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

DBRS Limited (DBRS) has today downgraded the rating of the following classes of Commercial Mortgage Pass-Through Certificates, Series 2006-1 (the Certificates) issued by ML-CFC Commercial Mortgage Trust, Series 2006-1 (ML-CFC 2006-1 or the Trust):

-- Class B to BB (high) (sf) from BBB (low) (sf)
-- Class C to CCC (sf) from B (low) (sf)

In addition, DBRS has confirmed Class A-1A through Class A-J, Class D through Class G, and the notional Class X. All trends are Stable, with the exception of Class C through Class G, which have ratings that do not carry trends. Class E through Class G continue to have Interest in Arrears.

The rating downgrades to Class B and Class C are a result of increased projected losses associated with 11 loans in special servicing. Each of these 11 loans have been in special servicing since January 2014, with outstanding advances continuing to increase monthly. To date, 21 loans have been liquidated from the trust at a combined realized loss of $80.7 million.

Since issuance, the transaction has experienced collateral reduction of 46.9% from loan amortization, successful loan repayment, principal recovered from liquidated loans and realized losses from defaulted loans. As of the August 2015 remittance report, 108 loans remain out of the original loan count of 152. Nine loans are fully defeased, representing 12.1% of the current pool balance. According to the August 2015 remittance report, there are 33 loans on the servicer’s watchlist and 13 loans in special servicing representing 30.6% and 9.6% of the current pool balance, respectively. Two of the loans in special servicing, representing 1.3% of the current pool balance, are anticipated to be resolved in the near future with the Jacobson Distribution loan (Prospectus ID#27, 1.3% of the current pool balance) expected to be repaid in November 2015 and the Meadow View Mobile Home Park loan (Prospectus ID#152, 0.1% of the current pool balance) returning to the master servicer once an insurance escrow issue is resolved. Two of the most pivotal loans in special servicing are highlighted below.

The Airport Square loan (Pros ID#17, representing 2.0% of the current pool balance) is secured by an anchored retail center in Reno, Nevada. The loan transferred to special servicing in October 2013 for imminent default. Although the borrower pursued a loan modification, acceptable terms could not be reached and the loan subsequently became real estate owned in June 2015. The current workout strategy is foreclosure and the projected disposition date of the asset is Q1 2018. The property has historically had occupancy issues as the loan was previously on the servicer’s watchlist for a low debt service coverage ratio (DSCR) following the departure of the property’s largest tenant, PetSmart, in 2007. This space has remained vacant since then and the asset was 54.0% occupied, according to the May 2015 rent roll, down from 67.3% in June 2014. As of August 2015, the servicer has indicated that the leasing broker is aggressively marketing the space to potential regional and national tenants, which include department stores, fitness centers and other various operators. As of the May 2015 rent roll, the largest tenant at the property, Mor Furniture for Less (16.9% of the net rentable area (NRA)) has a lease expiration in February 2016; however, the tenant has expressed interest in renewing at the subject, with lease terms currently being negotiated. Despite the ongoing performance issues, the property remains in good condition with minor deferred maintenance limited to graffiti at the rear of the property, according to the January 2015 site inspection. The property was last appraised in December 2014 at a value of $21.0 million, a $15.3 million decrease from the issuance value of $36.3 million. DBRS expects the Trust to experience a loss with the resolution of this loan.

The Breckenridge Park Portfolio loan (Pros ID#24, representing 1.5% of the current pool balance) is secured by a portfolio of 11 Class B commercial buildings consisting of a mix of warehouse and flex office space located in Tampa, Florida. The loan transferred to special servicing in February 2013 for imminent default as the portfolio occupancy had steadily declined over the past four years negatively affecting financial performance. Despite having reached acceptable modification terms, the borrower failed to execute the agreement, with the lender receiving final judgment for foreclosure on August 20, 2015. In addition, a potential note sale of the property in Q1 2015 did not materialize as bids fell under the reserve price. According to the most recent financial reporting, the Q1 2015 DSCR remains depressed at 0.03 times (x) compared with the YE2014 DSCR of 0.18x and the YE2013 DSCR of 0.55x. According to April 2015 servicer commentary, the portfolio was 47.0% occupied with Rosetta Technologies, the largest tenant, occupying 7.3% of the NRA on a lease expiring in July 2017. The most recent appraised value from September 2014 valued the portfolio at $14.1 million, a $9.2 million decline from the issuance value of $23.3 million. DBRS also expects the Trust to experience a loss with the resolution of this loan.

One loan, South California Ground Leases (Pros ID#42) is shadow-rated investment grade, representing 0.9% of the current pool balance. DBRS has today confirmed that the performance of this loan remains consistent with investment grade loan characteristics.

DBRS continues to monitor this transaction in its Monthly CMBS Surveillance Report, with additional information on the DBRS viewpoint for this transaction. The August 2015 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 related regulatory disclosures pursuant to the National Instrument 25-101 Designated Rating Organizations are hereby incorporated by reference and can be found by clicking on the link to the right under Related Research or by contacting us at info@dbrs.com.

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

The applicable methodologies are North American CMBS Rating Methodology (June 2015) and CMBS North American Surveillance (January 2015), which can be found on our website under Methodologies.