DBRS Confirms Ratings on FREMF 2012-K22 Mortgage Trust

DBRS Limited (DBRS) has today confirmed the following ratings on FREMF 2012-K22 Mortgage Trust, Series 2012-K22:

-- Class A-1 at AAA (sf)
-- Class A-2 at AAA (sf)
-- Class X1 at AAA (sf)
-- Class X2-A at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (sf)

The trends on all classes are Stable. DBRS does not rate the first loss bond, Class D.

The rating confirmations reflect the stable performance of the transaction since issuance. The pool consists of 81 fixed-rate loans secured by 81 multifamily properties. As of the September 2015 remittance report, the pool has a balance of approximately $1.38 billion, representing a collateral reduction of approximately 1.0% since issuance in November 2012. Five loans, representing 1.9% of the pool balance, were fully defeased in 2015. According to YE2014 reporting, the pool had a weighted-average (WA) debt service coverage ratio (DSCR) and WA debt yield of 1.7 times (x) and 9.8%, respectively. These figures compare with the WA term DSCR and WA debt yield figures of 1.47x and 8.0%, respectively, based on the DBRS underwritten cash flows for each loan at issuance.

There are currently four loans on the servicer’s watchlist, representing 3.6% of the current pool balance. The largest loan on the servicer’s watchlist, The Grove at Columbia (Prospectus ID#15, 1.64% of the current pool balance) is secured by a student-housing complex constructed in 2011 in Columbia, Missouri, providing housing for students of the University of Missouri (the University). The property is situated approximately 1.5 miles south of campus off of Nifong Boulevard, a primary artery servicing residential neighborhoods and commercial development alike. A shuttle service is provided for students to and from campus at the subject property. The loan is on the servicer’s watchlist because of a low DSCR, which was 0.69x at YE2014. During the 2012-2013 academic year, the subject was suspended from attending the on-campus housing fairs and from advertising by the university because of an unknown infraction. Although the suspension has reportedly been lifted, the subject has since struggled as occupancy fell to approximately 74.0% for YE2013/YE2014 and 73.0% at June 2015 from 99.0% at YE2012.

Enrollment at the University of Missouri has been trending up for several years (fall 2015 enrollment of 35,050 students represented a +3% improvement over the previous year, according to the University’s website) and with that growth has come a significant increase in active housing development, both on campus by the University and in off-campus projects such as the subject property. The subject’s location is somewhat inferior as it does not have strong visibility within the immediate area and the newer competing developments have more expansive amenity packages as well as newer furnishings and finishes. These factors are likely contributing to the occupancy struggles at the property over the past several years. The loan is sponsored by an institutional borrower that has a portfolio of approximately 82 student-housing properties across the United States and Canada. Among these properties, 44 are under The Grove brand as this brand reported an average pre-leased occupancy of 91.5% for the 2015/2016 academic year. DBRS has requested information from the servicer with regard to the current occupancy rate, pre-leasing rates for the winter semester and the borrower’s plans to improve occupancy rates at the subject property, but that information has not been received to date. DBRS will continue to closely monitor for developments and will provide information as it becomes available.

The second-largest loan on the servicer’s watchlist is Barrington Place (Prospectus ID#50, 0.83% of the pool balance), formerly known as Cambridge Arms Apartments. This loan is secured by a 694-unit multifamily property in Fayetteville, North Carolina. The loan was briefly transferred to special servicing for two months in 2014 because of a dispute between the city and the borrower that resulted in litigation. The loan was transferred back to the master servicer in August 2014 once an agreement to improve security and surveillance at the property was reached. An updated appraisal was ordered while the loan was with the special servicer, showing a value decline from $22.4 million at issuance to $12.98 million (loan-to-value of 87.3%) as of July 2014. The borrower has not provided consistent financial reporting for this loan since closing, but the value decline is likely related to the property’s occupancy struggles that appear to have begun in early 2014 when occupancy was reported at 65.0%, down from 93.5% at issuance. The most recent DSCR figures reported by the servicer show coverage of 1.29x (the issuer’s underwriting coverage was 2.49x) based on operations for the three months ending April 30, 2015.

The decrease in occupancy appears to be a product of systemic crime at the property as reported by local news agencies over the past several years, contributing to a significant decline in the property’s reputation and overall desirability. Fort Bragg, a large military base located near the property, had reportedly blacklisted the complex at one time, not allowing soldiers to rent at the subject. At issuance, the military-related personnel made up 80% of the existing tenants. It is not known what the current concentration level is, but DBRS has requested this information from the servicer. The servicer reported in July 2015 that the property would be sold and that the loan would be repaid, but that transaction has since fallen through and the borrower continues to market the property for sale at an unknown price point. DBRS has requested information on the list price, the current occupancy and the most recent cash flows available, but has not received that information to date. DBRS will continue to monitor for updates and will provide that information as received.

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 and loans on the servicer’s watchlist. The September 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.

For more information on this credit or on this industry, visit www.dbrs.com or contact us at info@dbrs.com.