DBRS Confirms Rating of FREMF 2011-K702 Mortgage Trust, Series 2011-K702

DBRS has today confirmed Multifamily Mortgage Pass-Through Certificates, Series 2011-K702, Class B of FREMF 2011-K702 Mortgage Trust, Series 2011-K702 at A (low) (sf) with a Stable trend.

The rating confirmation reflects the pool’s continued stable performance as the transaction has experienced total collateral reduction of 3.3% since issuance. The pool consists of 72 fixed-rate loans, all structured with seven-year loan terms. As of the June 2014 remittance, the weighted-average (WA) debt service coverage ratio (DSCR) and exit debt yield are 1.30 times (x) and 9.1%, respectively. The pool is diverse with regard to loan size, as the largest 15 loans collectively represent 42.0% of the current pool balance. According to YE2013 reporting, these loans have a WA DSCR of 1.34x. Additionally, the pool benefits from defeasance collateral, as four loans, representing 4.7% of the pool, are fully defeased.

There are eight loans on the servicer’s watchlist as of the June 2014 remittance, representing 13.2% of the current pool balance. The three largest loans on the servicer’s watchlist are highlighted below.

The Seminole Grand Apartments loan (Prospectus ID#2), which represents 3.8% of the current pool balance, is secured by a 486-unit, 1,554-bed, student housing apartment community in Tallahassee, Florida, less than two miles north of Florida State University. The loan was originally added to the servicer’s watchlist after the November 2012 servicer site inspection discovered that serious damage had been sustained to the clubhouse/leasing office and the penthouse unit above after the ceiling collapsed, reportedly the result of a tenant party. According to the October 2013 site inspection, the required repairs have been completed; however, due to the problems arising from the renovation period, the YE2013 DSCR declined to 1.00x from 1.34x at YE2012. The decline in performance was a result of reduced rental revenue as the occupancy rate decreased to 75.1% as of June 2013 compared with 84.1% at June 2012. In an attempt to increase occupancy, the advertising and marketing expense increased by 26% in 2013. Based on Q1 2014 reporting, the marketing efforts appeared to have had a positive effect, as the occupancy rate was 88%. DBRS has yet to receive the property’s pre-leasing rate for the 2014–2015 academic year; however, as a result of the increased occupancy rate and the completed renovations, DBRS expects the DSCR to stabilize in 2014.

The Palms on University loan (Prospectus ID#7), representing 2.79% of the current pool balance, is secured by a 152-unit, 528-bed, student housing apartment complex located just outside the University of California-Riverside campus in Riverside, California. The loan was added to the servicer’s watchlist in October 2013 after the June 2013 year-to-date DSCR fell to 1.06x compared with the YE2012 DSCR of 1.31x. The YE2013 DSCR further declined to 0.92x. According to the servicer commentary, the decline in net cash flow was a result of reduced revenue due to parking concessions, along with other incentives and rate adjustments offered to boost occupancy. Additionally, performance decline is partially due to the loan converting from interest-only payments to amortizing principal and interest payments, which began in February 2013. The leasing strategy has proven to be effective; however, occupancy has improved considerably to 94.8%, according to the September 2013 rent roll, compared with 74% at YE2012. According to the servicer, the pre-leasing rate for the 2014–2015 academic year was 55% as of May 2014 and the free parking concession has been discontinued. Given that the Q1 2014 DSCR improved to 1.11x along with the increase in occupancy, property performance should continue to stabilize for the remainder of 2014.

The Vue On Apache loan (Prospectus ID#6), representing 2.77% of the current pool balance, is secured by a 489-unit student housing apartment complex in Tempe, Arizona, directly west of the Tempe campus of Arizona State University. The loan was added to the servicer’s watchlist after the YE2013 DSCR declined significantly to 0.32x compared with the YE2012 DSCR of 1.57x. According to the servicer, the drop in DSCR is due to a decrease in Other Income along with an increase in utilities, repairs and maintenance expenses. The property was purchased and the loan was assumed in September 2012. According to the new borrower, the property was mismanaged and marketed as a party spot with a less-than-optimal tenant make up. Since new management has taken over, YE2013 occupancy has improved to 96% compared with 67% in June 2013. While DBRS has not received the pre-leasing rate for the 2014–2015 academic year, and the September 2013 operating statement shows gross potential rent of $2.65 million — a significant decline from $4.19 million at YE2011 — the increase in the occupancy rate at YE2013, as well as the installation of new management, indicate that performance is expected to stabilize in the future.

DBRS continues to monitor this transaction in its Monthly CMBS Surveillance Report, with additional information on the DBRS viewpoint for this transaction. The July 2014 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.

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

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.