below. DBRS also shadow-rates two loans investment grade, which represent nearly 29.1% of the pool combined. These shadow ratings were confirmed in conjunction with the above rating actions.

Beau Terre Office Building (Prospectus ID#16, 4.4% of the current pool balance) is secured by an office complex in Bentonville, Arkansas, home of Wal-Mart’s corporate headquarters. The loan transferred to special servicing in May 2010 following a steep drop in occupancy and subsequently became real estate owned (REO) in September 2011. Although the property’s occupancy bottomed out at 45% in February 2012, it has since bounced back to 57% as of November 2013. According to CoStar, vacancy and availability for Class B office space in the Benton County submarket were approximately 26.5% and 35.0%, respectively. Given submarket vacancy, recent rental rates and the property’s reported YE2012 operating and below-the-line expenses, DBRS derived a value that came in slightly below the appraiser’s estimate of $20.6 million. On a positive note, the property has been generating enough cash flow to cover operating expenses and slowly repay outstanding servicer advances. The loan’s original scheduled maturity date is July 2, 2014. DBRS expects a loss with the resolution of this loan.

Three of the five loans that have recently repaid were previously specially serviced loans. These three cross-collateralized loans, known as the Beyman Rollup, had been modified with hope notes in May 2011. The most recent appraised value for the properties securing the loans originally indicated that principal and interest due on the hope notes would ultimately be lost to the trust once the assets were sold. In a positive turn of events, the recent sale of these properties generated enough in proceeds to repay the full outstanding debt, including all three hope notes, as well as unpaid interest to Class H.

Overall, the pool is performing quite well, has recently benefitted from significant principal paydown and continues to benefit from a high concentration of investment-grade confidence. As such, DBRS has upgraded the ratings as listed above. Although there is some uncertainty surrounding Beau Terre Office Building (Prospectus ID#16), DBRS took a conservative approach in this loan’s loss projection. DBRS places additional stress on the reported as-is cash flows, across all loans in the pool, which further supports the upgrades.

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 remaining loans in the pool. The November 2013 Monthly CMBS 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.