DBRS Upgrades One, Downgrades One and Confirms Three Classes of Merrill Lynch Mortgage Trust 2005-CIP1

DBRS Limited (DBRS) has today upgraded the rating of the following class of Commercial Mortgage Pass-Through Certificates, Series 2005-CIP1 (the Certificates) issued by Merrill Lynch Mortgage Trust, Series 2005-CIP1 (MLMT 2005-CIP1 or the Trust):

-- Class B to BBB (high) (sf) from BB (high) (sf)

In addition, DBRS has also downgraded the rating of one class, as follows:

-- Class D to C (sf) from CCC (sf)

Finally, DBRS has confirmed the ratings of the remaining classes in the transaction, as follows:

-- Class C at BB (low) (sf)
-- Class E at C (sf)
-- Class XC at AAA (sf)

All trends are Stable, with the exception of Class D and Class E, which have ratings that do not carry trends. However, both classes continue to have Interest in Arrears.

The rating upgrade to Class B reflects the increased credit support to the bond as a result of loan amortization and successful loan repayment. In the last 12 months, 92 loans have been repaid from the Trust, contributing $975.2 million in repaid principal to the senior bonds. One loan, representing 5.5% of the current pool balance, is scheduled to mature by July 2016 with a debt service coverage ratio (DSCR) and exit debt yield of 1.76 times (x) and 17.2%, respectively, according to the most recent year-end reporting available. In conjunction with the benefit of the recent paydown of the bond stack, DBRS also recognizes the propensity for adverse selection as the pool becomes more concentrated and the increased risk of interest shortfalls should loans continue to default at maturity. There are currently six loans in special servicing, representing 68.0% of the current pool balance, four of which are non-performing matured balloon loans. Three of the loans in special servicing have been there for more than 12 months, with outstanding advances continuing to increase monthly. Since issuance, 22 loans have been liquidated from the Trust at a combined realized loss of $134.3 million, with a weighted-average loss severity of 36.2%.

As of the January 2016 remittance report, the pool has experienced collateral reduction of 94.5% since issuance, with 11 of the original 135 loans still outstanding. In the last 12 months, five loans were liquidated from the Trust with a combined realized loss of $452,936, with those losses contained to the defaulted Class F. Two non-performing loans in special servicing went through foreclosure in 2014 and 2015 and are now real estate owned (REO). DBRS modeled losses for the loans in special servicing based on recent appraisals for the individual properties, with an implied loss severity ranging between 19.8% and 83.6% when accounting for projected Trust expenses at liquidation. This analysis supports the downgrade to C (sf) from CCC (sf) for Class D, reflecting the increased risk of loss. The two largest loans in special servicing are highlighted below.

The Residence Inn Hotel Portfolio (Prospective ID#6, representing 39.4% of the current pool balance) was originally secured by four extended-stay hotels in Texas (two), New York (one) and Florida (one). The loan was previously on the watchlist for a low DSCR and was transferred to special servicing in February 2014 for imminent default in relation to the March 2014 expiration of the franchise agreements. The receiver rebranded all four hotels under the Hawthorn Suites by Wyndham flag and the portfolio has been REO since May 2014. In November 2015, the Wyndham Fishkill property was sold at a sale price of $4.4 million, well below its current allocated loan balance of $15.3 million (34.6% of the loan amount). To date, the proceeds from the sale have not been applied to the loan balance. As of January 2016, the servicer has noted that the Wyndham Fort Worth and Wyndham Tyler hotels, representing 22.7% and 13.4% of the allocated loan balance, respectively, will likely be included in a February 2016 auction. The remaining hotel, Wyndham Orlando, underwent significant renovations throughout 2015, which included refurbishing all rooms. With these renovations, the asset manager plans to stabilize the performance of the hotel under the new Wyndham flag. The overall portfolio reported an occupancy rate of 60% as of Q3 2015 with a correspondingly low DSCR of -0.71x, a decline from the YE2014 DSCR of -0.19x. Based on the combined 2015 appraised value of the remaining three properties, the portfolio was valued at $20.2 million, below the current allocated loan balance of $44.3 million and a $46.8 million decline from the issuance value of $67.0 million. However, recent broker opinion of values obtained by the servicer show that the individual property values may have fallen since those 2015 appraisals. DBRS has adjusted its loss forecast for the loan to reflect those more recent value estimates and anticipates the loss severity for the loan as a whole could be between 70.0% and 80.0% when the remaining properties are sold.

The Hampton Inn Newtown (Prospective ID#35, representing 11.8% of the current pool balance) is secured by a 137-key Hampton Inn hotel located in Yardley, Pennsylvania. The loan transferred to special servicing in April 2011 due to the borrower’s default in changing the management company without lender’s consent and failure to make the scheduled principal and interest payments. The property became REO in April 2015. The servicer notes that a property improvement plan from Hilton is expected to enhance the marketing process for the property, with a possible disposition occurring in mid-2016. According to the April 2015 Smith Travel Research report, the subject reported an occupancy of 62.1%, average daily rate (ADR) of $123.05 and revenue per available room (RevPAR) of $76.40. The subject trails the competitive set on the occupancy and RevPAR metrics with the competitive set reporting an occupancy of 67.8%, ADR of $119.86 and RevPAR of $81.32. Despite the lagging performance relative to the competitive set, the Q3 2015 DSCR of 1.32x shows improvement compared to the YE2014 DSCR of 0.83x and the subject is in average condition with no deferred maintenance observed as of the July 2015 site inspection. The property was last appraised in December 2014 at a value of $11.4 million, a $10.6 million decrease from the issuance value of $22.0 million. A recent draft appraisal received by the servicer shows that the property value may have further declined since the December 2014 appraisal. Given the sharp value decline since issuance and current outstanding advances of $913,402, DBRS anticipates the loss severity at disposition could exceed 50.0%.

DBRS continues to monitor this transaction in its Monthly CMBS Surveillance Report, with additional information on the DBRS viewpoint for this transaction. The January 2016 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 (December 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.