DBRS Confirms All Classes of RAIT 2014-FL3 With Stable Trends

DBRS, Inc. (DBRS) has today confirmed the ratings for all classes of secured floating-rate notes issued by RAIT 2014-FL3 with Stable trends, as listed below:

-- Class A at AAA (sf)
-- Class A-S at AAA (sf)
-- Class B at AA (low) (sf)
-- Class C at A (low) (sf)
-- Class D at BBB (sf)
-- Class E at BB (low) (sf)
-- Class F at B (low) (sf)
-- Class X-1 at BB (low) (sf)
-- Class X-2 at BB (low) (sf)

The servicer, RAIT Partnership, L.P. (RAIT), provided updated financial reporting (operating statements, rent rolls and other documentation) to the 17g5 information provider, U.S. Bank National Association (U.S. Bank), for all loans in the pool in October 2015, in response to a DBRS request for information. However, due to technical difficulties with the U.S. Bank website, DBRS was unable to obtain the provided documents.

Pending the resolution of those issues, DBRS placed all classes Under Review with Developing Implications on October 29, 2015. Those rating actions were not an indicator of any performance issues with the underlying loans or the overall transaction, and were not a reflection of RAIT’s efforts in providing the requested documentation. U.S. Bank has since resolved the technical issues for this deal on their website and all of the requested information provided by the servicer has been now posted. The rating actions taken today are reflective of DBRS’s full review of that information, which shows the overall performance to be in line with expectations at issuance, as further described below.

This transaction closed in October 2014 with 22 interest-only, floating-rate loans secured by 23 transitional properties. Of those 22 loans, 20 were closed and two were to be closed after the closing date for the overall transaction. One of those loans, Westhill Plaza ($4.2 million, 1.9% of the initial pool balance), did not close and was not included in the final pool. DBRS modeled for this scenario at issuance and determined the impact to the rating levels to be negligible.

Four loans, representing 43.81% of the pool balance as of the October 2015 remittance, have future funding commitments in junior participation interests that will be held outside of the trust and will cumulatively represent 12.13% of the full funding amounts for those loans. The servicer reports that those interests have been fully funded for two loans (Prospectus ID #1, The Summit on College and Prospectus ID #7, Foster City Medical Pavilion) and partially funded for one loan, Prospectus ID #2, 20 North Orange. No draws have been processed for Prospectus ID #3, Carolinas Distribution Center.

As of the October 2014 remittance report, all loans in the pool are current and there are no loans on the servicer’s watchlist. The servicer provided updated financial reporting, rent rolls and performance update summaries for all loans in the pool. DBRS reviewed all of the provided documentation for the underlying loans and notes that the performance for the pool is stable overall, with healthy occupancy and cash flow levels as compared with the in-place metrics issuance. The servicer’s calculated NOI at the most recent T-12 level for 19 of the 21 loans in the pool for which figures were available show a weighted-average improvement of +19.5% over the DBRS underwritten, as-is NCF figure for those loans. Occupancy as of the most recent rent rolls provided show levels up or flat from issuance for all but three loans, with a weighted-average improvement of 3.02% for the pool. The three loans showing occupancy declines represent 19.84% of the pool balance and show a range of decline between -0.16% and -8.73% from the levels at issuance. Based on the updates provided by the servicer for those three loans, the occupancy drops for all three are temporary declines that have already been or will soon be recovered.

The largest loan in the pool, Prospectus ID #1, The Summit on College (15.66% of the pool balance), is secured by a 220-unit (665 beds) student housing property constructed in 2013 in Fort Collins, Colorado, home of Colorado State University. The property has historically been well-occupied, but has typically had below-market rents and correspondingly low EGI levels due to concessions given to compensate students for the lack of adequate parking at the property, which is located in the city’s downtown area. At issuance, the borrower’s stabilization plan centered on the ability to get the city’s approval to construct an adjacent three-story parking garage at a cost of approximately $6.0 million. The trust loan was structured with a $3.0 million holdback to be held in reserve to fund 50% of the costs to construct once the borrower had funded the first half of the expense. The borrower has been working with the city on the plans for the past year and the servicer reports the final approval has been obtained, with construction to begin in the summer of 2016, with alternative parking resources secured for the 2016–2017 school year through the construction period. As of the September 2015 rent roll, the property was 97.8% occupied and the servicer’s NOI figure at the T-12 ending August 31, 2015, shows improvement of 10.7% over the DBRS UW as-is NCF figure. The junior participation interest in the amount of $5.3 million was funded prior to the transaction closing date for a total debt load of $39.0 million, including the $33.7 million trust note.

The second-largest loan in the pool, Prospectus ID #2, 20 North Orange (12.57% of the pool), is secured by a 270,000 sf Class B office property located in downtown Orlando, Florida. The trust loan financed the sponsor’s acquisition of the property for a purchase price of $34.8 million in a discounted payoff transaction for the previous ownership. Including reserves, the sponsor contributed $11.66 million in cash equity to close with a stabilization plan that included investment in capital improvements and enhanced marketing for the property to boost leasing. At issuance, the property was approximately 25.5% vacant, as compared with a submarket vacancy rate of 21% for Class B properties in downtown Orlando, as reported by CoStar. The August 2015 rent roll shows occupancy has declined slightly (-0.16%) to 74.31%, with CoStar showing a Class B vacancy rate of 18.5% for the submarket at November 2015. The servicer reports that the subject has a lease in progress for approximately 14,600 sf and is on track to achieve a stabilized occupancy rate of 85% by year three. The servicer’s reported NOI as of the T-12 ending September 30, 2015, represents an improvement of 9.9% over the DBRS underwritten as-is NCF figure. The junior participation interest in the amount of $5.78 million has been partially funded, according to the servicer as of November 2015.

DBRS will continue to communicate with the servicer regarding the performance of the underlying loans and will closely monitor the transaction for developments. For more information on this rating action, please contact us 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 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.